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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

1. Would the exception in paragraph 67.1(2)(c) apply so as not to limit 100% of the cost of meals included in a corporation's qualified Canadian labour expenditure?

PositionS:

1. Yes, in the particular situation.

Reasons:

1. Reading of the legislation.

		December 19, 2001

	Natalie Stibernik	HEADQUARTERS
	Manager	Allan Nelson, CMA
	Film Industry Services	(613) 443-7253
	344 Slater, 6th Floor

	Attention:  Alain Marchand
		2001-009716

Meals and Qualified Canadian Labour Expenditure
Film or Video Production Services Tax Credit

We are writing in response to your memorandum to us dated August 15, 2001, wherein you asked for our comments concerning the application of paragraph 67.1(2)(c) of the Income Tax Act (the "Act") as it relates to the film or video production services tax credit. Your questions arose from a referral you received from the Toronto Centre TSO.

Background

You have asked us to limit our comments to a typical production services arrangement where a foreign studio ("Studio") hires a Canadian corporation (the "Canadian Labour Service Provider"), that qualifies as an eligible production corporation as defined in subsection 125.5(1) of the Act, to incur certain Canadian labour costs in producing a film (the "Film") in Canada. The Studio retains legal and beneficial ownership of the Film at all times. The Studio pays the Canadian Labour Service Provider a fee (the "Fee") for its services. The Fee is computed as an amount equal to the labour costs incurred by the Canadian Labour Service Provider, plus an amount to provide them with a profit. The Canadian Labour Service Provider will claim the film or video production services tax credit in respect of the labour expenses incurred by it in producing the Film.

Included in the Canadian Labour Service Provider's labour costs of making the Film is the amount paid by it for meals provided to certain employees and self-employed individuals. For the sake of discussion, you have asked us to limit our comments to those labour costs (including the cost of meals) paid by the Canadian Labour Service Provider directly to self-employed individuals (the "Self-employed Individuals") resident in Canada that would otherwise meet the requirements in clause 125.5(1)(b)(i)(A) of the Act, at the definition of "Canadian labour expenditure".

The Toronto Centre TSO is of the view that the Canadian Labour Service Provider meets the requirements in paragraph 67.1(2)(c) of the Act in respect of the cost of meals. However, they disagree with them being able to claim the film or video production services tax credit on 100% of the cost of those meals. Our understanding of their argument is that because the "50% rule" in subsection 67.1(1) of the Act flows through to the Studio, the character of the meal expenses also flows through to Studio and presumably the meal expenses would no longer be labour expenses to the Canadian Labour Service Provider.

Our Comments

Based on the facts provided to us, we will respond to your questions in the following analysis.

Assuming all the other requirements of section 125.5 of the Act are met, subsection 125.5(3) of the Act would provide that the Canadian Labour Service Provider is deemed to have paid an amount on account of its tax payable equal to 11% of its qualified Canadian labour expenditure for the year in respect of the Film. Subject to the possible application of section 67.1 of the Act, the Canadian Labour Service Provider's qualified Canadian labour expenditure (within the meaning of that term in subsection 125.5(1) of the Act) would include its cost of meals (the "Meals") paid to the Self-employed Individuals.

If subsection 67.1(1) of the Act applied, it would deem the amount paid or payable in respect of the Meals to be 50% of the lesser of (a) the amount actually paid or payable for the Meals and (b) a reasonable amount in the circumstances. If, for example, paragraph 67.1(1)(a) of the Act applied, then the Canadian Labour Service Provider's qualified Canadian labour expenditure would be reduced by an amount equal to 50% of the actual cost of the Meals. This would also result in a reduction to their available film or video production services tax credit.

However, by virtue of paragraph 67.1(2)(c) of the Act, subsection 67.1(1) of the Act would not apply to reduce the amount of the payment for the Meals, if the Studio compensated the Canadian Labour Service Provider for that payment and the amount of the compensation was reasonable and specifically identified in writing to the Studio. This involves a question of fact, which appears to have been accepted by the TSO and yourself in this case. We do not have sufficient information to comment further on this point, except to say that it is not sufficient for the Canadian Labour Service Provider to merely provide an estimate of the cost of the Meals to the Studio. It must specifically identify in writing the amount paid or payable by it in respect of the Meals.

Although the application of subsection 67.1(1) of the Act may "flow through" to Studio when paragraph 67.1(2)(c) of the Act applies to the Canadian Labour Service Provider [refer to paragraph 7 of IT-518R], we do not agree with the TSO that the character of the cost of the Meals is lost to the Canadian Labour Service Provider, such that the cost of the Meals would no longer be its labour expenses. It is our position that once you have accepted that paragraph 67.1(2)(c) of the Act applies to the cost of the Meals, the Canadian Labour Service Provider's qualified Canadian labour expenditure would include 100% of the cost of the Meals.

In our view, the fact that Studio will reimburse the Canadian Labour Service Provider's labour costs in the manner described above, and that the Canadian Labour Service Provider will have to report the amount of this Fee as income, distinguishes the tax treatment of meal expenses in the above film or video production services tax credit scenario from the treatment in a Canadian film or video production tax credit scenario, where no such reimbursement mechanism exists (reference is made to the comments made by the TSO in the second and the last two paragraphs of their referral to you).

We have responded to your questions based on the limited facts and assumptions noted above. It should be kept in mind that these types of matters always involve a question of fact. If there are additional facts or if some of the facts in a particular scenario vary from those presented above, our responses might differ.

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

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