15 May 2002 Internal T.I. 2002-0127307 - FILM TAX CREDIT - ASSISTANCE

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:

Are payments from the government of Canada assistance to a television producer for the purposes of the Canadian film or video production tax credit?

PositionS:

Subject to valuation considerations, the "advertising" portion of the payments would be assistance and the "purchased assets" portion of the payments would not be assistance.

Reasons:

The advertising portion of the payments would more in the nature of a government grant and the purchased assets portion of the payments would be in respect of acquiring property from the Producer.

		May 15, 2002

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

	Attention:  Alain Marchand
		2002-012730

Canadian Film or Video Production Tax Credit Assistance

We are writing in response to your memorandum to us dated March 5, 2002, concerning the tax treatment of certain payments (the "Consideration") received or yet to be received by XXXXXXXXXX (the "Producer") from the XXXXXXXXXX (the "GoC") with respect to the production entitled XXXXXXXXXX (the "Production"). You have asked us whether the Consideration would be assistance as defined in subsection 125.4(1) of the Income Tax Act (the "Act").

Background

The Producer is making the Production, which is a miniseries concerning XXXXXXXXXX. Its total production budget is approximately $XXXXXXXXXX. The financing of the Production is comprised of several components, including the $XXXXXXXXXX Consideration from the GoC. The Producer has received the first $XXXXXXXXXX instalment in respect of the Consideration.

The XXXXXXXXXX of the agreement signed on XXXXXXXXXX, between the Producer and the GoC (the "Agreement") states

XXXXXXXXXX.

Under XXXXXXXXXX of the Agreement, the Producer agreed, inter alia, to:

XXXXXXXXXX.

XXXXXXXXXX of the Agreement states that the copyright in the Production, web site, merchandising program, and all related and ancillary activities and products shall be vested in the Producer.

Under XXXXXXXXXX of the Agreement, the Producer granted the GoC the rights to use the non-broadcast, non-exclusive, non-commercial, non-theatrical rights in the Production and to duplicate the Production for the GoC's internal purposes and for distribution to assignees only for educational purposes. The term and territory was XXXXXXXXXX, respectively.

XXXXXXXXXX

The Producer has applied to CAVCO for certification of the Production under the Canadian film or video production tax credit program.

Additional Information

XXXXXXXXXX

Representations

The Producer's representative, XXXXXXXXXX, is of the view that the funds paid by the GoC with respect to the Production are not assistance. It is his view that the Agreement is similar to the one entered into with XXXXXXXXXX (a non-governmental sponsor) and comprises an arm's-length, fair market value acquisition of sponsorship and related benefits by the GoC, such as on-screen credits, the right to distribute non-broadcast copies of the Production on a non-commercial basis for its own internal purposes and to enumerated non-profit groups, certain consultation rights in respect of the content of the Production, and the right to commission the Producer to produce customized non-broadcast, and non-commercial versions of the Production.

Reference is also made to XXXXXXXXXX understanding that the Agreement was issued from the Public Works and Government Services Department following a proper tender and negotiation process [We do not have further information on how this process works. However, we note that in XXXXXXXXXX of the Agreement it states that the Producer presented an unsolicited proposal to the GoC to produce the Production for them.]

Your Opinion

Based on the available information, it is your opinion that the funds paid by the GoC XXXXXXXXXX, meets the requirements of paragraph 12(1)(x) of the Act and should be considered as assistance for purposes of subsection 125.4(1) of the Act.

You referred to our file #7-983366, where we concluded that although the amounts paid by the Department of Canadian Heritage and Quebec's Ministère des Relations Internationales might have resembled advertising contracts, they could not be regarded as such. This was so since, unlike profit making enterprises, the normal scope of the duties of those government departments did not include carrying on a business for which advertising expenses would be incurred. At that time, the Department of Finance advised that our position reflected the intent of the legislative provisions.

Our Comments

Subsection 125.4(1) of the Act defines assistance to mean "...an amount...that would be included under paragraph 12(1)(x) in computing a taxpayer's income...if that paragraph were read without reference to subparagraphs (v) to (vii)".

Paragraph 12(1)(x) of the Act applies, inter alia, to "any particular amount...received by the taxpayer in the year...from...a government, municipality or other public authority, where the particular amount can reasonably be considered to have been received (iii) as an inducement, whether as a grant, subsidy...allowance or any other form of inducement, or (iv) as a refund, reimbursement, contribution or allowance or as assistance, whether as a grant, subsidy...allowance or any other form of assistance, in respect of (A) an amount included in, or deducted as, the cost of property, or (B) an outlay or expense, to the extent that the particular amount...(viii) may not reasonably be considered to be a payment made in respect of the acquisition by the payer or the public authority of an interest in the taxpayer or the taxpayer's business or property".

From our understanding of the facts presented, it appears that generally the GoC will pay $XXXXXXXXXX to the Producer as

1. consideration for the GoC's acquisition of certain hard copies of the Production and the right to acquire additional copies of the Production, all of which the GoC can use for non-broadcast, non-commercial purposes e.g., to show in schools or museums for educational purposes, etc. (in this memorandum we shall refer to these as the "Purchased Assets"), and

2. consideration for the Producer's recognition of the GoC's support for the Production (in the form of end credits) and as financial support in promoting the GoC's initiatives, as outlined above under the "Additional Information" subtitle and as stated in the XXXXXXXXXX of the Agreement (in this memorandum we shall refer to these as the "Advertising Benefits").

Generally, it is our view that an amount paid by a public body to a taxpayer in an ordinary business transaction would not constitute government assistance. This view is supported by such jurisprudence as CCLC Technologies Inc. (96 DTC 6527), Ottawa Valley Power Limited (69 DTC 5166), and Consumers Gas Company Limited (87 DTC 5008). To the extent that a portion of the Consideration relates to the cost of acquiring the Purchased Assets, it is our view that this amount would be in respect of an ordinary business transaction negotiated and entered into by both parties (i.e., XXXXXXXXXX). Consequently, this portion of the Consideration would not be assistance received by the Producer, as contemplated in section 125.4 of the Act.

To the extent that a portion of the Consideration relates to the cost of acquiring the Advertising Benefits and, for example, the GoC's end credits are shown in the Production and do not directly promote the Purchased Assets, it is our view that such an amount would be assistance received by the Producer, as contemplated in section 125.4 of the Act. This would be so, because, the Advertising Expenses would not be incurred by the GoC to acquire an asset, and unlike advertising expenses incurred by normal commercial businesses, the Advertising Expenses would not be incurred by the GoC to promote its business-related goods and services. Consequently, it would be reasonable to conclude that this portion of the Consideration was paid to the Producer by the GoC, as a contribution to the costs of the Production, in such a manner as to be included under paragraph 12(1)(x) of the Act, if that paragraph were read without reference to subparagraphs (v) to (vii) of the Act.

Our view would best be supported by a valuation, which demonstrates that the amount of the Consideration exceeded the fair market value of the Purchased Assets. In that case, presumably the excess would be in respect of the Advertising Benefits.

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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