9 July 2024 Internal T.I. 2023-0976691I7 - Film Tax Credit and Alter Ego Trust

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: For purposes of the BC Film Tax Credit, do the shares held in an alter ego trust "belong to" the trust or to the trustee, who is also the settlor?

Position: Based on the facts provided, they belong to the trustee.

Reasons: See memo.

								July 9, 2024

XXXXXXXXXX                 					HEAD OFFICE
Film Services Unit                       			Income Tax Rulings Directorate
								XXXXXXXXXX

Attention: XXXXXXXXXX

								2023-097669 

XXXXXXXXXX

Unless otherwise stated, every statutory reference herein is to the Income Tax Act (Canada) (the “Act”). Unless otherwise indicated, all references to monetary amounts are in Canadian dollars.

This is in reply to your submission provided on XXXXXXXXXX regarding the British Columbia production services tax credit (“BCPSTC”) claimed by XXXXXXXXXX. (the “Taxpayer” or “Claimant”) in the taxation year ending XXXXXXXXXX. Specifically, you requested our opinion on whether shares will be considered to “belong” to a trust for purposes of meeting the conditions of “remuneration” in the definition of “BC labour expenditure” under clause 79(1)(b)(iv)(B) of the the BC Income Tax Act (the “BC ITA”) (footnote 1) or, alternatively, will the shares be considered to “belong” to the individual who is rendering the services in his capacity as trustee and beneficiary of the trust as the Claimant contends.

Facts

Our understanding of the relevant facts in this case are as follows:

1. For the taxation year XXXXXXXXXX, the Taxpayer claimed the BCPSTC based on XXXXXXXXXX paid for services rendered, further described below.

2. All the outstanding and issued common shares of the Taxpayer are owned by XXXXXXXXXX, a company incorporated under the laws of British Columbia and a taxable Canadian corporation.

3. The Taxpayer paid $300,000 to XXXXXXXXXX for executive producer, producer and consulting services and claimed the entire amount as “renumeration” for services paid to a taxable Canadian corporation where all of the issued and outstanding shares of the capital stock of the corporation belong to a BC-based individual and the activities of the corporation consist principally of the provision of that individual’s services, to the extent that the amount paid is attributable to services rendered personally by the individual for the production under the definition of “BC labour expenditure” under clause 79(1)(b)(iv)(B) of the BC ITA.

4. The payments totaling XXXXXXXXXX from the Taxpayer to XXXXXXXXXX were for services provided by XXXXXXXXXX as follows:

	Details			Amount
	XXXXXXXXXX			XXXXXXXXXX	

5. The XXXXXXXXXX is an alter ego trust pursuant to the Act and was created on XXXXXXXXXX under the XXXXXXXXXX (the “Trust”).

6. The settlor and trustee of the Trust are XXXXXXXXXX. The beneficiaries of the Trust are XXXXXXXXXX.

7. All the outstanding and issued common shares of XXXXXXXXXX were contributed by XXXXXXXXXX to the Trust on a tax-deferred basis on XXXXXXXXXX and they are held by XXXXXXXXXX as Trustee of the Trust.

8. The stated purpose for the creation of the trust and transfer of property was that these transactions were part of estate planning that was done for XXXXXXXXXX to avoid probate fees.

District Office Position

We understand that your position is that the XXXXXXXXXX paid by the Taxpayer to XXXXXXXXXX does not qualify as an expenditure for the services portion of the tax credit, rather it should be considered “salary or wages” as defined in the definition of “BC labour expenditure” under the BC ITA, effectively limiting the amount that would be used to compute the credit. Your primary argument for this position is that one of the requirements to be eligible for inclusion as remuneration for services for purposes of the tax credit is that the payment is made to a BC-based individual or to a corporation that is a taxable Canadian corporation if all of the outstanding shares of the corporation belong to a BC-based individual. Your view is that this test may not be met as any assets transferred to an alter ego trust are no longer personally held by the settlor and are held by the trust. Furthermore, it is your understanding that the provision requires that the activities of the corporation have to primarily consist of the provision of that particular “individual’s services” in order to be eligible for the tax credit and if the shares of XXXXXXXXXX are considered to “belong” to the Trust for purposes of the tax credit and if the Trust is considered an “individual” then the trust cannot render the services. It is XXXXXXXXXX who is personally rendering the services. Therefore, in your opinion, the conditions in the definition of “BC labour expenditure” in the BCPSTC provision under the BC ITA are not satisfied.

