1 September 1989 Income Tax Severed Letter 5-8135A

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.

A certified production acquired after 1987 is included in class 10(w), except where it meets the transitional rules indicated in the history notes for class 10(w) and therefore, qualifies for inclusion in class 12(s). Paragraph (b) of those notes includes property:

• that is a film or tape acquired in 1988 that is part of a series of films or tapes where the series includes films or tapes that are included in Class 12 in Schedule II otherwise than by reason of this paragraph and the film or tape is produced at a fixed price or by reference to a formula under a production option agreement entered into by a licensed broadcaster or bona fide film or tape distributor before 1988.

This legislation implemented the announcement on August 31, 1987, by the Department of Finance in its Information Immediate Release # 87-128 that the transitional rules:

• will apply to all series productions where the pilot episode or the first series of the episode is governed by the old rules, future episodes are produced at a fixed price or by reference to a formula under a production option agreement entered into before 1988, and principal photography of the extended series is completed before 1989.

It is our understanding that the term “production option agreement” is not a term of art used in the Canadian film production community nor does it have a generally accepted meaning within that industry. Attached are two letters that have been issued to the law firm of XXX concerning the interpretation of this phrase - one dated June 15, 1988 from the Department of Finance and one dated September 15, 1988 from Specialty Rulings Directorate. This first letter states in summary, that the transitional relief was Implemented to respond to the situation where a producer of a television series could, under an option agreement, be required under the terms of the agreement to produce further episodes at a fixed price. The relief was not contemplated to apply 1) to further episodes which a producer might choose to produce before the end of 1988 at his discretion or 2) to any agreement which would be the equivalent of a right of first refusal on the part of the broadcaster or distributor. The second letter states that a production option agreement *should be interpreted to mean an agreement pursuant to which the option to proceed with the production of additional episodes of a series is held by a licensed broadcaster or a bona fide film or tape distributor. It would not include an agreement whereby the option to produce a film or tape is held by the producer.”

The firm of XXX recently requested our comments as to whether the wording in a particular distribution agreement for a television series between a producer and a film distributor would constitute a production option agreement. Due to the unusual wording in the agreement relating to distribution rights granted to the distributor for future episodes, the firm agreed to allow the film certification office of the Department of Communications ("DOC") to review the agreement and provide their comments as to the rights and responsibilities undertaken in the agreement. XXX.

We would appreciate confirmation by the Department of Finance of the intent of the legislation in view of the interpretation, based on their knowledge of the film industry, as presented by the Department of Communications. Perhaps the Departments could meet to resolve the issue.