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 Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
1. Will a particular distribution agreement result in the film tax credit being reduced or eliminated?
2. Will the amalgamation of a production subsidiary into its parent and the subsequent disposition of certain assets to a new subsidiary result in the application of the investor rules or the excluded production rules to deny the Canadian film or video production tax credit?
3. Will each episode in a television series be considered to be a property in and by itself, or is the entire series considered to be one single property?
Position:
1. Not if the distribution agreement represents a fair market value commercial arrangement and the distributor does not acquire any portion of the legal and/or beneficial ownership of the production copyright.
2. No.
3. Each episode is considered to be a separate property.
Reasons:
1. In this fact situation, the distributor is a qualified corporation therefore it is not an investor and subsection 125.4(4) of the Act does not apply. In addition the distributor will not acquire legal or beneficial ownership of the production. Therefore, the excluded obligation rules in Regulation 1106(1) do not apply. A similar ruling was given in file 992141 regarding a distribution arrangement and the ruling has been caveated to meet the criteria in the POSITION above.
2. Paragraph 87(2)(j.94) applies with modifications so that for the purposes of 125.4, Amalco is deemed to be the same corporation as, and a continuation of the production corporation. Therefore, Amalco is not an investor and 125.4(4) of the Act will not have application. We also considered the definition of excluded production in subsection 1106(1) of the Regulations. The proposed transactions would not result in there being an excluded production since the Regulations contemplate transfers of copyright within Canadian corporate families.
3. Consistent with position in file 981630. CAVCO only issues one certificate for a series, but that certificate shows a range of certificate numbers on it (one for each episode). Each episode must meet the Canadian content rules in order to be certified.
XXXXXXXXXX
XXXXXXXXXX 2000-001579
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 2000
Dear Sirs:
Re: XXXXXXXXXX
Advance Income Tax Ruling
This is in reply to your letter dated XXXXXXXXXX, and our numerous telephone conversations (XXXXXXXXXX), wherein you requested advance income tax rulings on behalf of XXXXXXXXXX, its related corporations and XXXXXXXXXX, in connection with the proposed transactions described below.
We understand that, to the best of your knowledge and that of the taxpayers involved, none of the issues involved in this ruling
(i) is in an earlier return of the taxpayer(s) or a related person,
(ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer(s) or a related person,
(iii) is under objection by the taxpayer(s) or a related person,
(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired, and
(v) is the subject of a ruling previously issued by Revenue Canada or the Canada Customs and Revenue Agency.
Unless otherwise stated, (i) all references to a statute are to the Income Tax Act (Canada) R.S.C. 1985 (5th Supp.), c.1, as amended, (the "Act"), and (ii) all terms and conditions used herein that are defined in the Act have the meaning given in such definition.
Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:
DEFINITIONS
"Acquisitionco" means XXXXXXXXXX.
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
"Regulations" means the regulations to the Act.
"Tax Credit" means the Canadian film or video production tax credit, as provided in section 125.4.
XXXXXXXXXX
XXXXXXXXXX
FACTS
1. XXXXXXXXXX is a taxable Canadian corporation and a public company resident in Canada. XXXXXXXXXX, indirectly through its subsidiaries, is involved in
XXXXXXXXXX
2. XXXXXXXXXX is a taxable Canadian corporation and a subsidiary wholly-owned corporation of XXXXXXXXXX, within the meaning of that term in subsection 87(1.4). XXXXXXXXXX is a qualified corporation for the purposes of section 125.4.
XXXXXXXXXX
XXXXXXXXXX
Finally, XXXXXXXXXX is also in the process of developing what will become new Canadian Productions after principal photography or taping has commenced. Until principal photography or taping has commenced, these properties are referred to herein as the "Indevelopment Productions".
XXXXXXXXXX
3.
XXXXXXXXXX
4. XXXXXXXXXX has non-capital loss carryforward amounts of approximately $XXXXXXXXXX. Those losses are related to the production business carried on by XXXXXXXXXX and its predecessor corporations. Productions were transferred to XXXXXXXXXX and other subsidiaries of XXXXXXXXXX in the course of a corporate reorganization which occurred in XXXXXXXXXX. As background information to the reorganization, XXXXXXXXXX had acquired certain production companies in the last few years, such as XXXXXXXXXX. It had also formed subsidiaries to produce specific productions. By XXXXXXXXXX, there were approximately XXXXXXXXXX corporations in the XXXXXXXXXX group. Thus, the purpose of the corporate reorganization was to simplify the corporate structure and consolidate certain types of activities each in a single company.
5. On or about XXXXXXXXXX commenced negotiations in respect of an acquisition by XXXXXXXXXX of shares of the capital stock of XXXXXXXXXX. However, XXXXXXXXXX did not wish to acquire the rights relating to the Indevelopment Productions for the reason that, inter alia, XXXXXXXXXX would generally no longer be entitled to the XXXXXXXXXX Credit in respect of such productions following an acquisition of control by XXXXXXXXXX.
PROPOSED TRANSACTIONS
6. XXXXXXXXXX will incorporate a company ("Bidco") for the purpose of acquiring the shares of the capital stock of Amalco (see paragraph 9 below) by way of a take-over bid. XXXXXXXXXX will own respectively XXXXXXXXXX% and XXXXXXXXXX% of Bidco.
7. XXXXXXXXXX, as well as a number of members of the management of XXXXXXXXXX will acquire the capital stock of "Acquisitionco" (Acquisitionco was recently incorporated, under the laws of the Province of XXXXXXXXXX. Its head office is located at XXXXXXXXXX. The XXXXXXXXXX of XXXXXXXXXX will acquire, in the aggregate, directly or indirectly, XXXXXXXXXX% of Acquisitionco's capital stock and XXXXXXXXXX will acquire the other XXXXXXXXXX%. Acquisitionco will deal at arm's length with XXXXXXXXXX and Bidco. It will also deal at arm's length with Amalco and Newco. Acquisitionco will be a qualified corporation within the meaning of section 125.4.
8. XXXXXXXXXX will incorporate "Newco", as a subsidiary wholly-owned corporation of XXXXXXXXXX. Consistent with XXXXXXXXXX corporate policy, Newco will be used to continue certain production operations in a subsidiary (refer to paragraph 12, below). Newco will be a qualified corporation within the meaning of section 125.4.
9. XXXXXXXXXX will be amalgamated by way of a short-form amalgamation, pursuant to section 87. The company resulting from the amalgamation is referred to in this letter as "Amalco". Paragraph 87(2)(a) will apply to deem XXXXXXXXXX to have a taxation year-end immediately before amalgamation. XXXXXXXXXX will file a claim for any available Tax Credits for expenses incurred by XXXXXXXXXX in producing Canadian Productions or XXXXXXXXXX Productions in XXXXXXXXXX last taxation year. After the amalgamation, Amalco will be the sole legal and beneficial owner of the copyright in the Canadian Productions and the XXXXXXXXXX Productions. Amalco will not incur any production expenditures which would otherwise form part of the cost or the capital cost of any of the Canadian Productions, the XXXXXXXXXX Productions or the Indevelopment Productions. Refer to paragraphs 10 and 12, below for details concerning Amalco's disposition of these properties.
10. On or about XXXXXXXXXX, Amalco will sell to Acquisitionco, solely in consideration for an amount of $XXXXXXXXXX, (i) all of its rights relating to the Indevelopment Productions (the "Rights"), (ii) all the equipment, computer and electronic material, telecopiers, photocopiers and furniture XXXXXXXXXX, (iii) all of XXXXXXXXXX equipment and furniture, that will then be owned by Amalco, that will, at some point in time, be used to produce the Indevelopment Productions and was used to produce the Canadian Productions, including all the sets and stages; (iv) all equipment and furniture used by the current employees of XXXXXXXXXX who will become employees of Acquisitionco (the assets described in (ii), (iii) and (iv) above are hereinafter referred to as the "Equipment"); and (v) all the software, licences, agreements and permits related exclusively to the Rights and the Equipment.
11. It is also proposed that on or about XXXXXXXXXX, Amalco will grant Acquisitionco a licence XXXXXXXXXX. Under the terms of the Licence, Acquisitionco will provide a recoupable, non-refundable distribution advance to Amalco of $XXXXXXXXXX. Acquisitionco will be entitled to earn a distribution fee of XXXXXXXXXX% of gross receipts and recover any reasonable distribution expenses (an exception is for videocassettes, where Acquisitionco will still be entitled to earn a distribution fee of XXXXXXXXXX%, but will not receive additional compensation to recover any of its distribution expenses). After Acquisitionco has recovered its distribution advance, it will deduct the amount of its distribution fee and an amount for the recovery of its reasonable distribution expenses, if applicable, before being required to remit the balance of net revenues to Amalco.
XXXXXXXXXX
12. Amalco will transfer the XXXXXXXXXX Productions and the Canadian Productions to Newco by way of a rollover pursuant to subsection 85(1). Amalco and Newco shall execute and file a joint election under subsection 85(1) within the prescribed delay. This joint election shall provide that the amount of the proceeds of disposition to Amalco and the cost of acquisition to Newco of the XXXXXXXXXX Productions and the Canadian Productions shall be at least equal to their cost amount to Amalco without exceeding their fair market value.
13. The closing of the take-over bid on the shares of the capital stock of Amalco, by Bidco, will take place on or about XXXXXXXXXX.
PURPOSE OF THE PROPOSED TRANSACTIONS
14. The purpose of the amalgamation of XXXXXXXXXX and the subsequent rollover by Amalco to Newco is to allow Amalco to dispose of its rights in the Indevelopment Productions, which would no longer be generally eligible for the XXXXXXXXXX Credit if produced by Amalco following the acquisition by Bidco, and to claim the losses presently in XXXXXXXXXX against the gain to be realized in respect thereof, while allowing the XXXXXXXXXX corporate group to continue to claim the Tax Credit with respect to the XXXXXXXXXX Productions and the Canadian Productions to be completed by it in the future.
RULINGS
15. Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and the purpose of the proposed transactions, and provided further that the proposed transactions are carried out as described above, and that the Canadian Productions and the XXXXXXXXXX Productions are or have been certified by the Ministry of Canadian Heritage as Canadian Films or Video Productions and such certification has not been and will not be revoked, we confirm the following:
A. Paragraph 87(2)(j.94) will apply so that, for the purposes of section 125.4, Amalco will be deemed to be the same corporation as, and a continuation of, XXXXXXXXXX. Consequently, the disposition of assets to Amalco on the amalgamation of XXXXXXXXXX (see paragraph 9 above) will not result in the application of 125.4(4) to deny XXXXXXXXXX claim for the Tax Credit in respect of expenditures incurred by XXXXXXXXXX in producing the Canadian Productions and the XXXXXXXXXX Productions in its taxation year ending immediately before the amalgamation.
B. Assuming Newco is a qualified corporation (see paragraph 8 above and our comments in the last paragraph of this letter), Newco will not be an investor within the meaning of that term in subsection 125.4(1). Consequently, Amalco's disposition of assets to Newco, as described above in paragraph 12, will not result in the application of 125.4(4) to deny Newco's claim for the Tax Credit in respect of expenditures incurred by Newco in producing the Canadian Productions and the XXXXXXXXXX Productions.
C. The Canadian Productions and the XXXXXXXXXX Productions will not become excluded productions under clause 1106(1)(a)(ii)(A) of the Regulations, at the definition of excluded production, solely as a result of the amalgamation of XXXXXXXXXX or as a result of the disposition by Amalco of the Canadian Productions and the XXXXXXXXXX Productions to Newco (see paragraph 12 above).
D. To the extent that
(i) the distribution fee to be received by Acquisitionco, as described above
in paragraph 11, reflects a fair market value fee for distributing the Canadian Productions in the particular territory,
(ii) the terms of the Licence represent a normal commercial agreement, and
(iii) no portion of the distribution advance paid by Acquisitionco to Amalco,
as described above in paragraph 11, represents the cost of acquiring legal or beneficial ownership of any portion of the copyright in the Canadian Productions,
the grant of the Licence by Amalco to Acquisitionco will not be considered to be a disposition of the Canadian Productions by Amalco, within the meaning of the term "disposition" in section 54. In addition, the granting of the Licence will not, in and of itself, cause subsection 125.4(4) to apply to deny either of XXXXXXXXXX claim for the Tax Credit, or Newco's claim for the Tax Credit, as the case may be, in respect of the Canadian Productions.
E. The transfer of the Rights relating to the Indevelopment Productions to Acquisitionco, as described above in paragraph 10, will not, in and of itself, cause any of those Indevelopment Productions to be excluded productions under clause 1106(1)(a)(ii)(A) of the Regulations, at the definition of excluded production.
These rulings are given subject to the general limitations and qualifications set forth in Information Circular 70-6R3 issued by Revenue Canada December 30, 1996, and are binding provided the proposed transactions are completed on or before XXXXXXXXXX. These rulings are based on the Act in its present form and do not take into account the effect of any proposed amendments. Except as expressly stated, our rulings do not imply acceptance, approval or confirmation of any income tax implications of the facts or proposed transactions. In particular, we are not commenting on any of the following matters:
(i) the fair market value of any amounts (fees, advances, purchase prices, etc.) referred to in this letter;
(ii) whether any of XXXXXXXXXX, Acquisitionco or Newco will be qualified corporations for the purposes of section 125.4; and
(iii) the possible impact of subsection 111(5) on Amalco's ability to claim the non-capital loss carryforwards, referred to above in paragraph 4.
Yours truly,
XXXXXXXXXX
for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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