4 June 2002 Internal T.I. 2002-0134137 - FILM TAX CREDIT

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:

Does the fact that a corporation sold several investments in a particular taxation year indicate that its activities in that year are not primarily the carrying on of a Canadian film or video production business, for the purposes of the definition of "qualified corporation" in subsection 125.4(1) of the Act?

PositionS:

Not necessarily. Involves a question of fact.

Reasons:

From the facts given it appears that the sale of the investments was an isolated incident and various tests such as the employees activities, use of assets and gross revenues, indicate that the "primarily" test may have been met.

		June 4, 2002

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

	Attention:  Alain Marchand
		2002-013413

Canadian Film or Video Production Tax Credit Qualified Corporation

We are writing in response to your memorandum to us dated April 8, 2002, concerning the definition of "qualified corporation" in subsection 125.4(1) of the Income Tax Act (the "Act"). The accounting firm of XXXXXXXXXX originally referred this question to you.

Question

You refer to a hypothetical scenario and have asked whether a producer's sale of certain capital investments (the "Investments") in a particular taxation year would result in the producer not being a qualified corporation in that taxation year.

Facts

You advise that we can assume the following facts:

? in the particular year all of the producer's transactions were related to its Canadian film or video production ("CFVP") business, with the exception of the sale the Investments, which were capital property to the producer. The producer's assets and capital were primarily devoted to its CFVP business and the producer's employees devoted virtually all of their time and efforts to its CFVP business;

? normally each year the producer's gross and net revenues are primarily derived from its CFVP business;

? the total gain from the sale of the Investments in the particular year exceeded the profit realized by the producer from its CFVP business. However, in the same year, the producer's gross revenue was derived primarily from its CFVP business; and

? without the sale of the Investments the producer would have otherwise met the definition of qualified corporation.

Your Opinion

You concur with XXXXXXXXXX view that in the above scenario the fact that the producer sold the Investments in a particular taxation year does not affect its eligibility as a qualified corporation since its principal activity remains a CFVP business.

Our Comments

The answer to your question of whether the producer's sale of the Investments would result in the producer not being a qualified corporation turns on whether the producer's activities in the year were "primarily the carrying on...of a business that is a CFVP business", as required in order to be a qualified corporation.

Although "primarily" is not defined in the Act, generally we consider that primarily means more than 50%.

In determining the producer's primary activity in a particular year, all the facts surrounding each of the various activities undertaken by the producer in that year must be examined and compared. Although the following list of criteria is not exhaustive and although none of the criteria may be sufficient in or by themselves to determine the producer's primary activity in a particular year, consideration should be given to

? the profits realized from each of the producer's activities,

? the volume and the value of the producer's gross sales or transactions from each activity,

? the value of the producer's assets devoted to each activity,

? the capital employed in each of the producer's activities, and

? the time, attention and efforts expended by the employees, agents or officers of the producer in each activity.

Using the guidelines noted above in your hypothetical situation, we concur with you that generally it would appear that a one-time sale of the Investments (which generated net gains in excess of the net profit from the CFVP business) would not, in and of itself, disqualify the producer from being a qualified corporation for the purposes of section 125.4 of the Act. Of particular note in arriving at this view is the assumed facts that, in the particular year, the sale of the Investments was an isolated incident, the producer had a viable CFVP business, the producer's assets and capital were primarily devoted to its CFVP business, the producer's employees devoted virtually all of their time and efforts to its CFVP business, and the producer's gross revenue was derived primarily from its CFVP business.

These matters always involve a question of fact that can only be determined after reviewing the specifics of a particular situation.

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