15 October 1997 External T.I. 9705685 - : Film & Video Tax Credit

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.

Principal Issues:

The producer of a film entered into an agreement to dispose of the film to a non-arm's length distributor which would also acquire the rights to all of the revenues from the exploitation of the film in all exploitable markets. Would the producer be entitled to the film tax credit?

Position:

No.

Reasons:

Based on IT-441, paragraph 4, such an agreement would be considered to be a disposition (prior to the production) of the film. However, the production may be considered to be done for the distributor and the labour expenditure may be considered to be incurred by the distributor, instead of the producer. Accordingly, the producer's labour expenditure would be nil and would not be entiled to the credit.

Canadian Audio-Visual Certification office
Department of Canadian Heritage
Les Terrasses de la Chaudiere
15 Eddy Street
4th Floor, Room 150
Hull, Quebec
K1A 0M5

Attention: Charlene Paling

Dear Sirs:

Re: Letter Agreement between Producer and Distributor

This is in reply to your facsimile transmission of February 27, 1997 concerning a letter agreement between a subsidiary corporation (the "producer") and its parent corporation (the "distributor"), collectively, the "taxpayers". The agreement appeared to confirm that the distributor would acquire all the rights and revenues arising from the exploitation of the film produced by the producer, for an amount equal to the cost of production, payable in accordance with the cash flow needs of the production. You requested our opinion concerning this type of financing and any potential problems related thereto.

During our telephone conversation of October 7, 1997 (Fontaine/Paling), you confirmed that:

(a) as stated in paragraph 4 of Interpretation Bulletin IT- 441, the producer appeared to have disposed of the film by granting to the distributor the rights to distribute the film in markets representing all of the exploitable value of the film which may reasonably be its fair market value;

(b) you were able to convince the taxpayers that on the basis of the pre-production disposition of the film by the producer to the distributor, the labour expenditure for the film to the producer would be nil and, therefore, the producer would not be entitled to the film tax credit;

(c) notwithstanding the producer's nil labour expenditure, you agreed that the production did not appear to be an "excluded production" under subsection 1106(1) of the Income Tax Regulations for the purpose of issuing a Form Part A Certificate;

(d) you opined that an argument could be made that the film was produced for the distributor which could be considered to incur the labour expenditure for the purposes of the film tax credit; however, there was some doubt as to whether the distributor would meet the requirements of the terms "throughout" and "primarily" in the definition of "qualified corporation" under section 125.4(1) of the Income Tax Act; and

(e) finally, the financing arrangement under the letter agreement was withdrawn and replaced with loan financing from the distributor.

As a result of the withdrawal of the letter agreement, you agreed that the matter is no longer an issue and that our file thereon should be closed.

Yours truly

for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch