11 July 2003 Ruling 2003-0023253 - FILM TAX CREDIT-OWNERSHIP VS ASSISTANCE

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

1. For the purposes of computing the Canadian film or video production tax credit in section 125.4 of the Act, will the purchase proceeds paid to a producer by a broadcaster, solely in order to acquire legal and beneficial ownership of a portion of the production, be assistance received by the producer?

Position:

1. No. However, there will still be a pro rata allocation of production expenses between the production owners, which would reduce the producer's available film tax credit.

Reasons:

1. Paragraph 12(1)(x)(viii) would apply to exclude the amount that might otherwise be assistance. The owners would be required to share production expenses.

XXXXXXXXXX
2003-002325
Allan Nelson, C.M.A
(613) 443-7253
July 11, 2003

Dear XXXXXXXXXX:

Re: Canadian Film or Video Production Tax Credit

Technical Opinion Request .

This is in reply to your June 10, 2003, facsimile requesting an advance income tax ruling for XXXXXXXXXX. During our telephone conversation on June 26, 2003 (XXXXXXXXXX/Nelson), you advised us that, due to various circumstances, you wish to withdraw your ruling request. We have done this and your deposit will be refunded to you under separate cover.

You have instead requested our general comments as to whether certain payments received by a producer would be assistance, as defined in subsection 125.4(1) of the Income Tax Act (the "Act").

Facts

You have provided the following set of hypothetical facts.

"Producer" is a qualified corporation, as defined in subsection 125.4(1) of the Act and would otherwise be entitled to claim the Canadian film or video production tax credit under section 125.4 of the Act, in respect of certain qualified labour expenditures incurred while making a film in Canada (the "Production").

In order to fund part of the costs to be incurred in making the Production, "Broadcaster" acquired a 40% legal and beneficial ownership interest (the "Acquired Equity") in the Production from Producer.

Broadcaster paid Producer the "Equity Purchase Price", solely as consideration for the Acquired Equity.

At all relevant times "Broadcaster"

? is a prescribed taxable Canadian corporation, within the meaning of draft subsection 1106(2) of the Income Tax Regulations (the "Regulations"),

? is a prescribed person, within the meaning of draft paragraph 1106(7)(a) of the Regulations, and consequently is not an investor for the purposes of section 125.4 of the Act, and

? operates at arm's length with Producer.

Query

You have asked for our opinion as to whether the Equity Purchase Price that Broadcaster paid to Producer would be assistance to Producer, thereby reducing the amount of qualified labour expenditure on which Producer could claim the Canadian film or video production tax credit under section 125.4 of the Act (the "Tax Credit") in respect of the Production.

Our Comments

As explained in Information Circular 70-6R5, dated May 17, 2002, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. If a situation involves a specific taxpayer and a completed transaction, all relevant facts and documentation should be submitted to the appropriate Tax Services Office for their views. However, we are prepared to offer the following general comments, which may be of some assistance to you.

Subsection 125.4(3) of the Act provides for a tax credit based, in part, on a percentage of the qualified labour expenditure for the year in respect of a particular production. Subsection 125.4(1) of the Act defines qualified labour expenditure, and provides that it can be reduced by the amount of assistance in respect of certain production costs. For these purposes, assistance is defined in subsection 125.4(1) of the Act to mean

"...an amount...that would be included under paragraph 12(1)(x) in computing a taxpayer's income for any taxation year if that paragraph were read without reference to subparagraphs (v) to (vii)."

In our view, subparagraph 12(1)(x)(viii) of the Act would generally apply to exclude any amount of the Equity Purchase Price that might otherwise have been included in computing Producer's income under paragraph 12(1)(x) of the Act. Therefore, the amount of the Equity Purchase Price would not be assistance received by Producer, within the meaning of subsection 125.4(1) of the Act.

However, the purchase of the Acquired Equity by Broadcaster would result in a reduction of the amount of qualified labour expenditure on which Producer could claim the Tax Credit in respect of the Production. This would be so because the total amount of Production expenditures would generally be allocated on a reasonable pro rata basis between each of the co-owners (or joint venturers) of the Production (i.e., Producer and Broadcaster), in accordance with their respective interests in the Production.

Additional Comments

These matters always involve questions of fact, and therefore any such determination can only be made after reviewing all of the relevant facts and documentation of each case.

In accordance with paragraph 22 of Information Circular 70-6R5, the above comments are only an expression of opinion, and as such should not be construed as an advance income tax ruling, nor are they binding on the Canada Customs and Revenue Agency.

We hope the above will be of assistance to you.

Yours truly,

M. Azzi, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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