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: Would the corporate owner of a film that subcontracts all of the production work out to one or more third parties be entitled to claim the film or video production services tax credit?
Position: Yes, based on the particular set of assumptions.
Reasons: The owner was in a film or video production business and the other necessary conditions were met. It is not a requirement that the owner be in a film or video production services business in order to claim the film or video production services tax credit in section 125.5.
December 22, 1999
Mel Machado Partnerships Section
A/Manager Allan Nelson
Tax Incentive Audit Section (613) 443-7253
Audit Directorate
Attention: Kevin Gibson
991760
Film or Video Production Services Tax Credit
We are writing in response to your memorandum dated June 23, 1999, and our telephone conversations on October 12 and December 1, 1999 (Nelson/Gibson) wherein you asked for our comments concerning a corporation's eligibility to claim the film or video production services tax credit in two different scenarios. Your query is as a result of a request you received from XXXXXXXXXX
Scenario 1
A Canadian corporation ("OwnerCo") enters into a subcontract agreement with another Canadian corporation ("ServiceCo"). Pursuant to that agreement, ServiceCo receives a fee to make a film in Canada and to return the finished product to OwnerCo. At all times OwnerCo retains legal and beneficial ownership of the copyright in the film. OwnerCo has no employees (and its only activity has been to contract with Serviceco (presumably this activity was undertaken by a corporate director or other authorized representative). In computing its income for tax purposes, OwnerCo reports revenue related to its exploitation of the film and expenses related to the production and distribution of the film. These costs include the subcontract fee paid to ServiceCo.
In your view, OwnerCo is not operating a film or video production services business as it has no employees that carry on production service activities and OwnerCo's revenue is not earned from production services activities.
Scenario 2
A Canadian corporation ("OwnerCo") subcontracts with numerous parties, each to do a portion of the work required in order to produce a film in Canada. At all times OwnerCo retains legal and beneficial ownership of the copyright in the film. OwnerCo may only have one employee or in some instances no employees and the directors of OwnerCo do the administrative work (hiring subcontractors, paying all expenses relating to the production of the film, etc.). Again, in computing its income for tax purposes, OwnerCo reports revenue related to its exploitation of the film and expenses related to the production and distribution of the film. These costs include the fees paid to the various subcontractors.
In your view, OwnerCo is not operating a film or video production services business, for the same reasons as in scenario 1.
In both scenarios, you would conclude that OwnerCo is in a film production business, but not a film or video production services business.
You have asked us to focus our comments on the question of whether OwnerCo would be an "eligible production corporation" as that term is defined in subsection 125.5(1) of the Act. In doing so, we should assume (i) the film is produced in Canada, (ii) OwnerCo's only activity is in Canada and is related to producing and exploiting the film, (iii) OwnerCo is not a corporation described in paragraphs 125.5(1)(c) to (e) at the definition of eligible production corporation, and (iv) the requirements in 125.5(3)(a) and (b) of the Act have been met.
Eligible production corporation is defined in subsection 125.5(1) as follows
"eligible production corporation", in respect of an accredited production for a taxation year, means a corporation, the activities of which in the year in Canada are primarily the carrying on through a permanent establishment (as defined by regulation) in Canada of a film or video production business or a film or video production services business and that
(a) owns the copyright in the accredited production throughout the period during which the production is produced in Canada, or
(b) has contracted directly with the owner of the copyright in the accredited production to provide production services in respect of the production, where the owner of the copyright is not an eligible production corporation in respect of the production, except a corporation that is...
Based on your given assumptions, OwnerCo would be an eligible production corporation in respect of the film, if its activities in the year are primarily the carrying on through a permanent establishment in Canada of a film or video production business or a film or a video production services business. It is our view that this will be the case, as explained below.
- Business is very broadly defined in subsection 248(1) of the Act to include "...a profession, calling, trade, manufacture or undertaking of any kind whatever and...an adventure or concern in the nature of trade..."
- Permanent establishment in respect of a corporation is defined in subsection (2) of section 400 of the Regulations to the Act and includes "a fixed place of business...including an office...(a) where the corporation does not have any fixed place of business it means the principal place in which the corporation's business is conducted..."
- Film or video production business is not defined in the legislation. Therefore, we must rely on the ordinary meaning of the words in conjunction with the above definition of business. Simply stated, in our view film or video production business is a business that makes films or videos.
Notwithstanding that OwnerCo subcontracts the film production work to one or more parties, its only activities relate to the production of a film or video. It is our view that the subcontracting of work to others is consistent with the definition "Canadian labour expenditure" in subsection 125.5(1) of the Act, as that definition explicitly accomodates labour expenditures for work undertaken by persons other than employees of OwnerCo. Consequently, it is our view that OwnerCo is operating a film or video production business consistent with the above definitions. OwnerCo also appears to meet the permanent establishment requirements noted above, since all production work and all of OwnerCo's activities are carried on in Canada.
Whether or not OwnerCo is also carrying on activities that are primarily on or in a film or video production services business is not relevant as carrying on a film or video production business (along with the other conditions noted above) is sufficient for OwnerCo to be entitled to claim the film or video production services tax credit pursuant to and in accordance with subsection 125.5(3) of the Act.
Our comments are meant to be general in nature and may change after reviewing all of the facts in any particular situation.
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.
Paul Lynch
for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch
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