10 October 1985 Income Tax Severed Letter A-1788

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.

Dear Sirs:

This is in reply to your letter of August 16 concerning the applicability of subsection 212(5) of the Income Tax Act (the "Act") to certain payments to U.S. residents. Our understanding of the situation is as follows:

• 1. Films produced in Canada are distributed in the U.S. through the U.S. distributors who are independent agents. Investors or unit holders of the films are Canadian residents.
• 2. License fees and distribution revenues are collected from the U.S. distributors and remitted to Canada net of U.S. withholding tax.
• 3. These fees and revenues are then distributed to the unit holders of the films and to other parties in accordance with agreements entered into during the production of the films.
• 4. Under these agreements, it is often provided that after 100% recoupment of their investment by the unit holders, further revenues are shared between the investors and the producer. Out of the producer's share, a certain percentage is paid to other talents in the production team that include screen writers, actors, authors, etc., who are often residents of the U.S.

With respect to the payments to U.S. residents referred to in 4 above, you ask us to confirm your view that such payments are not subject to Part XIII tax under subsection 212(5) of the Act because:

• (a) Although the payments are "on account or in lieu of payment of a motion picture film, or a film or video tape for use in connection with television", the film has not been used or reproduced in Canada. Rather, it was used or reproduced only in the U.S.
• (b) Part XIII of the Act is intended to levy Canadian withholding tax to non-residents on income that is derived in Canada. In the described situation, the payments are derived from revenue sourced in the U.S.
• (c) In any event, the U.S. residents should be able to seek protection under Article XXV(1) of the 1980 Canada-U.S. Income Tax Convention, because a U.S. withholding tax has already been levied on the remittances referred to in 2 above. Thus, any further withholding tax by Canada would be more burdensome than the taxation imposed on similar citizens of the U.S.

Our Comments

We cannot directly address your specific situation because to do so would require a determination of the facts. Such determinations are made by the relevant district taxation office. We therefore suggest that you refer your query to the Toronto District Taxation Office. Nevertheless, we offer the following comments which may be of assistance to you.

Generally speaking, the provisions of subsection 212(5) of the Act will not apply if a particular film has not been or is not to be used or reproduced in Canada. However, if it has been or is to be so used or reproduced, it is our view that the provisions of subsection 212(5) of the Act will apply to all payments for a right in or to the use of the film, notwithstanding that part of the payments relate to the film's use or reproduction outside Canada.

The inapplicability of subsection 212(5) of the Act does not ensure that a particular payment will not attract Part XIII tax. For example, a particular payment could be subject to Part XIII tax pursuant to subparagraph 212(1)(d)(i) of the Act to the extent it is made for the right to use a property in Canada, notwithstanding that the property is not actually used in Canada, unless the exempting provisions of subparagraph 212(1)(d)(vi) of the Act apply.

With respect to the comments in (c) above concerning Article XXV of the 1980 Canada-U.S. Income Tax Convention, it is our view that nothing contained therein prevents Canada from imposing a Part XIII tax on applicable payments made to a U.S. resident.

Whether or not our comments would differ if, as you suggest in your letter, the unitholders instructed the U.S. distributors to make payments directly to the U.S. residents entitled to share in the producer's film revenue would depend upon the facts. Certainly, they would not differ if the payments were being made on behalf of an obligor resident in Canada.

We trust that the above comments will be of assistance.