2000 Ruling 2000-0040653 - Canadian FIlm or Video Production Tax Credit

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:

Will the amalgamation of a production subsidiary into its parent, followed by (i) a section 85 roll of amalco's shares by amalco's parent corporation into another subsidiary and (ii) a wind-up of amalco into this latter subsidiary, result in the application of the investor rules or the excluded production rules to deny the Canadian film or video production tax credits previously claimed?

Position:

Not in and of themselves.

Reasons:

Paragraph 87(2)(j.94) applies to the amalgamation and paragraph 87(2)(j.94) as modified by 88(1)(e.2) applies to the wind-up, so that for the purposes of 125.4, the various corporations are deemed to be the same corporation as, and a continuation of, each predecessor corporation. Therefore, amalco and the parent corporation do not become investors and 125.4(4) does not apply to deny the credits. We also considered the definition of excluded production in draft 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 and also in situations involving treaty co-productions.

The position is similar to our position adopted in File #2000-001579 and File #992141.

XXXXXXXXXX 2000-004065

Attention: XXXXXXXXXX

XXXXXXXXXX , 2000

Dear Sirs:

Re: XXXXXXXXXX
Advance Income Tax Ruling

This is in reply to your letter dated XXXXXXXXXX, wherein you requested advance income tax rulings on behalf of XXXXXXXXXX and its related corporations, 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.

Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:

DEFINITIONS

In this letter, the following terms have the meaning specified, unless otherwise indicated:

"Act" means the Income Tax Act (Canada).

"Coprodco" means XXXXXXXXXX.

"Leaseco" means XXXXXXXXXX.

"Parentco" means XXXXXXXXXX.

"Prodco" means XXXXXXXXXX.

"Production" means the television series entitled "XXXXXXXXXX", referred to below in paragraph 5.

"Regulations" means the Regulations to the Act.

"Subco" means XXXXXXXXXX.

"Tax Credit" means the Canadian film or video production tax credit, as provided in section 125.4 of the Act.

FACTS

1. Prodco is a taxable Canadian controlled private corporation incorporated on XXXXXXXXXX, under the laws of Canada. Prodco files its federal income tax return at the XXXXXXXXXX tax services office. Its business number is XXXXXXXXXX. The issued and outstanding shares of Prodco are owned by Parentco.

2. Prodco's primary responsibility is the production of motion picture and television properties. It employs approximately XXXXXXXXXX full-time and part-time employees

XXXXXXXXXX

Prodco has claimed all the available Tax Credits and applicable provincial tax credits in respect of productions which it has produced itself (hereinafter referred to as the "Prior Prodco Productions").

3. Parentco is a holding company and a taxable Canadian private corporation. The issued and outstanding shares of Parentco are owned by XXXXXXXXXX . Parentco was incorporated on XXXXXXXXXX . It files its federal income tax return at the XXXXXXXXXX tax services office. Its business number is XXXXXXXXXX . Parentco's principal source of revenue is XXXXXXXXXX .

4. Leaseco was incorporated on XXXXXXXXXX and is a wholly-owned subsidiary of Parentco. It is a taxable Canadian controlled private corporation incorporated under the laws of Canada. It files its federal income tax return at the XXXXXXXXXX tax services office. Its business number is XXXXXXXXXX.

5. Subco is a taxable Canadian corporation incorporated on XXXXXXXXXX, under the laws of Canada. It is a wholly-owned subsidiary of Prodco and is a single purpose film and video production company. Subco entered into a treaty co-production (within the meaning of that term in draft subsection 1106(1) of the Regulations) and along with Coprodco (XXXXXXXXXX) co-produced the Production. The Production was completed in Subco's last fiscal year which ended XXXXXXXXXX. In that same year, Subco claimed the Tax Credit, plus any applicable provincial tax credits, in respect of their portion of the relevant costs of the Production. Subco files its federal income tax return at the XXXXXXXXXX tax services office. Its business number is XXXXXXXXXX.

PROPOSED TRANSACTIONS

6. Prodco and Subco will amalgamate pursuant to and in accordance with subsection 87(1) of the Act. The new company resulting therefrom will be called "Prodco 87".

7. Immediately thereafter, Parentco will transfer all the issued and outstanding shares of its wholly-owned subsidiary, Prodco 87, to Leaseco in exchange for common shares of Leaseco. Parentco and Leaseco will jointly elect under subsection 85(1) of the Act, within the time prescribed by subsection 85(6) of the Act, to treat this transaction on a tax deferred basis. The amount that Parentco and Leaseco agree on in their joint election in respect of the shares of Prodco 87 shall be equal to the lower of Parentco's cost amount or the fair market value of the Prodco 87 shares.

8. Subsequent to the transaction described in 7 above, Prodco 87 will be wound-up into Leaseco, pursuant to and in accordance with subsection 88(1) of the Act. All the film or video productions thus acquired by Leaseco will have been previously completed and all Tax Credits and provincial tax credits in respect of the productions applied for and received by the predecessor corporations. Thus, when Leaseco files its income tax return for the taxation year of the wind-up, it will not claim any Tax Credits or similar provincial tax credits.

PURPOSE OF THE PROPOSED TRANSACTIONS

The purpose of the proposed transactions is:

(i) to retain ownership of all capital assets subject to the leasing property rules under subsection 1100(15) of the Regulations under one corporate entity; and

(ii) to simplify the corporate organization by merging a wholly-owned single purpose production company with its parent after completion of the production and after filing for the relevant Tax Credits.

RULINGS

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 each of the Prior Prodco Productions and the Production have been certified by the Ministry of Canadian Heritage as a Canadian Film or Video Production and such certification has not been and will not be revoked, we confirm the following:

A. Paragraph 87(2)(j.94) of the Act will apply so that, for the purposes of section 125.4 of the Act, Prodco 87 will be deemed to be the same corporation as, and a continuation of, each of Prodco and Subco. Consequently, the disposition of assets to Prodco 87 on the amalgamation of Prodco and Subco will not, in and of itself, result in the application of subsection 125.4(4) of the Act to deny

(i) Prodco's claim for the Tax Credits in respect of expenditures incurred by Prodco in producing the Prior Prodco Productions, or (ii) Subco's claim for the Tax Credit in respect of expenditures incurred by Subco in producing the Production.

B. Paragraph 87(2)(j.94) of the Act, as modified by paragraph 88(1)(e.2) of the Act, will apply so that, for the purposes of section 125.4 of the Act, Leaseco will be deemed to be the same corporation as, and a continuation of, Prodco 87 [as per Ruling A above Prodco 87 will be deemed to be the same corporation as, and a continuation of, each of Prodco and Subco].

Consequently, the section 85 transfer of shares in Prodco 87 by Parentco to Leaseco, as described above in paragraph 7; or the wind-up of Prodco 87 into Leaseco, as described above in paragraph 8 will not in and of themselves result in the application of subsection 125.4(4) of the Act to deny (i) Prodco's claim for the Tax Credits in respect of expenditures incurred by Prodco in producing the Prior Prodco Productions, or (ii) Subco's claim for the Tax Credit in respect of expenditures incurred by Subco in producing the 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. This ruling is based on the Act in its present form and does 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 amount that Parentco and Leaseco agree on in their section 85 election in respect of the shares of Prodco 87 (referred to above in paragraph 7);

(ii) whether Prodco or Subco will be qualified corporations for the purposes of section 125.4 of the Act, and whether they were entitled to claim Tax Credits in connection with the Prior Prodco Productions or the Production, respectively; and

(iii) whether or not any properties referred to herein are leasing properties for the purposes of subsection 1100(15) of the Regulations.

OPINION

It is our opinion that the Prior Prodco Productions and the Production will not become excluded productions under draft clause 1106(1)(a)(ii)(A) of the Regulations, at the definition of excluded production, solely as a result of any or all of the following:

(i) the amalgamation of Prodco and Subco, as described above in paragraph 6;

(ii) the section 85 transfer of shares in Prodco 87 by Parentco to Leaseco, as described above in paragraph 7; or

(iii) the wind-up of Prodco 87 into Leaseco, as described above in paragraph 8.

As indicated in paragraph 22 of Information Circular 70-6R3, an expression of opinion is not an advance income tax ruling and, accordingly, is not binding on the Canada Customs and Revenue Agency.

Yours truly,

for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch
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