2001 Ruling 2000-0038853 - FILM PARTNERSHIP; LEASE

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: whether disposition of film

Position: no

Reasons: XXXXXXXXXX year lease; certain rights retained

XXXXXXXXXX 2000-003885

XXXXXXXXXX, 2001

Dear Sir/Madam:

Re: XXXXXXXXXX
Advance Income Tax Ruling

We are writing in response to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above taxpayers as well as your subsequent letters and our telephone conversations and meetings on this matter.

To the best of your knowledge, and that of the taxpayers involved, none of the issues contained herein is:

(i) dealt with in an earlier return of the taxpayers or a related person;

(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of one or any of the taxpayers or a related person;

(iii) under objection by one or any of the taxpayers or a related person;

(iv) subject to a ruling previously issued by the Income Tax Rulings Directorate; or

(v) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired.

In this letter, the following terms have the meanings specified:

(a) "Act" means the Income Tax Act, R.S.C 1985 (5th Supp.) c.1, as amended to the date hereof, and, unless otherwise stated, every reference herein to a Part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act;

(b) "Canadian License" means a license agreement between Can Production Co and UK Co #1;

(c) "Can Production Co" means XXXXXXXXXX;

(d) "Co-Production Treaty" means the Film Co-Production Agreement between Canada and the United Kingdom;

(e) "Film Partnership" means XXXXXXXXXX;

(f) "ParentCo" means XXXXXXXXXX;

(g) "Series" means the XXXXXXXXXX;

(h) "UK Co #1" means XXXXXXXXXX;

(i) "UK Co #2" means XXXXXXXXXX.

Facts

1. "Can Production Co" is a taxable Canadian corporation incorporated under the federal laws of Canada. The business office of Can Production Co. is XXXXXXXXXX. The voting shares of Can Production Co are owned by ParentCo.

2. ParentCo is a taxable Canadian corporation incorporated under the Canada Business Corporations Act. The voting shares of ParentCo are owned by XXXXXXXXXX.

3. "Film Partnership" was formed on XXXXXXXXXX as a partnership under the laws of XXXXXXXXXX. The current partners of the Film Partnership are XXXXXXXXXX, a corporation incorporated under the laws of XXXXXXXXXX and various unrelated investors. Film Partnership is not a Canadian partnership and is deemed to be a non-resident for purposes of certain payments under Part XIII of the Act. Film Partnership conducts its business from XXXXXXXXXX.

4. "UK Co #1" is a corporation incorporated under the laws of England. The business office of UK Co #1 is XXXXXXXXXX.

5. "UK Co #2" is a corporation incorporated under the laws of England. The business office of UK Co #2 is XXXXXXXXXX.

6. Can Production Co has co-produced certain episodes of the Series in Canada and the United Kingdom (the "UK") with UK Co #1 and UK Co #2. This production has been approved by Telefilm Canada as an official treaty co-production under the Co-Production Treaty.

7. The aggregate costs for producing the Series are approximately $XXXXXXXXXX. Can Production Co's share of the costs of production are approximately $XXXXXXXXXX. Can Production Co is financing its share of the costs of production through approximately $XXXXXXXXXX of Canadian federal and provincial income tax credits; revenues from pre-sales of the Canadian broadcast rights for a period of five years; its share of revenues from pre-sales of the international distribution rights for a period of five years and a contribution of equity from Telefilm Canada. The aggregate of Can Production Co's share of the revenues and the equity contribution and the tax credits from the above sources will approximate the cost of the Series. Additional revenues to cover the costs of production will be provided from the proposed transactions.

8. Two master negatives of each episode of the Series have been produced. UK Co #1 and UK Co #2 have received the first master negative and Can Production Co has received the second master negative. The production of two master negatives is typical of a co-production and is required under the terms of the Co-Production Treaty. Under the Annex to the Co-Production Treaty, each co-production contract is required to provide that each co-producer shall be the owner of a copy of the production and shall be entitled to use it to make necessary reproductions.

Proposed Transactions

9. Can Production Co will enter into a license agreement with UK Co #1 (the "Canadian License"). Under the terms of the Canadian License, Can Production Co will grant to UK Co #1 a license of its rights, as a co-owner, to copy, rent, license, exhibit, distribute, reissue and otherwise deal with the Series for the term of the Canadian License in the territory. The territory is defined as the world excluding Canada. The term of the Canadian License will be for a fixed period of 25 years. Can Production Co will retain: (i) ownership of the second master negative; (ii) ownership of its interest in the underlying copyright to the Series; (iii) its interest in the right to exploit the Series in Canada; and (iv) its interest in other rights specifically retained under the Canadian License, including but not limited to, rights to produce prequels and sequels. In consideration of granting the Canadian License, Can Production Co will receive from UK Co. #1 a lump sum amount of approximately $XXXXXXXXXX, which is approximately XXXXXXXXXX% of Can Production Co's costs of production (the "Initial Amount") and a lump sum payment of $XXXXXXXXXX (the "Additional Payment") to be made on the fifteenth anniversary of the completion date (the "Completion Date") of the sale/leaseback transaction in paragraph 12 below, provided that the Series has generated gross receipts (excluding VAT and any equivalent taxes) of $XXXXXXXXXX (excluding presales) and net of any commissions and other costs of distribution (the "Gross Receipts"). The Initial Amount will be paid on the Completion Date and will be used by Can Production Co to fund its costs of production.

10. UK Co #1 and UK Co #2 will sell the first master negative of the Series and certain ancillary materials to the Film Partnership under the terms of a sales agreement (the "International Sales Agreement"') and grant to the Film Partnership a license (the "International License") of the right to exploit the Series outside of Canada, including the rights obtained by UK Co #1 from Can Production Co under the Canadian License. UK Co #1 and UK Co #2 will retain certain rights including: (i) ownership of its interest in the underlying copyright to the Series and its interest in other rights under the International License including but not limited to rights to produce prequels and sequels. Can Production Co will not be a party to the International Sales Agreement or the International License.

11. The amount paid for the rights acquired by the Film Partnership under the International Sales Agreement and the International License wil1 be approximately $XXXXXXXXXX, the original cost of the Series, less the value of the rights to exploit the Series in Canada.

12. Immediately after the sale of the first master negative under the International Sales Agreement and the granting of the International License, the Film Partnership will enter into a lease agreement with UK Co #1 (the "Lease"). Under the terms of the Lease, the Film Partnership will lease to UK Co #1 the first master negative acquired under the International Sales Agreement and will license to UK Co #1 all of the Film Partnership's rights in and to the Series acquired under the International License to exploit the Series outside of Canada. The initial term of the Lease will be for a period of 15 years with annual renewal options thereafter provided that the aggregate term of the Lease, including renewals, will not exceed 25 years.

13. Immediately after the granting of the Lease from the Film Partnership to UK Co #1, UK Co #1 will enter into a sublicense agreement with the Can Production Co to license to Can Production Co the same rights licensed by Can Production Co under the Canadian License (the "Can Sublicense") on the same terms and conditions. The amount of the Can Sublicense payments due from the Can Production Co to UK Co #1 will be equal to the Additional Payment due from UK Co #1. The Can Sublicense will be for a period not exceeding 25 years.

14. The Film Partnership will claim a deduction under the tax laws of the United Kingdom for 100% of the amount paid to acquire the first master negative for the Series and the rights under the International License.

Purpose of the Proposed Transactions

15. The purpose of the Proposed Transactions is to generate additional revenues to reduce the production costs for the Series by taking advantage of provisions of the United Kingdom's tax legislation which are designed to encourage the production of film and television activity in the United Kingdom.

RULING GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our ruling is as set forth below:

The granting of the rights under the Canadian License by the Can Production Co to UK Co#1 will not be considered a disposition of the copyright in the Series by the Can Production Co for the purposes of the Act.

CAVEAT

The above ruling is given subject to the general limitations and qualifications set out in Information Circular 70-6R3 (the "Circular") issued by the CCRA on December 30, 1996, and is binding provided the proposed transactions are completed on or before XXXXXXXXXX.

This ruling is based on the Act in its present form and does not take into account the effect of any proposed amendments to the Act.

Nothing in this letter should be construed as implying that CCRA has agreed to or accepted:

(i) the determination of FMV, ACB or UCC of any property referred to in this letter;

(ii) the GST implications of any of the proposed transactions;

(iii) the entitlement of Can Production Co to any income tax credits described in paragraph 7 above;

(iv) any income tax consequences relating to any person who may have an interest in Film Partnership and is subject to income taxation in Canada; and

(v) any other tax consequences arising from the facts or proposed transactions described herein, other than those specifically confirmed in the ruling given.

Nothing in this letter should be construed as implying whether or not any of the transactions entered into by Can Production Co will directly or indirectly enable Film Partnership to have access to any deductions for UK tax purposes with respect to any or all of the $XXXXXXXXXX Canadian production costs, and, in particular, nothing in this letter should be construed as implying that Can Production Co has entered into a sale-leaseback transaction with respect to its interest in the Series.

Yours truly,

XXXXXXXXXX
for Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch