17 April 1989 Income Tax Severed Letter 7-3772 - [Interpretation Bulletin Project Number 1492 (Version 2)Revision of IT-441]

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.

APR 17 1989

TO R. C. Shultis, Director Publications Division Legislative Affairs Directorate

Attention: D. S. Delorey

FROM Head Office Specialty Rulings Directorate C.R. Bowen 957-2096

SUBJECT: Interpretation Bulletin Project Number 1492 (Version 2) - Revision of IT-441

We are writing in reply to your memorandum of March 22, 1989, wherein you requested our comments on the draft revision of Interpretation Bulletin IT-441 .

Our Comments

1. Page 1 - IT-441

In the area listing the various subsections of the Income Tax Regulations (the "Regulations") to which this bulletin applies, the reference to 1101(51) should be changed to 1101(5k). This change should also be made in paragraph 23 on page 18. This revision is required to reflect the changes to the Regulations for certified productions as enacted on December 22, 1988. Also, since subsection 1100(17) of the Regulations excludes classes 12(n) and 10(w) from the definition of leasing property, we suggest that this subsection be added to the list.

2. Page 2

i) Summary (continued)

Due to the length of the bulletin and the number of matters covered, we suggest that an index, similar to one found in numerous other bulletins (e.g., IT-120R3 ), be included at the end of the paragraph.

ii) Discussion and Interpretation

Most films with a large budget are not sold directly to individual investors, but instead are acquired by a limited partnership which then sells partnership units to individual investors. In recognition of this common type of ownership arrangement, the definition of the term "investor" in the second sentence should be expanded as follows: "The term "investor" refers to a partnership or a person who holds ... but not to a partnership or a person who acquires ..."

In order to avoid confusion for the readers between class 10(s) which relates to a non-certified film or tape and the newly created class 10(w) for a certified film or tape, we suggest that the applicable paragraph reference in class 10 be indicated throughout the bulletin.

As per paragraph 2 of IT-172R "... where an individual has income from non-business (e.g., property held to earn investment income) he ... is not subject to the above capital cost allowance restriction (i.e. Regulation 1100(3)) because his taxation year is always a full calendar year". However, this exemption from subsection 1100(3) of the Regulations applies only to individuals and not to partnerships or corporations, even where the interest in a film or tape is acquired by the latter two parties to earn income from property. As the third sentence implies that only an investor who acquires an interest in a film or tape to earn income from a business will be subject to subsection 1100(3) of the Regulations, that sentence should be modified accordingly. In addition, since that sentence deals with the restriction on the amount of capital cost allowance available, it is our opinion that it would be more appropriate to include that discussion under paragraph 24.

3. Page 7 - Certified Production

In the second line, the word "assets" should be changed to "properties", as the latter word is technically more accurate. It would appear that the reference in the second line to paragraph 21 should be to paragraph 22, since the latter paragraph describes the differences between the two classes.

The reference to "within 60 days after the end of the year" in the definition of certified production has been modified by paragraphs (h) and (i) thereof to contain the following transitional provisions:

(h) in respect of a film or tape acquired in 1987, other than a film or tape in respect of which paragraph (i) applies, the reference in this definition to "commenced before the end of the particular taxation year or was completed no later than 60 days after the end of that year" shall be read as a reference to "commenced before the end of 1987 or was completed before July, 1988", and

(i) in respect of a film or tape acquired in 1987 or 1988 that is included in paragraph (n) of Class 12 in Schedule II and that is part of a series of films or tapes that includes another property included in that paragraph, the reference in this definition to "commenced before the end of the particular taxation year or was completed no later than 60 days after the end of that year" shall be read as a reference to "completed before 1989".

The above transitional provisions should be added to paragraph 9. They are similar to, but not the same as, the transitional provisions in subsection 1100(23) of the Regulations.

4. Page 8 - Certified Production (continued)

In clause G, the word "production" should be lined up with the rest of the typing.

5. Page 11 - Disqualified Interest in a Certified Production

In the fifth line, the words "after 1978 and" can be eliminated as this condition will not normally be a consideration for the taxpayers reading this revised bulletin.

6. Page 13 - Financing

In order to provide additional information to the reader, we suggest that you add the following to the end of the first paragraph:

The requirement for the investor to pay at least 5 per cent (20% if acquired before 1983) of the capital cost of the certified production before the end of the year will apply only to the investors who directly acquire and own an undivided interest or proprietary interest in all components of a film or tape that has been produced. Consequently, this paragraph has no application to the actual partners acquiring an interest in a partnership which owns an undivided interest in the film or tape. Although the partners are not required to pay in cash any portion of the cost of their partnership interest, the business and property loss allocated to a limited partner from the partnership that may be deducted by that partner in a taxation year will be limited to his at-risk amount as calculated in subsection 96(2.2) of the Act (as discussed in paragraph 35).

The last 2 sentences of paragraph 15 do not necessarily represent the Department's current position. The issue of determining the cost amount of property acquired by the purchaser where the property is purchased by means of a non-interest bearing note or loan with the face amount payable in future years has been extensively addressed in recent years during the course of preparing several advance tax rulings. The result of the review in these cases was that the cost of such property purchased is not based on the present value today of the dollars at time of repayment, but on the face amount of the note or loan payable. It should be noted, however, that none of the cases under review involved an investment in a film property.

7. Page 14 - Timing of Capital Cost Allowance

The reference to 60 days in the last line of paragraph 18 should be modified by the transitional provisions in paragraphs (h) and (i) of the definition of certified production (as discussed in paragraph 3 above). This modification should be noted at the end of the paragraph.

8. Page 16 - Timing of Capital Cost Allowance (continued)

In order to provide additional information to the reader, we suggest that you add the following to the end of the paragraph 19:

"Costs incurred" as used in paragraphs (b) and (c) above include

1) production costs which are paid in the year, pursuant to legitimate business arrangements consistent with normal industry practice, and

2) production costs which are ascertained and unconditional liabilities of the taxpayer at the end of the taxation year (although not actually paid) for services rendered or goods delivered and which are not contingent upon some subsequent event(s). Again, such liabilities should be consistent with normal industry practice and incurred under legitimate business arrangements.

As paragraph 19, which describes the calculation of capital cost allowance, does not indicate that its source is paragraph 1100(21)(a) of the Regulations, the reference to paragraph 1100(21)(a) of the Regulations in paragraph 20 will not be a meaningful one. Therefore, that reference should be either added to paragraph 19 or deleted from paragraph 20.

Subsection 1100(23) of the Regulations outlined in paragraph 20 does not reflect the changes to the Regulations for certified productions as enacted on December 22, 1988. The wording is as follows:

(a) in respect of a film or tape acquired in 1987, other than a film or tape in respect of which paragraph (b) applies the references in paragraph (21)(a) to "within 60 days after the end of the year" shall be read as references to "before July, 1988", and

(b) in respect of a film or tape acquired in 1987 or 1988 that is included in paragraph (n) of Class 12 in Schedule II and that is part of a series of films or tapes that includes another property included in that paragraph the references in paragraph (21)(a) to "within 60 days after the end of the year" shall be read as references to "before 1989".

9. Page 18 - Capital Cost Allowance - Classification

The words "that is an interest" in paragraph (b) are repetitive in view of the preamble to the paragraph on page 17 which ends with "other than an interest". For the sake of clarity, the last sentence in paragraph 22 should be revised to indicate that "where an interest in a certified production meets the transitional provisions outlined in (a) or (b) above, or is acquired before 1987, it will be included in class 12 by virtue of paragraph (n) thereof. A film or tape which is not a certified production will be included in class 10 by virtue of paragraph (s) thereof."

10. Page 18 & 19 - Capital Cost Allowance - Amount Claimable

The Department of Finance uses the phrase "the half-year rule" rather than the "one-half year rule" used in the fifth line on page 18. At the end of paragraph 24, reference should be made to the fact that a certified property is excluded by virtue of subsection 1100(17) of the Regulations from the definition of leasing property to which the capital cost allowance restrictions in subsection 1100(15) of the Regulations apply. Therefore, the losses resulting from the deduction of capital cost allowance may be used to offset the taxpayer's income from other sources (except as discussed in paragraph 35 of the bulletin). The eighth line of paragraph 25 should be amended to read "respect to a particular taxation year, other than one to which subsection 1100(23) of the Regulations applies" (as discussed in paragraph 8 above).

11. Page 20 - Revenue Guarantees

In order to provide the reader with cross-referencing between concepts, the words "otherwise determined" in the fourth line should be followed by the words "(as per 19 above)".

12. Page 25 - Inflated Costs

In order to bring the wording in line with that now used in section 245, we suggest that the third last line be amended to read "the purpose of obtaining a tax benefit (as defined in subsection 245(1) of the Act), the Department will ...".

13. Page 26 - Cumulative Net Investment Loss

In view of the facts that 1) the concept of cumulative net investment loss applies only to individuals and 2) the loss of a partnership is created at the partnership level, we suggest that paragraph 34 be re-worded as follows:

Where a loss is created by the deduction in 1988 of capital cost allowance in respect of an interest in a certified production in class 12, the loss will not be included in the "cumulative net investment loss" of an individual (including an individual who is a member of a limited partnership or an inactive member of a general partnership), as defined in subsection 110.6(1) for the purposes of the capital gains deduction under section 110.6.

In order to provide the reader with additional information, a sentence should be added to paragraph 34 indicating that such a loss created in 1988 and in subsequent taxation years in respect of a certified production in class 12 will be included in the individual's cumulative net investment loss account, as will such a loss created in 1988 and in subsequent taxation years in respect of a certified production in class 10(w).

14. Page 26 - Limited Partner At-Risk Rules

In the 1988 Canadian Tax Foundation Conference - Revenue Canada Round Table Presentation, Revenue Canada confirmed that pending the outcome of the appeal of the court case Signum Communications Inc., it will continue to uphold its current position as outlined in paragraph 20 of IT-138R for an exempt interest in a partnership. Therefore, we suggest you add the following paragraphs as indicated at the Round Table:

Prior to the enactment of the statutory "at-risk" rules which are applicable after February 25, 1986, the Department's position was that a limited partner's share of partnership losses could not exceed his equity in the partnership. In this regard, the equity of a limited partner was generally the amount that the limited partner contributed or a determinable amount that was unconditional in its terms and that, taking into account all of the circumstances, was fully expected to have to be paid to acquire the interest in the partnership, plus amounts referred to in paragraph 53(1)(e) (to the extent not already included) and minus amounts referred to in paragraph 53(2)(c).

Following the enactment of the statutory "at-risk" rules the Department continues to follow this position for those limited partners who held an "exempt interest" in a partnership within the meaning of subsection 96(2.5). Although the Federal Court - Trial Division, in a decision on the question of at-risk in the case of Signum Communications Inc. v. The Queen (88 DTC 6427) was found in favour of the taxpayer, the Department is appealing this decision and will, therefore, continue to follow the aforementioned position until this matter is finally resolved.

The following commentary could be added to paragraph 35 in order to provide guidance to the reader in interpreting the at-risk rules:

A limited partner's at-risk amount will not be reduced in respect of amounts received by the partnership under a revenue guarantee, unless the revenue guarantee may reasonably be considered to ensure that the limited partner will receive a return of a portion of his investment. The Department interprets this to mean that a revenue guarantee which merely guarantees a level of revenues sufficient to offset annual cash operating expenses of the limited partnership will not reduce a limited partner's at-risk amount. However, to the extent that a revenue guarantee can reasonably be expected to ensure that funds will be available for distribution to the partners, the limited partner's at-risk amount will need to be reduced. The limited partner's at-risk amount will also be reduced where a limited partner has financed all or a portion of the purchase price of his partnership interest with a limited recourse loan.

15. Page 27 - Advance Income Tax Ruling Requests

Guy Mason from the Department of Communications indicated that the name of Telefilm Canada was adopted in 1984 to refer to the Canadian Film Development Corporation and that most readers would not recognize the latter name used in the bulletin. He recommended that the reference in the bulletin located in the second and third line of paragraph 38(c) be shown as "Telefilm Canada (also known as the Canadian Film Development Corporation)".

16. Pages 7 to 28 - Content of Bulletin

This bulletin is extremely long in part due to the inclusion of the entire contents of various regulations as opposed to a short summary or simply a reference to the applicable section of the Regulations. With a view to shortening the number of pages in the bulletin, you may wish to simply reference the source of the following definitions to the applicable section of the Regulations:

a) the part of the definition of certified production contained in paragraphs (a) and (b) of paragraph 9 of the bulletin related to Canadian content and the transitional provisions discussed in paragraph 3 above;

b) the words defined in subsection 1104(10) of the Regulations included in paragraph 10 of the bulletin; and

c) revenue guarantee defined in subsection 1100(21) of the Regulations included in paragraph 26 of the bulletin.

We trust these comments will be of assistance to you.

ORIGINAL SIGNED BY

Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch