Principal Issues:
Subsidiary corporation formed specifically to produce a film. Parent will acquire all the rights to commercially exploit the film at a cost equal to the net production cost of the film (i.e.net after any assistance and any tax credits in respect of the film). Would such transaction cause the subsidiary to be denied the film tax credit under 125.4?
Position:
The transaction could be considered as a disposition of the film to the parent before the film was produced or that the intention was to produce the film for the parent. In both cases, it can be argued that all the costs involved to produce the film would be the parent's. Accordingly, the subsidiary would not have any qualified labour expenditure on which the credit could be calculated.
Based on a question of fact and law, there is some uncertainty as to who would retain ownership of the film after all the distribution rights are acquired by the parent. If the parent can claim CCA, then this would avoid any claim for a tax credit.
There is also uncertainty that the film would not be an "excluded production" under Regulation 1106(1). Parent is not a "qualified corporation" for the purposes of section 125.4 and, accordingly, does not qualify as a "prescribed taxable Canadian corporation" under (a)(ii) of the definition of "excluded production".
Reasons: