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.
Principal Issues: Whether paragraph 212(1)(d) or subsection 212(5) of the Act apply to the payment for an option to acquire the motion picture rights in respect of a script and/or the payments made to exercise such option and actually acquire the motion picture rights.
Position: No.
Reasons: Paragraph 212(1)(d) and subsection 212(5) of the Act applies to payments for the use of the property described therein, not to the purchase of such property.
June 14, 2006
Janet Schermann HEADQUARTERS
Film Industry Services A. Seidel, CMA
SMEAD (613) 957-2058
6th Floor, Canada Building
344 Slater Street
2006-017937
Production or Reproduction of Literary Work
We are writing in response to your April 4, 2006 facsimile in which you requested our comments concerning the application of paragraph 212(1)(d) and subsection 212(5) of the Income Tax Act (the "Act") to certain payments made by XXXXXXXXXX (the "Purchaser") to XXXXXXXXXX (the "Vendor").
Background
1. XXXXXXXXXX (the "Writer") was the sole author of a certain literary and dramatic work (the "Script"). The Script, together with the story, plots, themes, titles, characters and copyright thereof and any translations, dramatizations, sequels and other adaptations or versions thereof now existing or hereafter created, as identified in the agreement referred to in 2 below, are referred to as the "Property". The Purchaser desires to purchase the "Motion Picture Rights" to the Property from the Vendor. The Motion Picture Rights include, "exclusively and forever" and without limitation throughout the world and in all languages, "the entire silent sound, dialogue, talking and musical rights" in and to the Property. For greater certainty, the Motion Picture Rights include the right to make a motion picture and/or a television production and the right to license, market or otherwise distribute such production(s) on VHS, DVD, CD-ROM or any other recording device now known or hereafter devised.
2. Pursuant to the terms of an "Option and Literary Purchase Agreement" (the "Agreement") the Purchaser first acquired an exclusive and irrevocable option to purchase the Motion Picture Rights (the "Option") from the Vendor and then exercised the Option.
3. The Purchaser paid $XXXXXXXXXX for the grant of the Option and a further $XXXXXXXXXX upon the exercise of the Option to purchase the Motion Picture Rights. The Vendor will also be entitled to "Contingent Compensation" which consists of XXXXXXXXXX% of the production budget that is in excess of $XXXXXXXXXX (US). Finally, the Vendor will be entitled to the applicable "production fee" as provided for in the standard Writers Guild of America agreement.
4. If the Purchaser had failed to exercise the Option, the Vendor would have been able to keep the $XXXXXXXXXX and would have been free to deal with the Script in the manner of their choosing.
5. Upon the exercise of the Option, the Vendor "sells, grants, conveys and assigns" to the Purchaser, its successors, licensees and assigns, the Motion Picture Rights as provided for in the Agreement.
Issue
Do any of subparagraphs 212(1)(d)(i), (iv) or (v) of the Act apply to any of the payments from the Purchaser to the Vendor? Does subsection 212(5) of the Act apply to any of the payments from the Purchaser to the Vendor?
Legislation
Subject to certain exceptions, subparagraph 212(1)(d)(i) of the Act provides that every non-resident person shall pay an income tax of 25% on every amount that a person resident in Canada pays or credits, or is deemed by Part I to pay or credit, to a non-resident person as, on account or in lieu of payment of, or in satisfaction of, rent, royalty or similar payment, including, but not so as to restrict the generality of the foregoing, any payment for the use of or for the right to use in Canada any property, invention, trade-name, patent, trade-mark, design or model, plan, secret formula, process or other thing whatever.
Subject to certain exceptions, subparagraph 212(1)(d)(iv) of the Act provides, among other things, that every non-resident person shall pay an income tax of 25% on every amount that a person resident in Canada pays or credits, or is deemed by Part I to pay or credit, to a non-resident person as, on account or in lieu of payment of, or in satisfaction of, rent, royalty or similar payment, including, but not so as to restrict the generality of the foregoing, any payment made pursuant to an agreement between a person resident in Canada and a non-resident person under which the non-resident person agrees not to use or not to permit any other person to use any thing referred to in subparagraph (i).
Subject to certain exceptions, subparagraph 212(1)(d)(v) of the Act provides, among other things, that every non-resident person shall pay an income tax of 25% on every amount that a person resident in Canada pays or credits, or is deemed by Part I to pay or credit, to a non-resident person as, on account or in lieu of payment of, or in satisfaction of, rent, royalty or similar payment, including, but not so as to restrict the generality of the foregoing, any payment that was dependent on the use of or production from property in Canada whether or not it was an installment on the sale price of the property, but not including an instalment on the sale price of agricultural land.
Subsection 212(5) of the Act provides that every non-resident person shall pay an income tax of 25% on every amount that a person resident in Canada pays or credits, or is deemed by Part I to pay or credit, to the non-resident person as, on account or in lieu of payment of, or in satisfaction of, payment for a right in or to the use of a motion picture film or a film, video tape or other means of reproduction for use in connection with television (other than solely in connection with and as part of a news program produced in Canada) that has been or is to be used or reproduced in Canada.
Subparagraph 212(1)(d)(i) of the Act applies to a payment for the use of or for the right to use in Canada any property, invention, trade-name, patent, trade-mark, design or model, plan, secret formula, process or other thing whatever. In this particular case, the payments are not for the right to use property. The Purchaser's payments are, firstly, for the Option to purchase the Motion Picture Rights and secondly, if the Option is exercised, the actual purchase price for the outright acquisition of the Motion Picture Rights from the Vendor. It is therefore our view that subparagraph 212(1)(d)(i) of the Act would not apply to any of the amounts the Purchaser would pay the Vendor for the Motion Picture Rights.
Subparagraph 212(1)(d)(iv) of the Act applies to any payment made pursuant to an agreement between a person resident in Canada and a non-resident person under which the non-resident person agrees not to use or not to permit any other person to use any property, invention, trade-name, patent, trade-mark, design or model, plan, secret formula, process or other thing whatever. Notwithstanding that the purchase of the Motion Picture Rights gives the Purchaser the exclusive ownership of such Motion Picture Rights, it is our view that the payments made to the Vendor for the acquisition of the Motion Picture Rights would not be payments that are made "under which the non-resident person agrees not to permit any other person to use" the Motion Picture Rights. As a matter of fact, once the Purchaser has acquired the Motion Picture Rights from the Vendor, the Purchaser has legal ownership of such rights and is free to deal with these rights in whatever manner they choose. On the other hand, the Vendor, having sold such rights, no longer has any legal right to the Motion Picture Rights and there is no need for the Purchaser to make a payment to obtain agreement from the Vendor not to use such rights. The Purchaser's copyright in the Motion Picture Rights would prevent the Vendor, or anyone else, from using the Motion Picture Rights. It is therefore our view that subparagraph 212(1)(d)(iv) of the Act would not apply to any of the amounts the Purchaser would pay the Vendor for the Motion Picture Rights.
Subparagraph 212(1)(d)(v) of the Act applies to any payment made by a person resident in Canada to a non-resident person where such payment is dependent on the use of, or production from, property in Canada, regardless of whether or not it was an installment on the sale price of the property. In this particular case, the purchase price is fixed, is not dependent upon the use of the Motion Picture Rights and is not dependent upon any production from the Motion Picture Rights. Notwithstanding the provision in the Agreement that the Vendor will be entitled to additional "Contingent Compensation" that is determined by reference to a "production budget" for making a movie, the two payments with respect to the acquisition of the Motion Picture Rights are not in respect of the "production" referred to in subparagraph 212(1)(d)(v) of the Act. It is therefore our view that subparagraph 212(1)(d)(v) of the Act would not apply to either of the payments that the Purchaser may make to the Vendor for the acquisition of the Motion Picture Rights.
Subsection 212(5) of the Act applies where a person resident in Canada pays to a non-resident person a payment for a right in or to the use of a motion picture film or a film, video tape or other means of reproduction for use in connection with television (other than solely in connection with and as part of a news program produced in Canada) that has been or is to be used or reproduced in Canada. In this particular case, the payment is for the acquisition of the Motion Picture Rights. Once the Purchaser has acquired the Motion Picture Rights, the Purchaser may choose to produce a motion picture film or a production that will be used on television. It is our view that this is not sufficient to conclude that either of the payments from the Purchaser to the Vendor would fall within the ambit of subsection 212(5) of the Act.
Conclusion
The Purchaser is making two payments to the Vendor. The first payment is being made to acquire the Option to purchase the Motion Picture Rights and the second payment will be made upon the exercise of the Option to actually acquire the Motion Picture Rights. It is our view that neither of these payments would be amounts paid by a person resident in Canada to a non-resident as "rents, royalties or similar payments" to which subparagraph 212(1)(d) of the Act would apply or "for a right in or for the use of" a property described in subsection 212(5) of the Act such that neither of the payments from the Purchaser to the Vendor would be subject to Part XIII withholding tax.
The Tax Review Board decision in Peliculas Sari S.A. v. The Minister of National Revenue (80 DTC 1766) confirmed that Part XIII tax was not exigible on payments made to acquire ownership of a film and that such payments were distinct from payments made to acquire specific rights in a film. Similarly, in Minister of National Revenue v. Paris Canada Films Limited (62 DTC 1338), the Exchequer Court of Canada concluded that a lump sum payment for rights irrevocably ceded "can hardly be reconciled with the customarily accepted notions attaching to "rents or royalties"" as described in paragraph 212(1)(d) of the Act.
Subparagraph 212(1)(d)(vi) of the Act specifically excludes from the application of subparagraph 212(1)(d) of the Act, a royalty or similar payment on or in respect of a copyright in respect of the production or reproduction of any literary, dramatic, musical or artistic work. The Agreement provides that the purchase of the Motion Picture Rights includes the acquisition of the copyright of the Script. Accordingly, since the copyright in the Script no longer remains with the Vendor, no portion of the payments by the Purchaser would be considered to be a royalty or similar payment in respect of the "production or reproduction" in respect of the copyright in the Motion Picture Rights. It is therefore our view that the application/non-application of subparagraph 212(1)(d)(vi) is not an issue in this particular situation.
Finally, we would point out that paragraph XXXXXXXXXX of the Agreement includes a provision that the Vendor will receive "contingent compensation" equal to XXXXXXXXXX% of the amount by which the "production budget" exceeds $XXXXXXXXXX It is our view that any payment made by the Purchaser to the Vendor pursuant to this paragraph in the Agreement would be a payment that was dependent upon the production from the Motion Picture Rights. Therefore, to the extent that such production from the Motion Picture Rights occurred in Canada, any such payment would be subject to Part XIII tax pursuant to subparagraph 212(1)(d)(v) of the Act.
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Customs and Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a copy severed using the Privacy Act criteria which does not remove client identity. Requests for this latter version should be made by you to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
Olli Laurikainen, CA
for Director
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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