Taxpayer's Representation

We understand that the Taxpayer’s filing position to claim the BCPSTC presumes that while the shares of XXXXXXXXXX were transferred to the Trust, they continue to “belong” to XXXXXXXXXX based on case law and the Canada Revenue Agency’s (“CRA’s”) prior positions concerning trusts and beneficial ownership of a corporation. Therefore, according to the Taxpayer, the condition in clause 79(1)(b)(iv)(B) of the BC ITA, as described above, is met. The Claimant’s representative provided a submission dated XXXXXXXXXX in response to your potential denial of the tax credit on the basis that the requirements of clause 79(1)(b)(iv)(B) of the definition of “BC labour expenditure” in the BC ITA are met (the “Taxpayer Response”). The Taxpayer’s position is that the shares of XXXXXXXXXX legally and beneficially belong to XXXXXXXXXX and therefore XXXXXXXXXX is the sole person to whom the shares could “belong” and as XXXXXXXXXX personally rendered the services to the Taxpayer the conditions in clause 79(1)(b)(iv)(B) of the definition of “BC labour expenditure” in the BC ITA are met. The Taxpayer Response notes as a matter of law the trust is not a separate legal entity and is rather a relationship and that it is widely accepted in case law that the owner of shares held through a trust is the trustee and not the trust. It cites case law such as Minister of National Revenue v. Consolidated Holding Company Limited, [1972] C.T.C. 18 (SCC) and H. A. Fawcett & Son, Limited v. The Queen, [1980] C.T.C. 293 80 D.T.C 6195.

Our Comments

In order for an amount to be eligible as a BC labour expenditure of a corporation under clause 79(1)(b)(iv)(B) of the BC ITA the amount must be paid as remuneration for service of another corporation where “all of the issued and outstanding shares of the capital stock of the corporation, except directors’ qualifying shares, if any, belong to a BC-based individual and the activities of the corporation consist principally of the provision of that individual’s services, to the extent that the amount paid is attributable to services rendered personally by the individual for the production” (emphasis added). This criteria is based on the wording in the Act for the definition of “labour expenditure” with respect to the Canadian Film or Video Production Tax Credit (CFVPTC) under subsection 125.4(1) and the definition of “Canadian labour expenditure” under subsection 125.5(1) for purposes of the Film or Video Production Services Tax Credit (FVPSTC). (footnote 3)

The Explanatory Notes in respect of paragraph (b) of the definition of “Canadian labour expenditure” in subsection 125.5(1) states: (footnote 4)

Paragraph (b) of the definition "Canadian labour expenditure" refers to a portion of amounts paid by the eligible production corporation under contracts for services, i.e. as non-salaried remuneration. The eligible portion is the amount that

• is directly attributable to the accredited production;
• is paid in a taxation year (or within 60 days after the end of the year) by the eligible production corporation;
• is paid to a person or partnership that is carrying on a business in Canada through a permanent establishment; and
• relates to services rendered in Canada to the eligible production corporation after October 1997 and in the year, for the stages of production mentioned above (see the above discussion in respect of paragraph (a)).

Furthermore, the service provider must be one of the following persons:

• an individual resident in Canada who is not an employee of the eligible production corporation, to the extent to which the amount paid is attributable to services personally rendered by the individual in Canada in respect of the accredited production, or is attributable to and does not exceed the salary or wages of those of the individual's employees who were resident in Canada for personally rendering services in Canada for the production;
• a taxable Canadian corporation, to the extent the amount paid is attributable to and does not exceed the salary or wages of those of the other corporation's employees who are resident in Canada for personally rendering services in Canada for the production;
• a taxable Canadian corporation, all the shares of which belong to an individual resident in Canada and the activities of which consist principally of the provision of the individual's services, to the extent the amount paid is attributable to services rendered personally in Canada by the individual for the production;
• partnership, to the extent to which the amount paid is attributable to services personally rendered in Canada by an individual resident in Canada who is a member of the partnership, for the production of the property, or
• is attributable to and does not exceed the salary or wages of the partnership's employees for personally rendering services for the production. (emphasis added)

As can be inferred from the above, the purpose of this provision is to permit the tax credit claimant to include as Canadian labour expenditures non-salaried remuneration for services paid directly to an individual resident in Canada who performed such services or to a sole shareholder corporation or a partnership. If XXXXXXXXXX held the shares of XXXXXXXXXX directly, the above criteria should be met.

There is no CRA commentary with respect to whether, for purposes of the above definitions in paragraphs 125.4(1) and 125.5(1), shares of a taxable Canadian corporation that are held through a trust “belong” to the trust or if the shares belong to the trustee of the trust. There is similarly no commentary as to whether the term “belong” in these provisions pertains to legal or beneficial ownership. (footnote 5) Accordingly, we looked at the ordinary meaning of the word “belong”.

The Merriam Webster Dictionary (11th Edition) defines the ordinary meaning of the word “belong” as a verb meaning to “be the property of a person or a thing”. Black’s Law Dictionary (8th Edition) defines “belong” as “to be the property of a person or thing” and refers the reader to see the entries therein regarding “ownership”. The ownership definition refers to “the bundle of rights allowing one to use, manage, and enjoy property, including the right to convey it to others”. With respect to the relevant provincial and federal film tax credits, the use of the term “belong” is in reference to the shares of the taxable Canadian corporation to which the remuneration is being paid (in this case the shares of XXXXXXXXXX) and this type of corporation has been referred to as a “sole-shareholder corporation”. (footnote 6)

Generally, it is Rulings’ view that it is the trustees of a trust who best fulfil the roles in respect of property described in the above definitions. As a matter of law, a trust does not have an independent legal existence and rather it is simply a legal relationship and accordingly we agree with the Claimant’s view that the XXXXXXXXXX shares are held by the trustee of the Trust in order to fulfil XXXXXXXXXX obligations as trustee.

As noted above, the Taxpayer’s Response relied on the Supreme Court decision in Consolidated Holding Company Limited to support its position that the owner of shares held through a trust is the trustee and not the trust and we affirm that Rulings consistently cites this decision as support for the view that in determining control of a corporation, it is the trustees of the trust who have the legal ownership of the shares, who have the right to vote those shares, and who, therefore, control the corporation.

Document No. 2001-0019525 states:

In this situation, the Trust and Opco would be related to each other before and after the sale of the shares of Opco. Pursuant to paragraph 104(1) of the Act, a reference to a trust shall, unless the context otherwise requires, be read to include a reference to the trustee, i.e. Mr. A in the first situation submitted. In accordance with the decisions of the Supreme Court of Canada in Consolidated Holding Company Limited, aforementioned, and the Federal Court of Appeal in H. A. Fawcett & Son, Limited v. The Queen, [1980] C.T.C. 293 80 D.T.C 6195, no difference should be drawn between Mr. A acting in his personal capacity and Mr. A acting in his capacity as trustee of the Trust. Therefore, in accordance with these decisions and subsection 104(1) of the Act, the Trust (which includes a reference to Mr. A) would be considered as controlling Opco before and after the sale of the shares of Mr. A and, as a result, the Trust and Opco would be related to each other pursuant to subparagraph 251(2)(b)(i) of the Act. (emphasis added)

We also note that following the principles established in Consolidated Holding Company Limited, a review of the trust indenture for the Trust was undertaken to determine if there were any limitations in regard to XXXXXXXXXX control over trust property and no limitations were identified that would alter our conclusion.

It is our view that the shares of XXXXXXXXXX belong to XXXXXXXXXX and not the Trust for purposes of the tax credit. As a matter of law, a trust does not have an independent legal existence and is a legal relationship. Property to which a trust relationship applies is held by the trustee(s) of a trust in order to fulfil their obligations as trustees. The facts further support this position as XXXXXXXXXX has legal ownership of the shares in XXXXXXXXXX role as trustee, and beneficial ownership of the shares as the sole beneficiary who is entitled to the income on the shares while XXXXXXXXXX is alive, and no other person may receive or obtain the use of the shares while XXXXXXXXXX is alive. Therefore, in our view the Taxpayer’s position that the XXXXXXXXXX shares “belong” to XXXXXXXXXX in XXXXXXXXXX capacity as trustee of the Trust for purposes of the definition of “BC labour expenditure” under clause 79(1)(b)(iv)(B) of the BC ITA is reasonable based on case law and prior Rulings’ positions.

Responses to questions 2 and 3 of your submission are not addressed as they are relevant only if the XXXXXXXXXX shares are considered to belong to the Trust and not XXXXXXXXXX for purposes of the provincial film tax credit.

We trust the above comments are of assistance.

Yours sincerely,

XXXXXXXXXX
for Director
Partnerships and Corporate Financing Section
Reorganizations Division
Income Tax Rulings Directorate

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 BC Income Tax Act [RSBC 1996] CHAPTER 215 << Full Multi - Income Tax Act (gov.bc.ca)>>.

2 Note XXXXXXXXXX are used interchangeably in legal documentation and supporting working papers.

3 BC tax credits are part of the tax administration agreement conclude with the province.

4 As noted above, the relevant part of the definition of “Canadian labour expenditure” in subsection 125.5(1) is the same as “labour expenditure” in subsection 125.4(1). For the purposes of the provincial film tax credit the individual is required to be resident in BC.

5 Of note, the term “belong” appears to be used infrequently in the Act. It is also used in the context of the meaning of “wholly owned corporation” in subsection 85(1.3) which is based on the look-through concept in determining if this definition applies.

6 XXXXXXXXXX.