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. Can we accept that an amended distribution agreement retroactively causes a film to no longer be an excluded production?

Position:

1. No.

Reasons:

The original agreement was legal and binding and caused the film to be an excluded production. Generally, we do not accept retroactive amendments, for tax purposes. This position is consistent with jurisprudence [e.g., see Sussex Square Apartments Limited 2000 DTC 6548, Mendel 65 DTC 114, Amelia Rose 73 DTC 5083, and Abrahams (No. 2) 66 DTC 5453].

		April 18, 2001

	Mel Machado	HEADQUARTERS
	Manager	Allan Nelson, CMA
	Financial Legislative Application	(613) 443-7253
	SR&ED Directorate

	Attn:  Alain Marchand
		2001-006946

Canadian Film or Video Production Tax Credit
Restated/Retroactive Distribution Agreement

We are writing in response to your memorandum to us dated February 7, 2001, wherein you asked for our comments concerning the ownership of a film entitled XXXXXXXXXX (the "Production").

Background

This matter was originally referred to you from CAVCO, concerning the computation of the Canadian film or video production tax credit in respect of the Production. In response to your referral to us dated October 30, 2000, Rulings issued a memorandum to you (our file #2000-005368, dated December 1, 2000). Therein, we stated our view that the producer, XXXXXXXXXX had disposed of some portion of the beneficial ownership in the Production copyright. As a consequence, you advised CAVCO, which in turn advised XXXXXXXXXX, that the Production was an excluded production (within the meaning of draft subsection 1106(1) of the Regulations to the Income Tax Act (the "Act") and that XXXXXXXXXX was not eligible to claim the Canadian film or video production tax credit.

Still attempting to obtain certification for the Production, from CAVCO, XXXXXXXXXX is now referred to as the producer and XXXXXXXXXX entered into a second distribution agreement dated XXXXXXXXXX (the "New Agreement") with the distributor. In the New Agreement, the parties endeavoured to restate/replace the terms of the XXXXXXXXXX, agreement previously entered into by XXXXXXXXXX and the distributor (the "Original Agreement"). This was done so the producer would not be viewed as having disposed of any portion of the beneficial ownership in the Production copyright. It was the producer's view that if CAVCO accepted the New Agreement, the Production would not be an excluded production and the producer could claim the relevant Canadian film or video production tax credit. Some examples of the extensive changes made to the terms of the Original Agreement are as follows:

• it appears that XXXXXXXXXX has replaced XXXXXXXXXX as the producer [XXXXXXXXXX];
• in the New Agreement, the distributor no longer has a right to XXXXXXXXXX% of the net revenues from the United States territory; and
• in the New Agreement, the distributor is now entitled to a specific distribution fee equal to XXXXXXXXXX% of gross receipts and to recoup from gross receipts (after the distribution fee), the amount of its U.S. $XXXXXXXXXX distribution advance and other expenses.

Your Views

It is your opinion that the New Agreement should not be accepted since the taxpayer now wants to revise the Original Agreement to try and comply with the film tax credit rules.

Your Questions

You have asked us to respond to the following questions:

1. Can we accept the New Agreement as being valid?

2. If the answer is yes, is there still a beneficial owner with respect to the Production that would taint the Production?

Our Comments

Draft subsection 1106(1) of the Regulations defines "excluded production" to mean a film or video production of a prescribed taxable Canadian corporation

(a) in respect of which...

(ii) ...neither the corporation nor another prescribed taxable Canadian corporation related to the corporation
(A) is, except to the extent of an interest in the production held by a prescribed taxable Canadian corporation as a co-producer of the production or by a prescribed person..., the exclusive worldwide copyright owner in the production for all commercial exploitation purposes for the 25-year period that begins at the first time the production had been completed and is commercially exploitable... [underlining is ours]

The distributor is XXXXXXXXXX company and there is no indication that it held its interest in the Production as a co-producer that was a prescribed taxable Canadian corporation. For the purposes of the above-noted definition, we have also assumed that the producer and distributor deal at arm's length to each other and that the distributor is not a prescribed person. Accordingly, it is important to determine who owned the Production copyright starting at the point in time that began when the Production was completed and was commercially exploitable (the "Particular Time"). From discussions with you (Nelson/Marchand), it is our understanding that the Production was completed and was commercially exploitable prior to entering into the New Agreement. The exact date is not known, at this time, but we do know that the Particular Time commences prior to the date the New Agreement was entered into. Therefore, if the distributor owned a portion of the Production copyright immediately prior to entering into the New Agreement, then the Production would be an excluded production under the above definition and the producer would be denied its Canadian film or video production tax credit. This would be so because the producer would not have been the sole owner of the Production copyright from the Particular Time.

Our position concerning ownership of the Production remains that the distributor acquired beneficial ownership of some portion of the Production when it entered into the Original Agreement in XXXXXXXXXX. We can accept that the parties have amended the terms of the Original Agreement by entering into the New Agreement. However, there is no indication that the Original Agreement was in error or that it was anything other than a legal and binding agreement between the parties, as of XXXXXXXXXX. We do not accept that the New Agreement retroactively replaces the Original Agreement. Rather, upon entering into the New Agreement the producer may have reacquired full ownership of the Production copyright. Our position is consistent with jurisprudence concerning retroactive agreements.¹

We note that there is significant and growing jurisprudence on the issue of the validity of retroactive amendments to contracts and what is referred to as rectification orders from the courts. However, the present case is distinguishable from those situations, particularly in that there has been no order of a court. We would also note that one of the criteria generally considered by the courts, in determining whether to grant a retroactive rectification, is the intention of the parties at the time of the original agreement. In your situation we do not have any information to support that the original intention was anything other than what was reflected in the Original Agreement. Further, the courts have been reluctant to sanction retroactive changes which were made through agreement between the parties, rather than through an order of a court (see Sussex Square Apartments Limited, 99 DTC 443, confirmed by the Federal Court of Appeal in 2000 DTC 6548).

Finally, if we were to allow retroactive agreements, as described above, it could precipitate a myriad of offensive after-the-fact tax planning schemes.

Additional Comments

Notwithstanding the above comments, we note that the February 28, 2000, federal budget stated 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. It is our understanding that the primary motivation for this was to eliminate or reduce the uncertainty created by the investor rule in subsection 125.4(4) of the Act. The timing for any legislative amendments and the possible impact on the producer's claim for the Canadian film or video production tax credit are presently unknown.

We hope the above will be of assistance to you.

If you have any additional queries on this matter please feel free to contact us.

Milled Azzi CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch

¹ In Mendel 65 DTC 114 (T.A.B.) at 122, it is stated:

"In view of the evidence given at the hearing of this appeal, it seems clear, beyond doubt, that, whatever legal details were required to effect the transfer of the feed lot operation to the holding company, they were not in fact taken until some time in June of 1961. I cannot accept the implication that the holding company should be considered in law and in fact to have acquired the F. Mendel Feed Lot business on January 1st, 1960, merely because this was the effective date inserted in an agreement completed at a much later date...Whatever may have been the situation between the immediate parties to the agreement...the Minister of National Revenue most certainly was not bound by the stipulation with regard to the effective date thereof. The Minister had no alternative but to base his assessment on the facts as they existed during the 1960 taxation year."

In Amelia Rose 73 DTC 5083 (F.C.A) at 5087-5088, it stated:

"It may well be that, after Central Park Estates Limited subsequently executed the back-dated services contract and after the corporate partners accepted payment as though they had performed the services under that contract, the situation was the same, as among the parties, as though everything had been regularly done on November 1, 1965. In other words, as among the parties, the services would then be regarded as having been performed by the five directors on behalf of the partnership and not as directors and as having been performed by the partnership under the management contract even though that contract did not exist at the time that they were rendered. However, in my view, no such back-dating of transactions can affect the fact that, during the period from November 1, 1965 to June, 1966, there was no services contract and no relationship between the partnership and the five directors. In other words, the fact is that the partnership did not carry on any business during the relevant period. It is that fact, and not some ex post facto arrangement that is relevant to the application of section 68(1)(c)."

See also Abrahams (No. 2) v. M.N.R. 66 DTC 5453 (Ex. Ct.) at 5460-5462.

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