15 August 2005 Internal T.I. 2005-0111291I7 - Film Tax Credit-Reimbursement of 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.

Principal Issues: Can a qualified corporation that repays a conditional loan (assistance) in year 2, amend its tax return and/or its Form T1131 for year 1 and recalculate its film tax credit for year 1 without any reduction to its year 1 film tax credit in respect of the conditional loan?

Position: No.

Reasons: Scheme of the Act, which is consistent with Form T1131, allows the corporation to claim its tax credit in year 2, when the assistance is repaid.

 		August 15, 2005

	Eric Saemisch	HEADQUARTERS
	Acting Manager	Allan Nelson, CMA
	Film Industry Services	(613) 443-7253
	344 Slater Street, 6th Floor

	Attention:  Pierre Mercier
		2005-011129

Canadian Film or Video Production Tax Credit - Reimbursement of Assistance

This is in response to your January 13, 2005, email where you asked for our comments about claiming a Canadian film or video production tax credit ("ftc"), as contemplated in section 125.4 of the Income Tax Act (the "Act"), when assistance is repaid in a subsequent taxation year.

Facts

As requested, we have considered a hypothetical example that has the following simplistic facts and, where applicable, we have used the legislative proposals for section 125.4 of the Act that were released by the Department of Finance on July 18, 2005:

? a qualified corporation ("QC"), as defined in subsection 125.4(1) of the Act, commences and completes production of a film in year 1. The total production costs [and capital cost to QC] at the end of year 1 were $1,000,000 of which the labour expenditure component was $700,000;

? in year 1, QC received a $100,000 conditional loan from a taxable Canadian corporation the proceeds of which QC used to finance part of the costs of producing the film. The loan was still outstanding at the end of year 1 and was repaid by QC in year 2;

? QC qualified for and claimed the relevant ftc when it filed its tax return for year 1; and

? in year 1, QC correctly treated the conditional loan as assistance, within the meaning of that term in subsection 125.4(1) of the Act. In computing the amount of its qualified labour expenditure ("QLE") in year 1, QC reduced the amount of production costs otherwise included in variable A in paragraph (b) of the QLE definition, in subsection 125.4(1) of the Act, by the full $100,000 amount of the unrepaid conditional loan [i.e., by the amount of the assistance still owing at the time QC filed its tax return for year 1].

Query

After QC repaid the conditional loan in year 2, can it amend its tax return and/or its Form T1131 for year 1 and recalculate its ftc for year 1 without any reduction for the conditional loan [i.e., without reducing QC's year 1 ftc calculation for the amount of assistance]?

Our Comments

As discussed during our telephone conversations on August 4 and 5, 2005 (Nelson/Mercier), it is our view that in the above example QC would not be entitled to amend its year 1 ftc claim simply because it repaid the assistance in year 2. However, QC would be entitled to claim a ftc in year 2 on the amount of the $100,000 of repaid assistance. This is consistent with section 125.4 of the Act and Parts 6A and 6B of Form T1131 Claiming a Canadian Film or Video Production Tax Credit, as illustrated below.

Subsection 125.4(3) of the Act provides for a ftc equal to 25% of QC's QLE for the year in respect of the production. In the above example this would generally be computed as follows:

Year 1

QC's QLE would be the lesser of (a) and (b), where

(a) is QC's $700,000 labour expenditure for year 1, and

(b) is computed as A - B = $540,000 where

A is 60% of ($1,000,000 film capital cost minus $100,000 of unrepaid assistance in respect of the production costs) = $540,000 and

B is QC's QLE for a preceding year = $nil.

Assuming all the other conditions were met, QC's ftc for year 1 would be $135,000 (i.e., 25% of its $540,000 QLE).

Year 2 [Year in which the assistance is repaid]

QC's QLE would be the lesser of (a) and (b), where

(a) is $160,000, which is computed as QC's $nil labour expenditure for year 2, plus the amount by which year 1's $700,000 labour expenditure exceeds year 1's $540,000 QLE, and

(b) is computed as A - B = $60,000 where

A is 60% of ($1,000,000 film capital cost minus $nil of unrepaid assistance at the time of filing its tax return for year 2) = $600,000 and

B is QC's QLE for a preceding year = $540,000.

Assuming all the other conditions were met, QC's ftc would be $15,000 (i.e., 25% of its $60,000 QLE).

The above calculations for year 2 provides a ftc for QC in respect of the $100,000 of assistance that was repaid in year 2 and initially resulted in a reduction to QC's ftc in year 1 (i.e., the year 1 grind to the ftc was 60% x $100,000 of assistance x 25% = $15,000, which equals the amount of the available ftc for year 2).

We hope the above will be of assistance to you.

If you have any additional queries on this matter please feel free to contact us.

Allan Nelson, CMA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate