31 October 2000 External T.I. 2000-0052995 - Film Credit - 95 year Distribution Agree

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 clause 1106(1)(a)(ii)(A) of the draft Regulations, at the definition of excluded production, apply to deny a Canadian producer's film tax credit, as a result of particular foreign distributors' participation in the production? This will involve distribution agreements with a potential term of 95 years.

2. Will subsection 125.4(4) of the Act apply to deny a Canadian producer's film tax credit, as a result of the same foreign distributors' participation in the production?

Position:

1. & 2. No, based on the facts as presented.

Reasons:

1. Since the film is a treaty co-production, clause 1106(1)(a)(ii)(A) of the draft Regulations, at the definition of excluded production, does not apply to the film.

2. Since the foreign distributors are not subject to tax in Canada, neither of the distributors would be an investor that may deduct an amount in respect of the film in computing its income, as is contemplated in order for subsection125.4(4) of the Act to apply.

2000-005299
XXXXXXXXXX Allan Nelson
(613) 443-7253
Attention: XXXXXXXXXX

October 31, 2000

Dear Sirs:

Re: Technical Opinion Request

We are writing in reply to your electronic mail to us dated October 25, 2000, wherein you asked for our opinion concerning the Canadian film or video production tax credit (the "film tax credit") and particular distribution agreements, as described below.

A Canadian producer, that would otherwise qualify for the film tax credit, enters into a treaty co-production (as that term is defined in draft subsection 1106(1) of the draft Regulations) with a foreign producer to produce a film. The copyright in the film is legally and beneficially owned by these treaty co-producers.

Distribution agreements for foreign territories are entered into between the treaty co-producers and two foreign distributors. The terms of the agreements are initially for 25 years, and they are automatically renewable for additional terms, to a total of 95 years. The distributors are non-residents of Canada and are not subject to income tax in Canada. The consideration to be received by the foreign distributors from the gross receipts of the film includes certain fees plus reimbursement of their distribution expenses and their distribution advances. Such entitlements do not exceed the fair market value of what other distributors may receive in similar circumstances. The balance of gross receipts from the film are paid to the co-producers.

You have asked for our opinion as to whether the entering into of distribution agreements, such as those described herein, would result in the film being an "excluded production" by virtue of clause 1106(1)(a)(ii)(A) of the draft Regulations, and whether the distributors would be investors as contemplated in subsection 125.4(4) of the Act.

Your questions relate to a specific factual situation. As noted in Information Circular 70-6R3, we do not provide opinions with respect to proposed factual transactions other than in reply to an advance income tax ruling request. However, as agreed, we will offer the following general comments.

Our Comments

Clause 1106(1)(a)(ii)(A) of the draft Regulations does not apply in respect of a treaty co-production. Consequently, where treaty co-producers enter into distribution agreements, similar to those described herein, generally it would not, in and of itself, result in the particular film being an "excluded production" by virtue of clause 1106 (1)(a)(ii)(A) of the draft Regulations.

Subsection 125.4(4) of the Act would apply to deny a producer's film tax credit in respect of a Canadian film or video production where a distributor, that is an investor and is subject to tax in Canada, acquires legal or beneficial ownership of any portion of the copyright in the production. This would be so because the distributor would be an investor that may deduct an amount (e.g., capital cost allowance) in respect of the production in computing its income. Where the distributor is not subject to tax in Canada [as was noted in your example], then the distributor would not be an investor that may deduct an amount in respect of the film in computing its income, as is required in order for subsection 125.4(4) of the Act to apply.

Additional Comments

Notwithstanding the above comments, each production must be analyzed upon its own particular facts and circumstances. Our responses may change after undertaking such a review. We also note that the February 28, 2000 federal budget stated that the Canadian film or video production tax credit would be reviewed, in consultation with industry associations, with a view to simplify the film tax incentives. The timing for any legislative amendments and the possible impact on a producer's claim for the Canadian film or video production tax credit are presently unknown.

In accordance with paragraph 22 of Information Circular 70-6R3, the above comments are only an expression of opinion, and as such should not be construed as an advance income tax ruling, nor are they binding on the Canada Customs and Revenue Agency.

We hope the above will be of assistance to you.

Yours truly,

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