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. Is a particular film and excluded production?

PositionS: 1. Legal question. More facts need to be obtained before the matter can be addressed. We recommend obtaining a written legal opinion.

Reasons: 1. The question is whether the Deal Memorandum was a legally binding agreement. If so, then the terms were such that there would be an excluded production, as explained in our prior responses on this file (files 2000-005368 & 2001-006946).

		April 18, 2002

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

	Attention:  Alain Marchand
		2002-012786

Canadian Film or Video Production Tax Credit
Distribution Agreement

We are writing in response to your memorandum to us dated March 7, 2002, concerning the film XXXXXXXXXX (the "Production"). You have asked us to review our previous positions on this subject, in light of the additional representations provided by XXXXXXXXXX.

Background

This issue was originally referred to you from CAVCO, concerning the computation of the Canadian film or video production tax credit in respect of the Production. On December 1, 2000 and April 18, 2001, we provided responses to your previous referrals on this matter (our files #2000-005368 and #2001-006946, respectively, hereinafter referred to as the "Rulings Memos"). Therein, we stated our view that the producer, XXXXXXXXXX had disposed of some portion of the beneficial ownership in the Production copyright to the XXXXXXXXXX corporate distributor (the "Distributor"). This was so even though XXXXXXXXXX, which was now referred to as the producer, entered into a [second] distribution agreement dated as of XXXXXXXXXX (the "New Agreement"), with the Distributor, in an attempt to restate/replace the terms of the XXXXXXXXXX, agreement previously entered into by XXXXXXXXXX and the Distributor (the "Original Agreement"). At that time we stated there was 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 and that we did not accept that the New Agreement retroactively replaced the Original Agreement. 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.

You have received another request for the CCRA to revise its position based on the following additional arguments from XXXXXXXXXX representative:

? the Original Agreement was only a draft and was not a distribution agreement intended to create legally binding obligations. The New Agreement was the binding distribution agreement between the parties. This was supported in part by affidavits from XXXXXXXXXX, the sole director and president of the XXXXXXXXXX, and XXXXXXXXXX, the director of the Distributor. The affidavits explained the intent of the XXXXXXXXXX, draft agreement and the purpose of the revised distribution agreement dated XXXXXXXXXX; and

? the conclusion that the draft agreement (i.e., the Original Agreement) evidenced a disposition of some portion of the copyright in the Production has no basis in law, equity or the CAVCO guidelines.

Your opinion

You are still of the opinion that the revised distribution agreement dated XXXXXXXXXX, should not be accepted for the reasons outlined in the Rulings Memos.

Our Comments

Our views expressed in the Rulings Memos have not changed. If it is concluded that the Original Agreement was a legally binding agreement between the parties, which was replaced by the New Agreement, then our view remains that the Distributor acquired beneficial ownership of some portion of the Production when it entered into the Original Agreement in XXXXXXXXXX. This would result in the Production being an excluded production and the producer would be denied its relevant Canadian film or video production tax credit.

As discussed with you on April 9, 2002 (Nelson/Marchand), the issue of whether the Original Agreement was a legally binding agreement involves a question of law. To address this issue, we recommend that you first obtain additional information from the client, similar to what we outlined in our telephone conversation, and then consider requesting a written legal opinion from the Department of Justice.

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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