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Citation: 2003TCC517
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Date: 20030904
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Docket: 2002-4916(IT)I
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BETWEEN:
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AJE PRODUCTIONS INC.,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Woods J.
[1] AJE Productions Inc. ("AJE
Productions") appeals an income tax assessment for the 2000
taxation year that reduced a refundable film tax credit under
section 125.4 of the Income Tax Act, R.S.C. 1985 (5th
Supp.), c. 1 (the "Act"). The Minister of
National Revenue ("Minister") assessed the corporation
on the basis that it was entitled to only 80 percent of the tax
credit because the corporation had assigned a 20 percent
ownership interest in the production to a broadcaster under a
broadcasting license agreement.
[2] The appeal was heard under the
Court's Informal Procedure. The Appellant agreed to a slight
reduction in the amount at issue to $12,000 so that it would not
exceed the monetary limit for this procedure.
Facts
[3] AJE Productions is a
Canadian-controlled private corporation that is in the business
of producing television programs. Ms. Amanda Enright has been
president of the corporation for approximately seven years and
has been in the television production industry for about 19
years.
[4] The corporation entered into a
license agreement dated as of May 7, 1999 (the "License
Agreement") with Lifestyle Television (1994) Limited
("WTN") under which WTN acquired the Canadian telecast
rights to a series to be produced by AJE Productions called Bella
1. WTN committed to pay $531,180 for the telecast rights as a
license fee. This amount was approximately 97 percent of the
total cost of the production.
[5] Under the License Agreement, AJE
Productions agreed to produce the series and was responsible for
all costs. It agreed not to make changes to the key creative
elements of the series without the prior consent of WTN, which
consent was not to be unreasonably withheld. The agreement also
required AJE Productions to deliver a budget respecting the
production to WTN and the budget was not to be changed without
the broadcaster's prior consent. The agreement specifically
provided that title and copyright in the series was to remain
with AJE Productions.
[6] The License Agreement also
contained a provision that granted to WTN the right to 20 percent
of net revenues from the exploitation of the series.
Ms. Enright testified that this was a typical provision in
broadcasting license agreements except that the 20 percent was
unusually high because WTN was funding such a large portion of
the production costs.
[7] In its tax return for the 2000
taxation year, AJE Productions claimed a refundable tax credit
under subsection 125.4(3) of the Act in the amount of
$65,455. The Minister assessed the corporation by reducing its
claim by $12,748.
Issue
[8] The question is whether AJE
Productions' entitlement to the refundable film tax credit
under section 125.4 of the Act in respect of the
production of Bella 1 should be reduced as a result of the
terms of the License Agreement.
Statutory Provisions
[9] The relevant parts of section
125.4 of the Act for the taxation year at issue read:
Subsection 125.4(3)
Where
(a) a qualified corporation for a taxation year files with its
return of income for the year
(i) a Canadian film or video production certificate issued in
respect of a Canadian film or video production of the
corporation,
(ii) a prescribed form containing prescribed information,
and
(iii) each other document prescribed in respect of the
production, and
(b) the principal filming or taping of the production began
before the end of the year,
the corporation is deemed to have paid on its balance-due day
for the year an amount on account of its tax payable under this
Part for the year equal to 25% of its qualified labour
expenditure for the year in respect of the production.
Subsection 125.4(1)
"labour expenditure" of a corporation for a
taxation year in respect of a property of the corporation that is
a Canadian film or video production means, in the case of a
corporation that is not a qualified corporation for the year,
nil, and in the case of a corporation that is a qualified
corporation for the year, subject to subsection (2), the total of
the following amounts to be extent that they are reasonable in
the circumstances and included in the cost or, in the case of
depreciable property, the capital cost to the corporation of the
property:
(a) the salary or wages directly attributable to the
production that are incurred after 1994 and in the year, or the
preceding taxation year, by the corporation ...
"qualified corporation" for a taxation year
means a corporation that is throughout the year a prescribed
taxable Canadian corporation the activities of which in the year
are primarily the carrying on through a permanent establishment
(as defined by regulation) in Canada of a business that is a
Canadian film, or video production business.
Submissions of Parties
[10] The position of the Crown is that AJE
Productions is not entitled to 100 percent of the tax credit
because it funded only three percent of the production. The Crown
argues that the cost of the production for purposes of the
definition of "labour expenditure" is in fact only the
three percent that AJE Productions funded and states that the
Minister is being generous in allowing the corporation 80 percent
of the amount claimed. Further, the Crown submits that the
overall effect of the License Agreement is to give WTN a 20
percent ownership interest in the production and therefore AJE
Productions' "labour expenditure" as defined in
subsection 125.4(1) should be reduced by this amount.
[11] AJE Productions takes the position that
it owns the entire production and that the License Agreement is a
typical license agreement that does not give WTN any ownership in
the production.
Analysis
[12] The refundable film tax credit in
section 125.4 came into force in 1995. It entitles
qualifying corporations to a credit based on remuneration paid in
respect of the production of Canadian films or video productions
to the extent that such remuneration is reasonable and included
in the cost of the production. Qualifying corporations are
defined as prescribed taxable Canadian corporations whose
activities consist primarily of film or video production in
Canada. Regulations defining prescribed taxable Canadian
corporations were released in draft form and apparently were not
in force in the relevant taxation year. It appears that the
regulations are still in draft form and I understand that the tax
credit is administered on the basis of the draft regulations. It
is not disputed that AJE Productions is a prescribed taxable
Canadian corporation as defined in the draft regulations.
[13] AJE Productions is entitled to the tax
credit in respect of remuneration paid for the production of
Bella 1 to the extent that such remuneration is reasonable and is
included in the cost of the production. It is not disputed that
the remuneration paid was reasonable. The Crown's position is
that AJE Productions incurred only three percent of the
remuneration for the production of Bella 1. I cannot agree with
this position. In my view AJE Productions had the obligation to
pay its employees in respect of this production notwithstanding
that WTN paid a license fee equal to 97 percent of such amount.
Similarly I disagree with the Crown that cost of the production
to AJE Productions is reduced by WTN's license fee. Quite
simply, the receipt of the license fee from WTN is revenue to AJE
Productions and is not a reduction of the production's
cost.
[14] The Crown also submits that AJE
Productions gave up ownership of 20 percent of the production by
granting to WTN the right to 20 percent of net revenues from the
exploitation of the series. In my view, the Crown's position
is not supported by the terms of the License Agreement. The
License Agreement explicitly states that AJE Productions retains
ownership of the production and I find nothing in the agreement
that is inconsistent with this. WTN's right to 20 percent of
net revenue from the exploitation of the series applies to
exploitation over and above the Canadian telecast rights that are
the main subject of the license and in my view this is more in
the nature of a sweetener and certainly does not give WTN a
20 percent ownership interest in the production.
[15] The Crown also submits that the License
Agreement was not a simple broadcasting license agreement but was
a complex arrangement like the type considered in the case of
Big Comfy Corp. v. The Queen, 2002 DTC 1729 (T.C.C.). The
Crown referred to various sections in the License Agreement to
illustrate that this was not a simple broadcasting license
agreement and that WTN had in effect veto control over decisions
respecting the production. In my view, the License Agreement was
not a complex hybrid agreement of the type considered in the
Big Comfy case and any decision making rights granted to
WTN were consistent with its rights as licensee. I have concluded
that WTN acquired no ownership rights in the series as a result
of entering into this agreement.
[16] Finally, I wish to note that it is
difficult to apply legislation that depends in part on draft
regulations. It appears that the Canada Customs and Revenue
Agency has been administering this tax credit as if the draft
regulations were in force. I think it is appropriate in these
circumstances to respect this administrative practice.
Conclusion
[17] For the foregoing reasons, the appeal
in respect of the 2000 taxation year is allowed and the
assessment is referred back to the Minister for reconsideration
and reassessment on the basis that the only reduction in the tax
credit under section 125.4 of the Act in respect of the
production of Bella 1 by AJE Productions is $748. This is the
amount conceded by the Appellant so as not to exceed the monetary
limits for the Court's Informal Procedure.
Signed at Ottawa, Canada this 4th day of September, 2003.
J.M. Woods J.
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