18 August 1989 Income Tax Severed Letter 5-8198A

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.

Dear Sirs:

We are writing in response to the questions you presented in a meeting on June 9, 1989 to Catherine Bowen concerning the income tax treatment of video tapes in a particular fact situation.

Facts

Our understanding of the facts of the situation is as follows:

XXX

Your Comments

It is your opinion that an interest in a video tape can only be considered depreciable property eligible for class 10(s) or 12(n) of Schedule II of the Regulations if the video tape is completed and put into a marketable state. Your view is supported by the court case Thomas McQuillan vs M.N.R., [[1981] C.T.C. 2657] 1981 DTC 618, where the Judge held that in order for the taxpayer to claim CCA on the film, the film must be ready to show to the public. It is also your opinion that in order for a video tape, to be eligible for inclusion in class 12(n) as a certified production (as defined in subsection 1104(2) of the Regulations), the H.O.C. must issue Part A and 8 of the certificate. in addition, the definition of certified production requires that the video tape must be completed within 12 months after the day the principal photography or taping is completed. A marketable video tape which has not received Part A and B of the certificate issued by H.O.C. would qualify as class 10(s) property and would be subject to the leasing property rules contained in subsections 1100(15) to (20) of the Regulations. The cost incurred by an investor for an incompleted video tape does not qualify for any income tax consideration.

Your Questions

• 1. Is a video tape considered to be certified for the purpose of the definition of certified production, after Part A or Part 8 of the certification form has been filed and accepted by the M.O.C?
• 2. At what point in time is a video tape eligible to be included in class 12(n), after Part A or Part B of the certification form has been filed and accepted by the M.O.C.?
• 3. If the investor has filed Part A of the certification form with the M.O.C., but not Part 8 of the form, which CCA class will the completed video tape qualify for - class 12(n) or 10(s)?
• 4. If a video tape is never completed into a marketable state, what is, the income tax treatment of the costs incurred by the investor?
• 5. If Part 8 of the form is not filed and accepted by the H.O.C., is it necessary for the M.O.C. to revoke the certificate issued based on the information provided in Part A of the form, or is the certificate revoked automatically?
• 6. When do the leasing property rules in subsections 1100 (15) to (20) apply to class 12(n) or 10(s) property?

Our Comments

XXX. The applicable legislation relating to such tapes certified by the M.O.C. is the definition of "certified short production" found in the history notes of subsection 1104(2) of the Regulations. According to this definition, a video tape must, among other things, be certified by the M.O.C. to be a video tape 1) in respect of which the principal photography was commenced before the end of the taxation year, and 2) that meets the requirements of paragraphs (a) to (f) of that definition. As the process of certifying a video tape, for the purpose of the definition of certified short production was the responsibility of the M.O.C., we can only provide comments based on our limited understanding of the process and suggest that our comments be confirmed by the D.O.C. Our responses are presented in the same order as your questions.

• 1. Upon receipt by the D.O.C. In 1982 of the completed Part A of the application form for certification of the series, the M.O.C. issued a certificate which certified that XXX video tapes were certified short productions which met the requirements of the definition in subsection 1104(2) of the Regulations. On the same date the certificate was issued, a covering letter was sent by the M.O.C. to the producer stating that the certificate was issued conditionally on the basis of the information provided in Part A of application form CCA-S. The letter went on to state that Part 8 of the form must be completed and submitted to the Canadian Film and Videotape Certification Office within one year of completion of taping, or by December 28, 1982. It was also indicated in the covering letter, that failure to complete Part 8 of the form or to provide the necessary documentation to prove that the criteria out lined in the Regulations had been fulfilled, will be reason to revoke the certificate.
• As the certificate issued by the M.O.C. made no reference to the conditions issued in the covering letter, it was our understanding that the certificate issued was not considered to be provisional. In other words, even though Part 8 of the form was never completed and the conditions therein not satisfied, the certificate could still legally be considered a valid certificate. Consequently, based on the type of certificate issued for XXX video tapes, it is our understanding that the video tapes were considered certified for the purpose of the definition of certified short production at the time the certificate was issued by the M.O.C. in 1982. As a matter of interest, starting in 1983 the M.O.C. issued certificates indicating provisional approval only, so that failure to complete all aspects of the criteria required for certification would prevent a film or video tape from getting final certification.
• 2. For the reasons discussed in number 1 above, an investor in the series could include the video tapes in class 12 in his 1981 income tax return once the certificate from the M.O.C. was issued in 1982. The certificate issued is effective on the date the principal photography is completed.
• 3. For the purposes of paragraph 1104(10)(b) of the Regulations, the M.O.C. may revoke a certificate effective the day of the issue where an incorrect statement was made in the furnishing of information to the M.O.C. for the purpose of obtaining that certification. The certificate for XXX video tapes was eventually revoked by the M.O.C. in August 19 effective the date of issue. Where a certificate is revoked under paragraph 1104(10)(b) of the Regulations, the property is removed from class 12 effective the date of acquisition.
• 4. The court case Thomas McQuillan v. M.N.R. dealt with the question of when a film exists for the purpose of claiming CCA on a class 18 motion picture film acquired before May 26, 1976. The judge held that a notion picture film is something that is ready to be shown to the public. This judgement was contrary to the Department's position issued in 1976 that for the purposes of class 12 and 18, a motion picture film comes into existence as a depreciable property for CCA purposes at the date of completion of principal photography thereof. This position also applies to class 10(s) (which replaced class 18) and is contained in paragraph 8 of Interpretation Bulletin IT-50R issued by the Department on February 13, 1978. We have not changed the bulletin as a result of the McQuillan case. To remove the uncertainty as to the amount of CCA that could be claimed on an uncompleted certified production, subsection 110(21) of the Regulations was added and is applicable in respect of class 12(n) property acquired after 1978. This subsection allows CAA to be claimed on a certain portion of the capital cost incurred by the investor as long as the principal photography or taping was either commenced before the end of the taxation year or completed no later than 6 days after the end of the taxation year.

If an amount invested in an uncompleted and uncertified film or video tape is not eligible to be included in class 10(s), it could be considered capital property of the investor. Where such property is subsequently disposed of, a capital loss under paragraph 39(1)(b), of the Income Tax Act may result.

• 5. Please see the answer to number 3.
• 6. The leasing property rules in subsections 1100(15) to (20) of the Regulations restrict the deduction of CCA in respect of leasing, property to the amount of income earned from that property. The definition of leasing property in subsection 1100(17) of the Regulations excludes property in class 12(n). Property included in class 10(s) would be considered leasing property where the property was used by the taxpayer principally for the purpose of gaining or producing gross revenue that is rent or leasing revenue.

We trust these comments will be of assistance.