3 November 1994 Internal T.I. 9411717 - FILM RIGHTS

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.

		November 3, 1994

	Anne Marie Long	Business and General
	Audit Division	  Division
	Toronto District Office	A.M. Brake
(613) 957-2133

		941171

XXXXXXXXXX

This is in reply to your referral of April 27, 1994 requesting our comments regarding four specific issues relating to the above-noted taxpayer.

Issue 1:

Is the taxpayer's CRTC licence a class 14 Asset?

You state that the licence issued by the CRTC to XXXXXXXXXX appears not to be transferable and has a limited life, normally 5 years as is the case with the present licence. Licence fees payable under the present licence is directly linked to net advertising revenues and payable shortly after the end of each fiscal period. You suggest that there is an unspoken assumption that government licences are "automatically" renewable and, as such, are truly not licences of a limited period as is required under class 14.

It is our view that in the case at hand the licence is issued for a period of 5 years, thus, meeting the criteria of a limited period as set out in class 14. While it is likely that a new licence will be issued or the present one extended or renewed for another specified period after the present 5 year period has lapsed, there is no basis to assume that the present licence is for anything but for a limited period of 5 years. Paragraphs 14 through 17 of IT-477 discusses circumstances which would cause a licence to be considered to be renewable or extended beyond the initial period. However, in the case at hand, none of these circumstances are present as there is nothing expressed or implied in the CRTC licence issued for a period of 5 years that would cause it to be treated for longer than the period for which it was issued.

Issue 2:

Expenditures for equity investment or advances on account of equity investment. The question here is whether the payments constitute outlays to be inventoried and expensed when the program is shown or the actual acquisition of a class 10, 12 or 14 assets or an interest therein.

XXXXXXXXXX Programming Costs

XXXXXXXXXX

The question is what was acquired? Was it class 14 rights, inventory for resale, a current or deferred expenditure or the acquisition of a capital property for XXXXXXXXXX own business use, for leasing or otherwise to earn income?

It is true that with ownership comes the right to show along with all other rights inherent in ownership. However, such a right would not be one described in class 14. Page 83 of the manual Terminology for Accounts, 3rd edition, prepared by the Canadian Institute of Chartered Accountants ("CICA") defines "inventory" as follows:

"Items of tangible property which are held for sale in the ordinary course of business, or are to be currently consumed in the production of goods or services to be available for sale."

Since the acquisitions were not made for the purpose of resale they would not be inventory. It would seem, therefore, that certain types of those acquisitions could be treated as current or deferred expenses and, depending on the circumstances, others could be capital properties which would in fact be acquisitions of films would constitute depreciable property of a prescribed class.

Deferred Program Cost Amounts

Amounts expensed during the period under audit represent cash outlays, mostly in the form of investment in return for an equity position in or a specified share of the net future income stream anticipated from production programs. This, we assume, would be the income stream of an arm's length producer which would derive revenue partly from charges to XXXXXXXXXX from the sale of rights to show such productions as well as other revenues to be generated from the production. The acquisition of rights to show a particular production is covered by a contract separate from the agreement to acquire the ownership interest.

The cost of the rights to show any production or film properly constitutes a class 14 depreciable asset. The cost of the ownership interest in a production would represent the acquisition of a film the nature of which is a capital property, separate and apart from the rights acquired in another transaction. Unless the ownership interest was acquired for resale, it would not constitute inventory and, therefore, would have to be treated as depreciable property of a prescribed class.

Issue 3:

You indicate that TOM 13(20)2.1 states that limited period licences for television exhibitions of film properties should be treated as class 14 property. You also feel that the main difference between a film property and a television property is in the fact that the latter may consist of several episodes. It is your view that all of the program rights acquisitions should be treated as class 14 assets.

In fact, it is the rights or permission to show these productions and not the film properties themselves that are acquired and in this regard, we agree that they would constitute class 14 and that amortization is to be based solely on the life of each of the properties acquired and should not in any way be influenced by the time remaining on the CRTC licence. The cost of assets acquired and/or expenses incurred to comply with the conditions set out in the licence do not in any way relate to the cost of the licence itself and should be treated on the basis of their own particular characteristics.

Paragraph 19 of IT-477 contains comments relating to the capital cost of such a class 14 asset and in this regard it should be noted that while paragraph 20(1)(cc) specifically provides for a deduction of certain amounts, such expenditures normally would be characterised as making up the cost of the class 14 licence. This position presupposes that the expenditures in question are in fact class 14 by virtue of being a payment on account of the capital cost of capital property described in class 14. Notwithstanding that a specific deduction is provided by paragraph 20(1)(cc), such amounts have to be treated as class 14, because they fit the description of assets described therein, and the deduction claimed under paragraph 20(1)(cc) is deemed by virtue of subsection 13(12) to have been allowed as capital cost allowance. While other methods of write-off may provide similar treatment to such deferred costs which may or may not extend beyond the current accounting period, they are assets described in class 14 and must be written off through the CCA system and in this regard it could be that while the amounts deducted in earlier years may not necessitate adjustments, should they not be significantly different than the amounts allowable as CCA, the taxpayer should be asked to properly set up and operate class 14 in the future.

Issue 4:

Program rights as inventory?

The acquisition of program rights as described in class 14 constitutes the acquisition of capital property and unless these properties are acquired for resale or as a component part of something being assembled for sale, such properties should be treated as class 14 assets. The fact that the CRTC licence requires XXXXXXXXXX to acquire certain capital properties in order to fulfil the viewing requirements of the licence does not, in our view, change the nature of these properties. It is our view that the CCA treatment overrides any accounting treatment with regard to such deferred costs in respect of assets described within a particular class even though the write offs may not be dissimilar. It might be argued that some of the assets described in class 12 such as a tool costing less than $200 could properly be expensed from an accounting point of view. However, as in the case of rights described in class 14, a tool costing $5.95 properly constitutes a class 12 asset. We do not accept that the cost of assets described in class 14 which are to be charges against revenue in future accounting periods is anything but class 14 and that the accounting treatment ("GAAP") does not override the CCA provisions. Assets such as rights and licences described in class 14 in some instances can be written off in the current year as CCA but it is the CCA mechanism which provides the deduction and it must be adhered to notwithstanding the GAAP treatment. A collection of class 14 assets not acquired for resale but rather for showing, the cost of which benefits current and future periods, are not inventory items and any amounts claimed in respect of their cost is restricted, by virtue of paragraphs 18(1)(b) and 20(1)(a) of the Income Tax Act, to an amount "as is allowed by regulation". We refer you to paragraphs 5 to 9 of IT-283R2 for further comments on this issue.

We apologize for the delay in making our reply.

R. Albert
for Director
Business and General Division
Rulings Directorate
Policy and Legislation Branch