4 June 1992 Income Tax Severed Letter 9210585 - Canadian Certified 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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

SUBJECT: CERTIFIED PRODUCTION SECTION: ART 96(2.2), ART 9,
ART 96(1)]

921058
XXX

Attention: XXX

June 4 1992

Dear Sir,

Object: Canadian Certified Production

This is in reply to your letter dated April 3, 1992 wherein you requested the views of the Department with respect to an investment by a limited partnership in a television series.

It would appear that the subject matter of your letter relates to transactions that have either taken place or are proposed rather than a request for the Department's interpretation of a specific provision of the Act. If you wish the Department's views with respect to a completed transaction, you should write to the District Office with which your client files its income tax return. Alternatively, if you are dealing with a proposed transaction, you may wish to request an advance income tax ruling in accordance with the requirements set forth in the Department's Information Circular 70-6R2 dated September 28, 1990. However, we are prepared to offer the following general comments which may be of assistance.

When a partnership borrows money to assist in the purchase of a TV series, the cost of the certified production is equal to the purchase price provided the borrowing is pursuant to a bona fide loan. In these circumstances, we would look to the relevance of the recent case, Ensign Tankers (Leasing) Ltd. v Stokes (1992) BTC 110 where the Court indicated that loans must be repaid before any payments are made to the partners.

In West Kootenay Power and Light Company, Limited v. The Queen [[1992] 1 C.T.C. 15] (92 DTC 6023), the Federal Court of Appeal held that the principle of recognition of income to be applied is the principle that gives the truer picture. It is a question of fact to determine when an amount should be included in the income of a partnership since the recognition of income depends on the contractual arrangements between the parties. It is the Department's position to allow limited partnerships that invest in films or TV series to report in their income only amounts received by them in the year. This acceptance of the cash basis is on the understanding that there has been no artificial damming of the flow of revenue from the exhibitor through the distributors to the partnership. There should be no reason to dam income since Regulation 1100(1))l) provides that capital cost allowance can be taken up to the extent of the net income from the film.

As for amounts received by the partnership, the timing of the inclusion in income of these amounts will depend upon the agreements between the parties and the weight or relevance that a court would give to any conditions included in those agreements. In this regard, we would refer you, for example, to the Queen v. Foothills Pipelines Yukon Ltd. [[1992] 2 C.T.C. 448] (90 DTC 6607).

The allocation of income or loss among partners will ordinarily be established in the partnership agreement. Generally, partnership agreements provide for the sharing of profits and losses on the same basis from year to year. Any deviation from this pattern should be supported by valid reasons. Where the principal reason for the allocation may reasonably be considered to be a reduction or postponement of tax that might otherwise have become payable under the Act, the Department would seek to apply the provisions of section 103.

We agree with your position that, where limited partners have the obligation to dispose of their partnership interests, the "obligation", in and by itself, will not result in a reduction of the at-risk amount pursuant to subparagraph 96(2.2)(d)(iv) of the Act as long as the other condition of this subparagraph regarding fair market value is met.

The above comments are of a general nature and are not binding on Revenue Canada in respect of a specific situation.

Yours truly

Director General
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch