5 February 1998 External T.I. 9729535 - ASSISTANCE

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:

Meaning of "assistance" for the purposes of the film tax credit under section 125.4. Various scenarios provided. However, in all, the repayment of loans made to the production company by private third parties would depend on projected film revenue.

Position:

Question of fact dependent on the terms of the particular agreement. Where repayment depends on film revenue and it is unlikely that the loan will be repaid, the loan could be forgivable. Accordingly, the loan would be considered as assistance. As well, if the lender is committed to forgive the loan because of insufficient revenue or for any other reason, the loan would be considered to be a forgivable loan.

Reasons:

The requirements of 12(1)(x)(iii) and (iv) requiring forgivable loans to be included in income and the definition of "assistance" in subsection 125.4(1) that describes such inclusions in income as assistance.

                	                  972953
XXXXXXXXXX					                        F.B. Fontaine, FCCA
Attention:  XXXXXXXXXX

February 5, 1998

Dear Sirs:

Re: Definition of "Assistance"

This is in reply to your letter of November 6, 1997 requesting the meaning of the term "assistance", for the purposes of subsections 125.4(1) and (3) and paragraph 12(1)(x) of the Income Tax Act (the "Act"), as it relates to an agreement to co-produce certain feature films with loans from private third parties. In the three scenarios that you described, the repayment of the entire loan amounts received by the corporation for the film production budget would depend on sufficient revenue being earned from the films. Your concern would appear to be whether the funding would be considered "assistance", for the purposes described above.

While the situations may be considered from the perspective of the definition of the term "assistance", it is our view that they may involve, and the situation specifically referred to as "Scenario 2" would involve, the acquisition of an equity interest in the production by an investor, as defined under subsection 125.4(1) of the Act. Such an equity interest, for the purpose of the film and video production tax credit, would taint the production if the investor may deduct an amount (including capital cost allowance, interest expense, etc.) in respect of the production in computing income pursuant to subsection 125.4(4) of the Act.

In accordance with paragraph 22 of Information Circular 70-6R3 (the "Circular") , we are unable to provide confirmation of the income tax effects of the situations described, as they involve specific taxpayers as well as certain completed and contemplated transactions. We are prepared, however, to offer the following general comments pertaining to the meaning of the term "assistance" only:

1.Whether an amount can be determined to be assistance for the purposes of subsection 125.4(1) of the Act and, accordingly, reduce the cost or capital cost to a corporation of a film or video production, is a question of fact which, in a particular situation would depend on any relevant documents entered into between the parties involved.

2. For the purposes of subsection 125.4(1), the term "assistance" is an amount that would be included in computing income of a taxpayer under paragraph 12(1)(x) of the Act. Under that paragraph, such an amount includes a forgivable loan, grant or any other form of assistance in respect of the cost of property that is received by the taxpayer in the course of earning income from a business or property from a person or public authority. Also, the payer, other than a public authority, must pay the amount in the course of a business or at least achieve a benefit or advantage from making the payment. Paragraph 12(1)(x) provides certain exceptions in respect of such income inclusion. See paragraph 5 below.

3. Normally, a bona fide loan (i.e., a loan that is not a forgivable loan because it is made with full recourse to the borrower and which would have been granted by a financial institution based on the borrower's ability to pay and/or adequate security being provided) would not constitute "assistance". However, where a loan is made to a taxpayer under a loan agreement wherein the loan repayments are to be made out of projected revenues, the loan may be considered as assistance if it is unlikely that the loan will be repaid. In this regard, the loan could be characterized as a forgivable loan pursuant to subparagraph 12(1)(x)(iv) of the Act depending on the particular facts and terms of the agreement.

4. It is our view that a loan would be a forgivable loan to the extent that the lender is committed to forgive the loan if certain conditions are met by the borrower. Part of such conditions, in our opinion, could be the earning of insufficient film revenue to meet the repayment of the loan.

5. An amount paid to a production company that otherwise would be described under subparagraphs 12(1)(x)(i) to (iv) of the Act may not necessarily be considered as assistance. For the purpose of the definition of "assistance" under subsection 125.4(1) of the Act, to the extent an amount described in paragraph 12(1)(x) can reasonably be considered to be for the acquisition of shares in the particular company or an interest in the company's business or property, the amount would not be included in computing income pursuant to subparagraph 12(1)(x)(viii) of the Act and, accordingly, it would not be considered as assistance under subsection 125.4(1). However, while such an amount may not be considered to be assistance in the particular circumstances, as indicated in the second paragraph above, the production company may be denied the film tax credit under subsection 125.4(4) of the Act, if the person acquiring such an interest is an "investor".

6. Incidentally, for the purpose of issuing any certificate in respect of a production, Cavco would require copies of the financing agreement and evidence that all components of the financing plan of a particular production are in place. This, in our opinion, would include details of all amounts that would constitute assistance in respect of the production.

The comments above represent an expression of our opinion which, as indicated in paragraph 22 of the Circular, is not an advance income tax ruling and, accordingly, is not binding on Revenue Canada.

for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch
- 4 -