15 May 2002 Internal T.I. 2002-0127857 - FILM TAX CREDIT - BANKRUPTCY

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. Can CCRA deny a Canadian film or video production tax credit claim if CAVCO has not revoked its certificate?

2. Should the Canadian film or video production tax credit be issued in a particular bankruptcy situation?

PositionS:

1. Yes, if the production is an excluded production.

2. Depends on the facts.

Reasons:

1. If it were an excluded production there would be no "qualified labour expenditure" on which to base its claim.

2. Reading of the applicable legislation.

		May 15, 2002

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

	Attention:  Alain Marchand
		2002-012785

Canadian Film or Video Production Tax Credit Bankruptcy

We are writing in response to your memorandum to us dated March 8, 2002, concerning the definition of the "excluded production" in draft subsection 1106(1) of the Income Tax Regulations (the "Regulations").

Facts

"Parentco" owns all of the shares of the capital stock of "Subsidiary". Subsidiary is a qualified corporation, as defined in subsection 125.4(1) of the Income Tax Act (the "Act"). Subsidiary produced and owns the copyright in a Canadian film or video production (the "Production"). It obtained the pertinent 'Part A' and 'Part B' certificates from the Canadian Audio-Visual Certification Office ("CAVCO"), in respect of the Production and submitted a claim for the Canadian film or video production tax credit ("FTC") to the Canada Customs and Revenue Agency ("CCRA"), pursuant to and in accordance with the provisions of subsection 125.4(3) of the Act.

Parentco is now in bankruptcy and a trustee in bankruptcy (the "Trustee") has been appointed (Subsidiary is not in bankruptcy). As part of its duties in dealing with the estate of Parentco, presently the Trustee is waiting for CCRA to refund the amount of the FTC claimed in respect of the Production by Subsidiary under subsection 125.4(3) of the Act, so that this money could be shared with Parentco's creditors (apparently Parentco has a right to excess funds held by Subsidiary and the FTC will form a part of these funds. We note that pursuant to subsection 128(1) of the Act, the Trustee is deemed to be the agent of Parentco).

Issue

Presently, Subsidiary holds all the relevant copyright and exploitation rights in the Production so that the Production is not an "excluded production" as defined in draft subsection 1106(1) of the Regulations. However, if CCRA refunds the amount of the FTC to Subsidiary (which in turn pays the amount to the Trustee) without knowing what is going to happen to Subsidiary, or to the Production, as a result of Parentco's bankruptcy, you are concerned that the CCRA may be unable to recover these funds if the Production becomes an excluded production (say for

example if the Production is later sold as part of the settling of Parentco's bankruptcy). You enquire whether we have any authority to deny the FTC if CAVCO has not revoked the Canadian film or video production certificate.

Our Comments

We will address your concerns based on the very limited facts presented to us. We have also assumed that, besides the uncertainty surrounding the 25-year ownership requirement in the excluded production definition, you are satisfied that Subsidiary otherwise meets the requirements to receive the FTC in respect of the Production.

The FTC is only available in respect of a "Canadian film or video production" as defined in draft subsection 1106(3) of the Regulations. That definition specifically eliminates an "excluded production" from being a Canadian film or video production. Subject to certain listed exceptions, if neither Subsidiary nor another related prescribed taxable Canadian corporation is 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, the Production will be an excluded production. This could occur if, for example, before the 25-year ownership period expires, Subsidiary sells the Production to an arm's length party as part of the settling of Parentco's bankruptcy [It is our understanding that this has not occurred].

If it is determined that the Production is an excluded production, (1) the Production would not be a "Canadian film of video production", (2) because the Production is not a Canadian film or video production, Subsidiary would not have any "labour expenditure" or "qualified labour expenditure" (defined in subsection 125.4(1) of the Act) in respect of the Production, and (3) since the FTC is based on 25% of its qualified labour expenditure, Subsidiary would not have an amount eligible for the FTC. Even if CAVCO has not revoked the Canadian film or video production certificate, CCRA could still issue a reassessment disallowing Subsidiary's claim for the FTC (subject to the limitations of section 152 of the Act).

Section 125.4 of the Act does not impose any requirements on the use to which, in this case, Subsidiary puts the amount of the FTC it receives. Therefore, Subsidiary's claim for the FTC cannot be denied simply because the Trustee will ultimately use of the amount of Subsidiary's FTC to pay Parentco's creditors. We would also note that subsections 220(6) & (7) of the Act recognize that in certain instances a FTC refund may be assigned to another party.

Further, you have not given us any indication that Subsidiary will sell the Production. Until such time as it is sold, Subsidiary's entitlement to the FTC in respect of the Production would not be denied merely because of uncertainty as to whether or not Subsidiary will at some future time be required to sell the Production as part of the settlement of Parentco's bankruptcy (in fact, it may then be decided to sell the shares of Subsidiary, instead of the Production).

However, if there were a clear indication of a pending sale of the Production, such that it would become an excluded production, and if you concluded that by issuing the FTC refund to Subsidiary there would be a high risk that the government would not be able to recover these funds after the sale, it is our view that you would be prudent to take whatever steps are available to minimize the risk of such a loss. Ultimately it is the responsibility of Audit, Assessing and Collections to decide how to proceed on these types of assessing issues.

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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