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: Has a broadcaster acquired an equity interest in a production?
Position: Yes, based on the available facts.
Reasons: Consistent with draft interpretive guidelines concerning the investor rules issued to CAVCO on June 17, 1998.
July 14, 1998
A/Manager Partnerships Section
Tax Incentive Audit Section Allan Nelson
Audit Directorate (613) 957-9768
Attention: Alain Marchand
Canadian Film or Video Production Tax Credit
We are writing in response to your memorandum, dated April 1, 1998, and our telephone conversation on June 2, 1998 (Nelson/Marchand), concerning the appropriate income tax treatment of a broadcaster which invests money in a particular Canadian film or video production. Your query is as a result of an opinion request you received from CAVCO.
Pursuant to a written agreement
- a broadcaster paid an amount (referred to as the licence fee) to a producer in order to acquire the right to broadcast in the Canadian market certain “Episodes” for an unlimited number of runs during a specific term.
- for no additional consideration, the producer agreed to pay the broadcaster 10% of all revenues received from the exploitation of the Episodes, merchandise and ancillary products throughout the world in perpetuity (the percentage increases to 15% after a preset level of net receipts is met).
- the broadcaster does not acquire any copyright ownership in the production.
- in the taxpayer’s representations you faxed to us on April 8, 1998, they acknowledged that a portion of the total “licence fee” payment to the producer was for broadcasting rights and the balance was for additional rights including IRCS rights, merchandising rights, development rights and revenue sharing rights.
On June 17, 1998, our Directorate issued draft interpretive guidelines for the Canadian film or video production tax credit investor rules (a copy of the “Guidelines” is attached for your convenience). We believe the Guidelines address your queries, as more fully explained below. Please note that the Guidelines are subject to change, as we have requested feedback from interested parties before we finalize our positions. However, we do not expect any changes to the position relevant to your queries. Your work section will be provided with a copy of our Guidelines, once our positions are finalized.
You have indicated that the broadcaster is a prescribed person as defined in proposed paragraph 1106(7)(a) of the Income Tax Regulations. Therefore, we agree with your view that the broadcaster would not be an investor and subsection 125.4(4) of the Income Tax Act (Canada) would not apply to deny the entire amount of the producer’s credit in respect of the Episodes.
Broadcaster licence fees are discussed on pages 5 and 6 of the Guidelines. In the second paragraph under the “Our Comments” section, on page 6, we state that where, in addition to acquiring a right to broadcast the production, a broadcaster acquires other exploitation rights, it is a question of fact whether the transfer of those rights is sufficient to constitute a disposition by the producer of an equity interest in the production to the broadcaster. In making this determination, and in ascertaining the correct tax treatment in your scenario, we would look at the same principles as are discussed in example two, on page 4 of the Guidelines, under the distributors subheading.
From the limited facts presented to us, it appears that the broadcaster has acquired beneficial ownership of a percentage interest in the entire production. The fact that the broadcaster does not acquire copyright ownership in the production does not alter this view. Consequently, a reasonable allocation of the monies paid by the broadcaster to the producer, as between the licence fee and the cost of the equity interest should be made. Thereafter, the total amount of production expenditures would be allocated on a pro rata basis to the producer and to the broadcaster, in accordance with their respective equity interests in the production. The producer would not be entitled to include the broadcaster’s pro rata share of expenses in the computation of its Canadian film or video production tax credit.
In your particular case, the broadcaster is entitled to a 10% share of all the exploitation revenues, for a time, after which the percentage moves up to 15%. If we assume the higher percentage may not be achieved, unless the production is unusually successful, then it would appear reasonable to state that the broadcaster has acquired at least a 10% equity interest in the production. However, we do not have sufficient information to make a final determination on this matter, without knowing all of the relevant facts and reviewing all of the relevant documents. For the same reasons, we are not commenting on the impact the other “investors financing the production costs of the Episodes” (referred to in section 4.1 of the documentation provided to us) will have on the producer’s eligibility to claim the Canadian film or video production tax credit.
We hope the above will be of assistance to you.
If you have any additional queries on this matter please feel free to contact us.
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