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 advances to a producer from Telefilm out of their Low Budget Independent Feature Film Assistance Program (part of Telefilm's Canadian Feature Film Fund) assistance to the producer for the purposes of the Canadian film or video production tax credit?

PositionS:

Question of fact. Likely assistance.

Reasons:

Reading of the definition of "assistance". The producer is only required to repay Telefilm out of profits from the production. If there are insufficient profits, the advance is not repaid.

		October 31, 2002

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

	Attention:  Brian Heatherington
		2002-016278

Canadian Film or Video Production Tax Credit Assistance

We are writing in response to your memorandum to us dated September 12, 2002, concerning the tax treatment of certain advances received by XXXXXXXXXX (the "Producer") from Telefilm Canada ("Telefilm") out of the Canada Feature Film Fund (the "CFFF") with respect to the feature film production entitled "XXXXXXXXXX" (the "Production"). You have asked us whether these advances would be assistance as defined in subsection 125.4(1) of the Income Tax Act (the "Act").

Background and Facts

The CFFF was introduced in 2000 to be administered by Telefilm. It has various programs, one of which is the Low Budget Independent Feature Film Assistance Program (the "Low Budget Program"). This program was used to partially fund the Production. Telefilm's literature describes, in part, the objectives for the Low Budget Program as follows:

The Program supports the production and post-production/completion of high quality, original and culturally relevant director-driven low budget feature films from both emerging and established filmmakers. The Program supports films where the director is the driving force behind the proposed project.

In conjunction with the other elements of the Canada Feature Film Fund, the Low Budget Program is an important component of the federal government's Canadian Feature Film Policy that has the objective to increase the quality, diversity and accessibility of Canadian feature films.

Some of the salient terms of the agreement, dated XXXXXXXXXX, between the Producer and Telefilm (the "Agreement") under the Low Budget Program are as follows:

Section 2 - the Production budget was $XXXXXXXXXX;

Section 3 - Telefilm agreed to advance to the Producer a maximum of $XXXXXXXXXX (the "Advances" being XXXXXXXXXX% of the Production budget) to be used to finance the making of the Production;

Section 5 - the Producer agreed to pay Telefilm 10% of the "Production Revenues" until the amount of the Advances had been recovered (note: no interest is stipulated on the amount of the Advances);

Section 6.05(a) of the Standard Terms - Telefilm was to receive certain on-screen credits for its participation in financing the Production;

Section 6.08 of the Standard Terms - the Producer must declare to Telefilm in writing "all other government assistance...received or to be received in respect of the Production..." [underlining is ours];

Section 9.01 of the Standard Terms lists events of default and includes

(j) any material adverse change occurs in the financial position of the Applicant [the Producer] which, in Telefilm's opinion, impairs the Applicant's capacity to perform its obligations under this Agreement;

Appended to the Agreement is a "Guarantee" signed by XXXXXXXXXX guaranteed the Producer's payments and performance of obligations under the Agreement. In addition, XXXXXXXXXX agreed to indemnify and save Telefilm harmless from and against all costs, losses, expenses and damages it may suffer as a result of the Producer's failure to perform, or breach or violation of any of the obligations under the Agreement.

Additional Information

We obtained the following additional information from our telephone discussions with representatives at Telefilm:

? under the current Low Budget Program, Telefilm would be entitled to 10% of production revenues until the Telefilm advances were recouped and thereafter would be entitled to 5% of production revenues. The terms of the Low Budget Program in existence at the time the Agreement was entered into provided that Telefilm would only be entitled to 10% of Production Revenues until the Telefilm Advances were recouped. Telefilm was not entitled to interest on the Advances or to any other participation in the Production;

? the event of default definition in the Standard Terms (including 9.01(j), noted above) would not include a situation where the Producer could not repay the Advance to Telefilm simply because the Production was not generating sufficient money. In such circumstances, there would be no legal basis and it is not intended that Telefilm would pursue any other avenue against the Producer to obtain payment. There would be an event of default if the Producer breached its commitments under the Agreement (e.g., if the Production generated revenue and the Producer failed to pay the required 10% amount of that revenue to Telefilm). Other events of default include Producer bankruptcy or creditor protection, adverse significant ownership changes in the Producer and failure to complete the Production;

? the Guarantee signed by XXXXXXXXXX represented a completion bond. If the Producer failed to meet its obligations (e.g., did not complete the production), XXXXXXXXXX was obligated to make certain payments to Telefilm. The Guarantee had nothing to do with the commercial success of the Production and did not provide for the repayment of the Advances to Telefilm; and

? historically, some very rough Low Budget Program statistics are that in less than 1% of arrangements has Telefilm recouped the full amount of its advances. Approximately 50% of productions have provided no recoupment at all for Telefilm and Telefilm's average recoupment may only be in the neighbourhood of 14-15% of its advances. It was also noted that to their knowledge, Telefilm has never converted any amount of an unrecouped advance under the Low Budget Program to a grant. They have simply not collected the relevant amounts.

Our Comments

Subsection 125.4(1) of the Act defines assistance to mean "...an amount, other than a prescribed 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)".

Prescribed amount is defined in draft subsection 1106(8) of the Income Tax Regulations to the Act to exclude certain amounts from the definition of assistance. Payments out of the Low Budget Program or the CFFF are not excluded by virtue of this definition.

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, forgivable loan...allowance or any other form of inducement, or (iv) as a refund, reimbursement, contribution or allowance or as assistance, whether as a grant, subsidy, forgivable loan...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.

We considered, whether the Advances could be viewed as some sort of forgivable loan, or any other form of inducement or assistance as contemplated in paragraph 12(1)(x) of the Act.

Reference is made to our position as stated in response to Question 46 at the 1988 Canadian Tax Conference [our position was restated in response to Question 11 at the 1994 APFF]:

"It is the department's view that all loans that a lender is committed to forgive if certain conditions are met fall within the ambit of subparagraph 12(1)(x)(iii) or 12(1)(x)(iv) of the Act. Only loans that are unconditionally repayable would be excluded."

Although the Advances are only conditionally repayable if sufficient Production Revenues are earned, there is no stated requirement in the Agreement for Telefilm to forgive any of the unpaid Advances. However, it is implicit in the terms of the Agreement (and Telefilm officials have orally confirmed) that if there are insufficient revenues from the exploitation of the Production, there is no requirement for the Producer ever to repay the unpaid amounts of the Advances and no further actions are available or will be taken by Telefilm to collect these amounts.

Consequently, based on the limited facts provided, it appears that the Advances would be assistance, as contemplated in subsection 125.4(1) of the Act.

We hope the above will be useful 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

- 4 -