3 August 1999 External T.I. 9904915 - ACTORS BACKEND PARTICIPATION

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:

Will a foreign actor's backend participation in net profits from a Canadian production result in the application of 125.4(4) to disallow the producer's claim for the Canadian film or video production tax credit?

PositionS:

Not in an arrangement where the backend participation is given strictly for commercial reasons (e.g., reasonable additional potential remuneration to compensate for a lower than normal salary received by the lead actor). This involves a question fact, based on documents and agreements.

Reasons:

Our understanding of the law and tax policy.

990491
XXXXXXXXXX Allan Nelson
(613) 443-7253

Attention: XXXXXXXXXX

August 3, 1999

Dear Sirs:

Re: Canadian Film or Video Production Tax Credit - Investor Rules

We are writing in response to your letter dated February 23, 1999, wherein you asked for our comments concerning the impact on a producer's Canadian film or video production tax credit (hereinafter referred to as the "film tax credit") , in the situation where a non-resident actor receives a backend participation in the producer's net profit from a film production. You note that this scenario was not addressed in our Directorate's June 17, 1998, draft interpretative guidelines concerning the meaning of the term "investor", as it relates to the film tax credit.

As discussed during our telephone conversation on July 13, 1999 (Nelson/XXXXXXXXXX), we are in the process of revising our draft interpretative guidelines and they will address scenarios such as you have described. We anticipate releasing the revisions to industry associations in the near future.

Your questions appear to relate to a specific factual situation. As noted in Information Circular 70-6R3, we do not provide opinions with respect to proposed factual transactions other than in reply to an advance income tax ruling request. However, we will offer the following general comments.

Where, in addition to their regular remuneration for services rendered in the production of a film, a lead actor negotiates additional compensation from the producer in the form of a backend participation in the revenues from the film (e.g., salary + 3% of world-wide net revenues from exploitation of the film in perpetuity), the granting of the backend participation generally will not, in and of itself, result in a reduction to the amount of the film tax credit that the producer is otherwise entitled to claim. This would be the case where, for example, the backend participation is given strictly for commercial reasons, such as providing the actor with reasonable additional potential remuneration to compensate for a lower than normal salary received for their acting services in respect of the film.

However, where the facts and agreements clearly indicate that the amount of the backend participation granted to a non-resident actor represents more than a fair market value salary to the actor, but in substance represents an acquisition of beneficial ownership of any percentage of the copyright in the film, then the producer would be denied the entire film tax credit. This would be so since the film would then be an excluded production, pursuant to clause 1106(1)(a)(ii)(A) of the Income Tax Regulations (the "Regulations") [i.e., the producer would not be the exclusive world-wide copyright owner]. Consequently, (1) the film would not be a Canadian film of video production (defined in subsection 1106(3) of the Regulations), (2) the producer would not have any qualified labour expenditure (defined in subsection 125.4(1) of the Act) in respect of the film, and (3) since the film tax credit in subsection 125.4(3) of the Act is based on 25% of its qualified labour expenditure, the producer would not have any such amount on which to claim the film tax credit.

In accordance with paragraph 22 of Information Circular 70-6R3, the above comments are only expressions of opinion, and as such should not be construed as advance income tax rulings, nor are they binding on the Department.

We hope this will be of assistance to you.

Yours truly,

Paul Lynch
Acting Manager
Partnerships Section
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch