Application Policy

Number: FAS 2008-01

Date: March 26, 2008

Subject: Bona Fide Loan

Purpose

The purpose of this policy paper is to inform stakeholders in the film industry of the criteria used by auditors in the Film Services Units (FSUs) to determine if a loan is in fact a bona fide loan.

Application

A loan that is not considered a "bona fide loan" is usually characterized as a "forgivable loan," which is considered "assistance" for the purposes of:

• the Canadian Film or Video Production Tax Credit;
• the Film or Video Production Services Tax Credit; and
• various provincial tax credits that are administered by the Canada Revenue Agency.

Continuous treatment

This is not a new position or approach but a confirmation of an existing one. It has previously been communicated to various film industry stakeholders, such as the Canadian Film and Television Production Association and the Association des producteurs de films et de télévision du Québec, either verbally or by email.

Bona fide loan vs. assistance

Amounts such as "producer loans" may be treated as assistance if the auditor concludes that they are not "bona fide loans" – for example, if repayment of the loan is conditional upon a future event such as projected revenues.

Applicable criteria

FSU auditors use the following criteria to distinguish between bona fide loans and assistance purported to be a loan. However, this list is not exhaustive and other criteria may be considered. The criteria are:

• Carries the same terms and conditions as a transaction completed between two parties dealing at arm's length.
• Bears interest. The interest rate must be reasonable under the circumstances.
• Has repayment terms, for instance, arrangements are made for repayment of the loan within a reasonable time and repayment is not conditional upon a future event – e.g., projected revenues.
• Creditor's intention (understood by the debtor) that the full amount of the loan will be repaid.
• Security provided to the creditor. Failure to provide some security for the loan may indicate that no loan was intended.
• Signed note or acknowledgement of debt in favour of the creditor.
• The loan is one substantial amount borrowed for one or more specific purposes rather than numerous smaller amounts received more or less regularly over a period of time.
• Reasonable efforts are made by the creditor to collect the debt. Failure by the corporation to attempt to obtain repayment suggests that the amounts distributed were not loans.
• Debtor's ability to repay the creditor. If repayment is totally dependent upon earnings from the debtor, this would suggest that the distribution was not a loan. Good credit is not conclusive to establishing that the debtor could repay the loan.

Original signed by
Pierre Mercier
Manager
Film Advisory Services
Small and Medium Enterprises Directorate

Date modified:

2010-01-28