21 May 1998 External T.I. 9807315 - CANADIAN FILM OR VIDEO PRODUCTION 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:

Entitlement to the film tax credit where loans have been made to the producer that may be participation payments or where shares have been issued for an interest in the producer.

Position:

Question of fact. This would depend on terms of the particular arrangement, whether loans are bona fide loans and whether lenders are investors under 125.4(1). Generally, shares issued by the producer would not cause the purchaser to be an investor for purposes of 125.4(4) of the Act.

Reasons:

Based on interpretation of section 125.4 and the teleological approach in interpreting the words "may deduct an amount in respect of the production...." under 125.4(4).

XXXXXXXXXX 980731
F. B. Fontaine, FCCA

Attention: XXXXXXXXXX

May 21, 1998

Dear Sirs:

Re: Canadian Film or Video Production Tax Credit
Section 125.4 of the Income Tax Act (the “Act”)

This is in reply to your letter dated March 23, 1998 concerning the proposed production of a film by a corporation and the issuance of shares of the corporation to investors. You posed five scenarios and asked whether the Canadian film or video production tax credit under subsection 125.4(3) of the Act (the “tax credit”) would be denied to the corporation in any of those scenarios.

In accordance with paragraph 22 of Information Circular 70-6R3 (the “Circular”), a proposed transaction can only be dealt with by way of a request for an advance income tax ruling. The Circular outlines the procedure to be followed in respect of an application for such a ruling. Accordingly, while we are unable to provide confirmation of the income tax effects of the particular situation, we are prepared to offer the following general comments:

1. Although a shareholder of a production company may meet the definition of “investor” under subsection 125.4(1) of the Act, generally the investment in fixed-dividend preferred shares of a Canadian film producer, by itself, would not result in the application of subsection 125.4(4).

2. The comments in 1 above may also apply to the second scenario; however, this would depend on whether the return on such shares is considered to be a participation in the revenues of the production and the investor is entitled to a deduction in respect thereof.

3. Technically, a person described in the third scenario may be considered an “investor”. However, the awareness by an investor, at the time an investment is made, that there would be insufficient production revenues to meet dividend payments and the recoupment of the invested amount may cause the amount to be considered as “assistance” for the purposes of subsection 125.4(1). Also, any interest expense in respect of such investment would not be deductible.

4. A bona fide loan arrangement, in and of itself, would not preclude a film producer from qualifying for the tax credit in respect of the particular production.

5. A loan arrangement with a rate of return dependent on revenues would be subject to the comments described in 2 above.

6. The last scenario would be subject to the comments described in 3.

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.

Yours truly,

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