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:
Is capital cost allowance still available to an investor for an investment in a Canadian content feature film produced in 1997?
Position:
Yes, subject to the "half-year rule", the "available for use rules", the "leasing property rules" and, if applicable, the proposed tax shelter investment rules. General comments.
Reasons:
Proposed new section 143.2 of the Act.
Income Tax Regulations and draft Regulations released on December 12, 1995.
XXXXXXXXXX 5-970902
Attention: XXXXXXXXXX
July 11, 1997
Dear Sirs:
Re: Deductions for investment in a Canadian content feature film
This is in reply to your facsimile dated April 4, 1997 wherein you requested our opinion concerning the income tax deductions available to an investor who wishes to invest in a Canadian content feature film produced in 1997.
As explained in Information Circular 70-6R3, it is not the Department's practice to comment on proposed transactions other than in the form of an advance income tax ruling. Taxpayers seriously contemplating a proposed transaction are best advised to seek a formal ruling, submitting a complete statement of facts and issues as well as copies of all relevant documents. Should your situation involve completed transactions, you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views. We are therefore not in a position to give a definitive response to your enquiry. However, we can offer you the following general comments which may be of assistance although, in certain circumstances, they may not be appropriate to your specific situation.
The following opinion provides a general discussion on the capital cost allowance (CCA) deduction that is available to taxpayers who invest in a feature film. Your facsimile refers to the term Canadian content feature film which is not a defined term in the Income Tax Act (the "Act"). This letter assumes that you are referring to a "Canadian film or video production" as defined in subsection 125.4(1) of the Act.
Prior to the enactment of section 125.4, the Act provided a CCA incentive for Canadian certified productions which was not entirely benefitting film producers. Consequently, the CCA tax incentives were replaced with a fully refundable tax credit for eligible films produced by a qualified corporation as defined in subsection 125.4(1) of the Act.
It is important to note that the new credit under section 125.4 of the Act will not be available to a qualified corporation where an investor or a partnership in which an investor has an interest, directly or indirectly, may deduct an amount in respect of the production in computing income for a taxation year.
Capital cost allowance
Our comments are premised on the enactment of the proposed amendments to sections 1100 and 1106 and to Schedule II of the Income Tax Regulations (the "Regulations"), as proposed in the draft income tax regulations released on December 12, 1995. We have enclosed a copy of the draft Regulations for your perusal.
The income tax deductions available to a taxpayer for an investment in a feature film relate principally to the CCA deduction in respect of the film owned by the taxpayer.
Paragraph 2 of Interpretation Bulletin IT-441 comments on the requirements necessary for an investor to be considered the owner of a motion picture film or a video tape. It reads as follows:
2. To qualify for capital cost allowance on a film or tape, an investor must beneficially own an undivided interest in a film or tape property, i.e. he must beneficially hold an undivided proprietary interest whether alone or jointly with other persons in all the components of the film or tape property and not merely an interest in some elements thereof. In order to acquire a property that is a film or tape, an investor must acquire all of the following elements:
(a)the master negative of the film or tape,
(b)the copyright of the film or tape, and the right to secure copyright of the film or tape and the right to secure copyright registration and renewal of copyright globally,
(c)all film or tape rights including silent, sound, talking, television, and motion picture rights,
(d)all distribution and exhibition rights in perpetuity (although some or all of these rights may have been licenced to third parties - see 4 below). These include theatrical, non-theatrical, television, e.g. network, local syndication, pay television, cable television, hotel television, video cassettes and discs,
(e)the right to translate versions of the film or tape into all languages,
(f)the right to advertise and exploit the film or tape in all media, including the right to condense the full length film or tape version.
Ancillary rights such as remake, sequel, television series, music and book publishing and character rights, although they may be commonly owned by an investor in a film, are not considered to be an essential part of the film for purposes of capital cost allowance.
The capital cost of a "Canadian film or video production" is included in class 10(x) and the capital cost of a film that is not a "Canadian film or video production" is generally included in class 10(s). A "Canadian film or video production" is a film or video production of a "prescribed taxable Canadian corporation", other than an excluded production, that meets the requirements of subsection 1106(3) of the draft Regulations. The definition of "prescribed taxable canadian corporation" is found in subsection 1106(2) of the draft Regulations.
The CCA rate of class 10 is 30 percent computed on a declining balance basis, subject to the "half-year rule", the "available for use rules" and the "leasing property rules".
Half-year rule
Subsection 1100(2) of the Regulations limits CCA claims in the taxation year of acquisition of most depreciable property to the amount otherwise available less one-half of the CCA attributable to "net acquisitions" in the year, determined on a class by class basis. The term "net acquisitions" refers to cost of acquisitions in the year in excess of net proceeds of disposition (or capital cost if less) in that year. Those rules apply to property of class 10(s) or 10(x). The rules will not apply where property is considered to have become available for use by the taxpayer in the year by reason of paragraph 13(27)(b) or 13(28)(c) of the Act.
Available for use rules
Subsection 13(26) of the Act provides that in computing the income of a taxpayer, no amount in respect of the property is to be included in computing the undepreciated capital cost (UCC) of depreciable property of a prescribed class until the property has become "available for use" by the taxpayer. Therefore, the taxpayer would not have an income tax deduction for CCA until such time. Subsection 13(27) establishes, for purposes of subsection 13(26), the earliest time that the property (other than a building or part thereof) is considered to have become available for use. These rules apply to property of class 10(s) or 10(x).
Leasing property rules
Subsection 1100(15) of the Regulations limits the amount of CCA that can be claimed on leasing property owned by a taxpayer so as to prevent the taxpayer from creating or increasing a loss to shelter non-leasing income. CCA deductions that exceed leasing property income net of losses incurred (computed without reference to CCA) are disallowed. Subsection 1100(17) provides the definition of leasing property. Property included in class 10(s) or 10(x) would be considered leasing property where the property is used by the taxpayer principally for the purpose of gaining or producing gross revenue that is rent, royalty or leasing revenue.
Additional allowance
In certain situations a separate class is prescribed by subsection 1101(5k.1) of the draft Regulations for a "Canadian film or video production" included in class 10(x) of a corporation. The particular situations that are subject to a separate class are described in that draft subsection (copy of the draft subsection is enclosed). For a "Canadian film or video production" included in class 10(x) and for which a separate class is prescribed by subsection 1101(5k.1) of the draft Regulations, paragraph 1100(1)(m) of the draft Regulations provides for an additional allowance not exceeding the lesser of the UCC of the "Canadian film or video production" and the net income for the year from that property (before making any deduction under paragraph 1100(1)(m) of the draft Regulations). This allows the owner of the film to deduct, as CCA, against income from the film, an amount in excess of the otherwise available 30 percent of the UCC of the film and up to the remaining UCC balance.
Tax shelter investment rules
The new tax shelter investment rules contained in proposed section 143.2 of the Act could affect the capital cost of a film and therefore limit the CCA in a particular year.
Proposed section 143.2 of the Act provides rules that could limit the expense or the capital cost or cost of a property where the property is a "tax shelter investment", as defined in proposed subsection 143.2(1), and where the taxpayer has an "at-risk adjustment" (also defined in that section) and/or a limited-recourse amount. In essence, a tax shelter investment includes a property that is a tax shelter as defined in subsection 237.1(1) of the Act. Paragraph 3 of Information Circular 89-4 provides a definition of a tax shelter for the purpose of subsection 237.1(1) of the Act. We have enclosed a copy of this Circular for your perusal. This Information Circular should be read in conjunction with the legislative changes and the proposed amendments to section 237.1 since the release of this Circular.
As indicated in paragraph 22 of Information Circular 70-6R3 dated December 30, 1996, this opinion is not a ruling and accordingly, is not binding on the Department.
We trust our comments will be of assistance to you.
Yours truly,
Marc Vanasse
Acting Section Chief
Resources, Partnerships and Trusts Section
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch
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