5 May 1997 External T.I. 9707735 - CANADIAN FILM OR 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.

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.

Principal Issues:

Whether ancillary rights granted as part of a pre-sale arrangement of a film/video production, such as rights to sell related merchandise, or to develop into interactive format such as CD ROM, would result in the application of subsection 125.4(4).

Position:

Possibly.

Reasons:

Depends on specific facts whether such ancillary rights are "in respect of the production".

XXXXXXXXXX

Att: XXXXXXXXXX 970773
B. G. Dodd
(613) 957-8953
May 5, 1997

Dear Sirs:

Re: Canadian Film or Video Production Tax Credit ("Tax Credit")

We are writing in reply to your facsimile transmissions of March 11 and 24, 1997 concerning eligibility for the Tax Credit.

We would note initially that we are unable to comment definitively with respect to the situation described in your material. In this regard, the Department does not formally comment on specific proposed transactions otherwise than through the advance income tax rulings service. This service is more fully described in the enclosed Information Circular 70-6R3, dated December 30, 1996. Currently, the fee charged is $90 per hour, plus GST. In the case of completed transactions, these are considered by the local tax services offices and may involve the audit process if necessary to determine the relevant facts. We would, however, offer the following comments which are of a general nature and are not binding on the Department with respect to any specific situation.

Subsection 125.4(4) of the Income Tax Act (the "Act") provides that the Tax Credit is not available with respect to a Canadian film or video production where an "investor", as defined in subsection 125.4(1), may deduct an amount in respect of the production in computing income for any taxation year. In the case of an arrangement whereby a producer of a qualifying production enters into a pre-sale arrangement with another party, the other party may be regarded as an investor for the purposes of subsection 125.4 of the Act. With respect to the granting to that other party of ancillary, miscellaneous rights, such as rights with respect to the distribution of related merchandise (such as clothing, stationery, etc.), transcripts, recipes, etc. and the adaptation into interactive or multimedia formats, such as CD - ROM, in our view such rights may be considered to be "in respect of the production" as contemplated in subsection 125.4(4) of the Act depending on the facts of the particular situation.

Factors which could have a bearing on these issues would include the commerciality of the arrangement, whether the effect of the arrangement was to grant an equity interest in the production as well as the relationship between the various parties (i.e., whether or not non-arm's length). In any event, all relevant facts, including the terms of any related agreements, would have to be considered in making a determination for any specific situation.

We hope this will be of assistance to you.

Yours truly,
Chief
Partnerships Section
Resources, Partnerships and
Trusts Division
Income Tax Rulings and
Interpretations Directorate
Enclosure