2013 Ruling 2013-0513991R3 - Reg 1106 and excluded production

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: 1- Will the granting of the Option by the production company (Prodco), a qualified corporation, to a related company (Master Distributor), a prescribed taxable Canadian corporation, cause the 25-year copyright ownership requirement not to be met? 2- Will the exercise of the Option by Master Distributor cause the 25-year copyright ownership requirement not to be met? 3- Upon the exercise of the Option by Master Distributor, will the production be a Class 10(x) property to Master Distributor?

Position: 1 & 2 – No. 3 – Yes, provided the production does not subsequently become an excluded production (i.e. the 25-year copyright ownership requirement continues to be met) and the production meets the other requirements of a Canadian film or video production under subsection 1106(4) of the Regulations.

Reasons: 1 & 2 – Clause 1106(1)(a)(iii)(A) of the definition of "excluded production" in the Regulations contemplates a transfer of the copyright between a qualified corporation and a related prescribed taxable Canadian corporation. 3 – Wording of provisions (including subsection 1101(5k.1) of the Regulations which contemplates a transfer of the production between a qualified corporation and a related corporation).

XXXXXXXXXX
2013-051399

XXXXXXXXXX, 2013

Dear XXXXXXXXXX:

Re: XXXXXXXXXX (the "Taxpayer")
Advance Income Tax Ruling Request

This is in reply to your letter of XXXXXXXXXX (as amended by your email dated XXXXXXXXXX), in which you requested an advance income tax ruling on behalf of the Taxpayer.

We understand that, to the best of your knowledge and that of the Taxpayer and the other persons described herein, none of the issues involved in the ruling request is:

(i) in an earlier return of the Taxpayer or a related person,

(ii) being considered by a tax services office or tax centre in connection with a previously filed tax return of the Taxpayer or a related person,

(iii) under objection by the Taxpayer or a related person,

(iv) before the courts, or if a judgment has been issued, the time limit for appeal to a higher court has expired, and

(v) the subject of a ruling previously considered by the Income Tax Rulings Directorate for the Taxpayer or a related person, with the exception of the 2012 Ruling (as defined below).

You have confirmed to us, on behalf of the Taxpayer in the 2012 Ruling and the other related persons described therein, that those related persons are unable to complete the Proposed Transactions described in the 2012 Ruling.

This document is based solely on the facts and transactions described below. Any information or documentation submitted in the course of processing your request does not form part of the facts and transactions and any references thereto are provided solely for the convenience of the reader.

1. DEFINITIONS

Unless otherwise expressly stated, every reference herein to the "Act" or to a part, subdivision, section or subsection, paragraph or subparagraph and clause or subclause is a reference to the relevant provision of the Income Tax Act (Canada), R.S.C., 1985, c.1 (5th Supp.), as amended from time to time and consolidated to the date of this letter, and the Income Tax Regulations thereunder are referred to as the "Regulations".

All monetary amounts are expressed in Canadian dollars unless otherwise indicated.

In this letter, the following terms or expressions have the meaning specified and, where the circumstances so require, words reporting the singular include the plural and vice versa:

XXXXXXXXXX;

"ACB" means "adjusted cost base" and has the meaning assigned by section 54 of the Act;

"ACo" means XXXXXXXXXX, a taxable Canadian corporation, as further described in paragraph 2.4;

"BCo" means XXXXXXXXXX, a taxable Canadian corporation, as further described in paragraphs 2.4, 2.7, 2.8 and 2.9;

"Branch" is a branch XXXXXXXXXX to be established by Master Distributor, as more fully described in paragraph 3.1;

"Canadian Broadcaster" means XXXXXXXXXX;

"CAVCO" means the Canadian Audio-Visual Certification Office which co-administers the CFVPTC with the CRA;

XXXXXXXXXX;

"CFVPTC" means the Canadian film or video production tax credit under section 125.4 of the Act;

"CRA" means the Canada Revenue Agency;

"Exercise Price" is the exercise price in respect of the Option as more fully described in subparagraph 3.4(ii);

"FMV" means fair market value;

XXXXXXXXXX;

XXXXXXXXXX;

XXXXXXXXXX;

XXXXXXXXXX;

"Master Distributor" means XXXXXXXXXX, a XXXXXXXXXX taxable Canadian corporation which is wholly-owned by ACo;

"Option" is an option to acquire all of Prodco's right, title and interest in the Production (subject to any agreements entered into by Prodco prior to the exercise of the Option) as more fully described in subparagraph 3.4(ii);

"Paid-up capital" or "PUC" has the meaning assigned by subsection 89(1) of the Act;

XXXXXXXXXX;

"Prescribed taxable Canadian corporation" has the meaning assigned by subsection 1106(2) of the Regulations;

"Prodco" means a sole-purpose XXXXXXXXXX production company, which will be a taxable Canadian corporation and a qualified corporation, to be incorporated for the production XXXXXXXXXX. Prodco is further described under the Proposed Transactions in paragraph 3.3;

"Production" means the XXXXXXXXXX;

"Proposed Transactions" means the transactions described in paragraphs 3.1 to 3.13;

"Qualified corporation" has the meaning assigned by subsection 125.4(1) of the Act;

XXXXXXXXXX;

"Related persons", or persons related to each other, has the meaning assigned by section 251 of the Act;

XXXXXXXXXX;

XXXXXXXXXX;

"Tax Credits" means any CFVPTC under the Act and any analogous provincial legislation;

"Taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Act;

"UCC" means "undepreciated capital cost" and has the meaning assigned by subsection 13(21) of the Act;

"XXXXXXXXXX Broadcaster" means XXXXXXXXXX; and

"XXXXXXXXXX Co" means XXXXXXXXXX, a corporation resident in XXXXXXXXXX which enters into licensing agreements with XXXXXXXXXX Broadcasters, as further described in paragraph 2.5;

Our understanding of the facts, transactions and the purpose of the Proposed Transactions is as follows:

2. FACTS

2.1 XXXXXXXXXX.

2.2 XXXXXXXXXX.

2.3 XXXXXXXXXX.

2.4 ACo is a wholly-owned subsidiary of XXXXXXXXXX. BCo is a wholly-owned subsidiary of ACo XXXXXXXXXX.

2.5 XXXXXXXXXX Co is a wholly-owned subsidiary of ACo and is resident in XXXXXXXXXX. XXXXXXXXXX Co is engaged in the XXXXXXXXXX business within XXXXXXXXXX.

2.6 XXXXXXXXXX.

2.7 BCo's business address is XXXXXXXXXX. BCo files its T2 Corporation Income Tax Return with the XXXXXXXXXX Tax Centre. BCo's business number is XXXXXXXXXX and it deals with the XXXXXXXXXX Tax Services Office.

2.8 BCo XXXXXXXXXX has a taxation year end of XXXXXXXXXX. BCo is a prescribed taxable Canadian corporation.

2.9 XXXXXXXXXX.

2.10 XXXXXXXXXX.

2.11 XXXXXXXXXX.

2.12 XXXXXXXXXX.

2.13 Master Distributor was incorporated on XXXXXXXXXX under the laws of Canada. Master Distributor is taxable on its worldwide income and is a prescribed taxable Canadian corporation and will be related to Prodco. Master Distributor's business address is XXXXXXXXXX.

3. PROPOSED TRANSACTIONS

To increase overall income (through the elimination of the fees to XXXXXXXXXX) and to ensure that the XXXXXXXXXX business is undertaken in an effective manner including ensuring XXXXXXXXXX withholding taxes are minimized, XXXXXXXXXX has incorporated Master Distributor as a XXXXXXXXXX Canadian distribution company with the intention of establishing a XXXXXXXXXX branch to undertake the XXXXXXXXXX distribution business XXXXXXXXXX:

(a) XXXXXXXXXX

(b) XXXXXXXXXX

(c) Master Distributor will be taxed on its worldwide income in Canada. The XXXXXXXXXX distribution operations carried on through the Branch will also be subject to XXXXXXXXXX tax on any net income. To the extent available, Master Distributor would claim foreign tax credits with respect to XXXXXXXXXX taxes paid.

