1. Would subsection 125.4(4) of the Act apply to deny a producer’s claim for the Canadian film or video production tax credit solely because of a loan from a Canadian lender to the Canadian producer in respect of a particular production?
2. Would subsection 125.4(4) of the Act apply to deny a producer’s claim for the Canadian film or video production tax credit solely because the producer acquires what is referred to as time variable contingent insurance (“TVC insurance”) from an arm’s length non-resident insurer that is not taxable in Canada? The insurer receives a fee for guaranteeing the producer’s loan with the lender. The insurer guarantees to pay the lender if the producer defaults on the loan. The insurer would then have full recourse to the producer to collect the amount of any payment made by the insurer to the lender.
3. Would TVC insurance be assistance with a resulting grind to the maximum amount of a producer’s Canadian film or video production tax credit?
1.(a) Where a bona fide loan arrangement exists, that fact alone would not preclude the Canadian producer from qualifying for the Canadian film or video production tax credit in respect of that production.
1.(b) Where the facts indicate that the producer has also transferred an equity interest in the production to the Canadian lender, this will result in the producer being ineligible for the credit in respect of that production (unless the lender is a prescribed person, as defined in proposed subsection 1106(7) of the Regulations, or the lender is actively engaged on a regular, continuous and substantial basis in a business carried on through a permanent establishment in Canada that is a Canadian film or video production business). Such a disposition and acquisition of an equity interest would occur where, for example, the lender’s compensation for the loan includes all of the following: (a) participation payments computed as a percentage of profits from the production, (b) no maximum amount to the participation payments, and (c) clearly no connection between the estimated participation payments and a fair market value interest rate.
2.(a) Acquiring TVC insurance from the insurer will not, in and of itself, result in the application of subsection 125.4(4) to deny the Canadian film or video production tax credit to the producer.
2.(b) In a TVC arrangement, where a 3rd party (the “broker”) receives a percentage share in the net profits of the production, as partial consideration for its services of putting the arrangement together, it is a question of fact whether the broker has acquired an equity interest in the production. If so, it will result in a reduction or elimination of the producer’s available Canadian film or video production tax credit.
3. Not in this scenario where (a) the insurer becomes subrogated to all the rights and remedies of the lender in respect of the defaulted loan, and (b) the insurer does not intend to forgive the obligation.