The following transactions will be undertaken:

3.1 Master Distributor will establish Branch, a XXXXXXXXXX branch XXXXXXXXXX, for purposes of undertaking a XXXXXXXXXX business in XXXXXXXXXX.

3.2 XXXXXXXXXX.

3.3 Before undertaking the Production, BCo will incorporate a sole-purpose production company, Prodco, which will be wholly-owned by BCo. The purpose of Prodco is to undertake the Production and claim the CFVPTC as a qualified corporation. Until the Option is exercised (as described below in paragraph 3.13), Prodco will be the sole legal and beneficial owner of the worldwide copyright in the Production and will control all distribution rights.

3.4 Before undertaking the Production, Prodco will enter into the following agreements with respect to the distribution of the Production:

i) An agreement with BCo wherein Prodco grants to BCo, for exploitation in all languages throughout XXXXXXXXXX, for a period commencing on the date of entering into the agreement and ending XXXXXXXXXX years from delivery of the Production with XXXXXXXXXX options for a further XXXXXXXXXX years each subject to the approval of Prodco, the exclusive right to exhibit, distribute and license the exhibition and distribution of the Production XXXXXXXXXX. BCo will be entitled to receive a distribution fee in the future XXXXXXXXXX and to recover any distribution expenses XXXXXXXXXX. XXXXXXXXXX. BCo will not be required to make any payments to Prodco until after delivery of the Production. Under the agreement, for consideration at FMV, BCo undertakes to have the Production XXXXXXXXXX Canadian Broadcaster within XXXXXXXXXX that begins at the earliest time after the Production is completed that it is commercially exploitable.

ii) An agreement with Master Distributor wherein Prodco grants to Master Distributor, for exploitation in all languages throughout XXXXXXXXXX, for a period commencing on the date of entering into the agreement and ending XXXXXXXXXX years from delivery of the Production, the exclusive right to exhibit, distribute and license the exhibition and distribution of the Production XXXXXXXXXX. Master Distributor will be entitled to receive a distribution fee in the future XXXXXXXXXX and to recover any distribution expenses XXXXXXXXXX. Master Distributor will not be required to make any payments to Prodco until after delivery of the Production.

Prodco will also grant to Master Distributor, through its XXXXXXXXXX branch, an Option to acquire all of Prodco's right, title and interest in the Production [the "Property"] (subject to any agreements entered into by Prodco prior to the exercise of the Option), save and except for the right of Prodco to retain the proceeds of (i) any Tax Credits and (ii) XXXXXXXXXX. The Option may be exercised by Master Distributor at any time by written notice during the XXXXXXXXXX following delivery of the Production and will have immediate effect. The Exercise Price of the Option will be equal to the FMV of the Property at the date of exercise of the Option. For greater certainty, in the event that the Option is exercised, Master Distributor will not be required to make any payments to Prodco with respect to the distribution of the Production in the territory. Until such time as the Option is exercised, there will be no assignment of copyright (either wholly or partially) under the Copyright Act.

3.5 XXXXXXXXXX.

3.6 Sometime prior to commencement of the Production, Branch will enter into a sub-distribution agreement with XXXXXXXXXX Co with XXXXXXXXXX the following terms:

i) Branch grants to XXXXXXXXXX Co, for exploitation in all languages in XXXXXXXXXX, for a period commencing on the date of entering into the agreement and ending XXXXXXXXXX years from delivery of the Production, the exclusive right to exhibit, distribute and license the exhibition and distribution of the Production XXXXXXXXXX.

ii) There will be XXXXXXXXXX distribution fee on the initial XXXXXXXXXX sale.

iii) Conditional upon Master Distributor complying with all of its obligations under the agreement (including delivery of the Production), XXXXXXXXXX Co agrees to pay a distribution advance, anticipated to be approximately XXXXXXXXXX $XXXXXXXXXX, payable on the later of (i) XXXXXXXXXX and (ii) XXXXXXXXXX.

3.7 Sometime prior to commencement of the Production, XXXXXXXXXX Co will enter into a licensing agreement with a XXXXXXXXXX Broadcaster. XXXXXXXXXX Co will not be obligated to make any payments to Master Distributor until after delivery of the Production, including any payments in respect of XXXXXXXXXX sales.

3.8 XXXXXXXXXX.

3.9 Prodco will file for a Canadian Film or Video Production Certificate (Part A certificate) with CAVCO.

3.10 Prodco will undertake the production and post-production of the Production.

3.11 After the Production is completed and delivered, Prodco will file for a Certificate of Completion (Part B certificate) with CAVCO before the Production's application deadline, as determined under subsection 1106(1) of the Regulations, and will be issued that certificate before the Production's certification deadline, as determined under subsection 1106(1) of the Regulations.

3.12 Distribution will be made XXXXXXXXXX by Prodco (or Master Distributor if the Option is exercised) within the XXXXXXXXXX that begins at the earliest time after the Production is completed that it is commercially exploitable. XXXXXXXXXX.

3.13 If the Option is exercised:

i) Master Distributor will acquire the copyright in the Production from Prodco and Master Distributor will be the sole legal and beneficial owner of the worldwide copyright in the Production.

ii) XXXXXXXXXX.

iii) XXXXXXXXXX.

4. PURPOSE OF THE PROPOSED TRANSACTIONS

The purpose of the Proposed Transactions is to not negatively impact the availability of the CFVPTC while:

• Allowing the consolidation of distribution activities in one legal entity (Master Distributor) and providing a structure that will facilitate future growth and is consistent with the tax rules in Canada and XXXXXXXXXX;
• Being neutral from a Canadian tax perspective as all of the income will continue to be taxable in Canada;
• Retaining more cash and income in Canada XXXXXXXXXX; and
• Continuing to promote the film and television production business in Canada.

5. RULINGS

Provided that

(a) the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, transactions and purpose of the Proposed Transactions,

(b) the Proposed Transactions are completed in the manner described above,

(c) there are no other transactions which may be relevant to the rulings requested, and

(d) the Production is or has been certified by the Minister of Canadian Heritage as a Canadian film or video production (as defined under subsection 1106(4) of the Regulations) and such certification has not been and will not be revoked,

we rule as follows:

A. The granting of the Option by Prodco to Master Distributor would not, in and of itself, result in the Production becoming an excluded production under clause 1106(1)(a)(iii)(A) of the Regulations at the definition of "excluded production".

B. The exercise of the Option by Master Distributor would not, in and of itself, result in the Production becoming an excluded production under clause 1106(1)(a)(iii)(A) of the Regulations at the definition of "excluded production".

C. Immediately after the exercise of the Option by Master Distributor, the Production that is thereby acquired by Master Distributor from Prodco will be a Class 10(x) property to Master Distributor under Schedule II of the Regulations provided that the Production was a Class 10(x) property to Prodco immediately prior to the exercise of the Option.

The above advance income tax rulings, which are based on the Act and Regulations in their present form and do not take into account any proposed amendments thereto, are given subject to the general limitations and qualifications set out in Information Circular 70-6R5 Advance Income Tax Rulings, dated May 17, 2002, and are binding on the CRA provided that the Proposed Transactions described in paragraphs 3.1 to 3.10 and 3.13 are completed on or before XXXXXXXXXX and the remainder of the Proposed Transactions are completed within the prescribed period provided under the Act or the Regulations.

OTHER COMMENTS

Unless otherwise expressly confirmed in the above rulings, nothing in this letter should be construed as implying that the CRA has confirmed, reviewed, made any determination or accepted any method for determination in respect of:

a. the PUC of any share or the ACB, UCC or FMV of any property referred to herein;

b. the reasonableness or FMV of any fees or expenditures referred to herein;

c. the nature of the legal relationships entered into or contemplated by the entities referred to herein;

d. whether or not the Minister of Canadian Heritage (or CAVCO) will certify the Production or issue any of the certificates referred to herein; or

e. any other tax consequence relating to the facts, Proposed Transactions or any transaction or event taking place either prior to the Proposed Transactions or subsequent to the Proposed Transactions, whether described in this letter or not, other than those specifically described in the rulings given above, including whether any of the Proposed Transactions would also be included in a series of transactions or events that include other transactions or events that are not described in this letter.

Yours truly,

XXXXXXXXXX
For Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch