1999 Ruling 9921413 - 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:

1. Will a particular distribution agreement result in the film tax credit being reduced or eliminated?

2. Will the wind-up of a single-purpose production company into its parent result in the application of the investor rules to deny the Canadian film or video production tax credit?

3. Will the acquisition of shares of an old production company and its subsequent wind-up result in application of the investor rules to deny the Canadian film or video production tax credit?

Position:

1. Not if the distribution agreement represents a fair market value commercial arrangement and the distributor does not acquire any portion of the legal and/or beneficial ownership of the production copyright.

2. No.

3. No.

Reasons:

1. In this fact situation, although the distributor would be an investor, it will not acquire legal or beneficial ownership of the production and we also do not otherwise consider that it will be able to deduct an amount in respect of the production, as required for subsection 125.4(4) of the Act to apply.

2. Per 88(1)(e.2), paragraph 87(2)(j.94) applies with modifications so that for the purposes of 125.4, Aco is deemed to be the same corporation as, and a continuation of Prodco. Therefore, Aco is not an investor and 125.4(4) of the Act will not have application. We also considered the definition of excluded production in subsection 1106(1) of the Regulations. The proposed transactions would not result in there being an excluded production since the Regulations contemplate transfers of copyright within Canadian corporate families.

3. Per 88(1)(e.2), paragraph 87(2)(j.94) applies with modifications so that for the purposes of 125.4, Aco is deemed to be the same corporation as, and a continuation of Old Prodco. Therefore, Aco is not an investor and 125.4(4) of the Act will not have application. We also considered the definition of excluded production in subsection 1106(1) of the Regulations. The proposed transactions would not result in there being an excluded production since the Regulations contemplate transfers of copyright within Canadian corporate families.

XXXXXXXXXX 992141

Attention: XXXXXXXXXX

XXXXXXXXXX, 1999

Dear Sirs:

Re: XXXXXXXXXX
Advance Income Tax Ruling

This is in reply to your letter dated XXXXXXXXXX, as amended in your letter dated XXXXXXXXXX, and our numerous telephone conversations (XXXXXXXXXX), wherein you requested advance income tax rulings on behalf of XXXXXXXXXX, in connection with the proposed transactions described below.

In this letter the following definitions are used:

"Aco" means XXXXXXXXXX.

"Act" means the Income Tax Act (Canada).

"Bco" means XXXXXXXXXX.

"Film" means the film entitled XXXXXXXXXX.

"Master Rights" means the license of the worldwide distribution rights with respect to the Property.

"Old Prodco" means XXXXXXXXXX.

"XXXXXXXXXX" means XXXXXXXXXX.

"Prodco" means XXXXXXXXXX.

"Property" means XXXXXXXXXX.

"Regulations" means the regulations to the Act.

"Tax Credit" means the Canadian film or video production tax credit, as provided in section 125.4 of the Act.

"XXXXXXXXXX" means XXXXXXXXXX.

"XXXXXXXXXX" means XXXXXXXXXX.

Our understanding of the relevant facts, proposed transactions and purpose of the proposed transactions is as follows:

RELEVANT FACTS

1. XXXXXXXXXX.

2. XXXXXXXXXX.

3. Old Prodco is XXXXXXXXXX company which is a wholly-owned subsidiary of Bco, also XXXXXXXXXX company. XXXXXXXXXX. Old Prodco produced the Film in XXXXXXXXXX, and in the same year claimed the Tax Credit in respect of the Film. Old Prodco has not fully depreciated the capital cost of the Film pursuant to the capital cost allowance rules set forth in the Regulations.

4. To the best of your knowledge and that of the taxpayers involved, none of the issues involved in this ruling

i) is in an earlier return of the taxpayer(s) or a related person,

ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer(s) or a related person,

iii) is under objection by the taxpayer(s) or a related person,

iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired, and

v) is the subject of a ruling previously issued by Revenue Canada or the Canada Customs and Revenue Agency.

PROPOSED TRANSACTIONS

5. Aco will incorporate, under the laws of XXXXXXXXXX, a wholly-owned production subsidiary under the name Prodco. Prodco will be a qualified corporation for the purposes of section 125.4 of the Act and the Regulations thereunder. Aco will grant Prodco a license to produce the Property. Prodco will enter into all material contracts with respect to the production of the Property. Until Prodco is wound up into Aco (as described below in paragraph 8), Prodco will be the sole legal and beneficial owner of the copyright in the Property. Prodco will apply for and receive certification in respect of the Property as a Canadian film or video production, within the meaning of that term in subsection 125.4(1) of the Act.

6. It is proposed that Prodco grant Aco the Master Rights for a term of 25 years. The license would also provide for two automatic renewals of 25 years each, unless notice was provided by Aco that the license would terminate at the end of the term in effect at the time the notice is given. Aco would then sublicense the distribution rights to Canadian and foreign distributors. XXXXXXXXXX. The license of the Master Rights would not include any pre-sale licenses, the proceeds of which would be retained directly by Prodco. Under the terms of the Master Rights agreement Aco will provide a recoupable, non-refundable distribution advance to Prodco equal to the cost of producing the Property less the total of (i) the amount of the Tax Credit actually received by Prodco in respect of the Property (this amount will initially be estimated and later will be adjusted to reflect the actual amount of the Tax Credit received), and (ii) any pre-sale revenues received by Prodco. Under the Master Rights agreement, Aco will be entitled to earn a distribution fee, XXXXXXXXXX and to recover any distribution expenses (XXXXXXXXXX). Aco would then be required to remit the balance of net revenues from the Property to Prodco after recoupment of its distribution advance.

7. In computing its income for the year, Prodco will deduct the maximum amount of capital cost allowance available, with the goal of reducing its net income to nil. The amount of the deduction will be at least equal to the distribution advance received by it from Aco in the year of receipt of such advance (this assumes that such a deduction would be available pursuant to and in accordance with paragraph 1100(1)(m) and subsection 1101(5k.1) of the Regulations. These provisions are presently in draft form and were originally proposed in the Department of Finance's News Release #95-104, dated December 12, 1995).

8. Aco will wind-up Prodco, pursuant and in accordance with the provisions of subsection 88(1) of the Act, once Prodco has filed its income tax return for its XXXXXXXXXX fiscal year and has claimed the Tax Credit in respect of the Property. After the wind-up, Aco will be the sole legal and beneficial owner of the copyright in the Property.

9. Prior to Aco's XXXXXXXXXX year-end, Aco will acquire all of Bco's shares in Old Prodco for consideration representing the current fair market value of Old Prodco. Aco will then wind-up Old Prodco, pursuant and in accordance with the provisions of subsection 88(1) of the Act. Subsequent to the wind-up of Old Prodco, Aco will claim any remaining capital cost allowance in respect of the Film.

PURPOSE OF THE PROPOSED TRANSACTIONS

10. XXXXXXXXXX.

11. The purpose of winding-up Prodco and Old Prodco into Aco is to facilitate the administration of the production entities.

RULINGS

12. Provided that the statement of relevant facts, the proposed transactions and the purposes thereof, all as described above, is accurate and constitutes complete disclosure of all of the representations, relevant facts, proposed transactions and the purposes thereof, and provided further that all of the proposed transactions are carried out as described above, and that the Property and the Film is or has been certified by the Ministry of Canadian Heritage as a Canadian film or video production and such certification has not been and will not be revoked, we confirm the following:

A. To the extent that

(i) each of the XXXXXXXXXX distribution fees to be received by Aco, as described above in paragraph 6, reflects a fair market value fee for distributing the Property in the particular territory,

(ii) the terms of the Master Rights agreement represent a normal commercial agreement, and

(iii) no portion of the distribution advance paid by Aco to Prodco, as described above in paragraph 6, represents the cost of acquiring legal or beneficial ownership of any portion of the copyright in the Property,

the grant of the Master Rights by Prodco to Aco will not be considered to be a disposition of the Property by Prodco, within the meaning of the term "disposition" in section 54 of the Act. In addition, the granting of the Master Rights will not, in and of itself, cause subsection 125.4(4) of the Act to apply to deny Prodco's claim for the Tax Credit in respect of the Property.

B. The winding up of Prodco into Aco, as described above in paragraph 8, will not, in and of itself, cause subsection 125.4(4) of the Act to have application in respect of the Property.

C. The winding up of Old Prodco into Aco and the subsequent deduction by Aco of capital cost allowance in respect of the Film, all as described above in paragraph 9, will not, in and of itself, cause subsection 125.4(4) of the Act to have application in respect of the Property.

These rulings are given subject to the general limitations and qualifications set forth in Information Circular 70-6R3 issued by Revenue Canada December 30, 1996, and are binding provided that on or before XXXXXXXXXX (i) the proposed transactions in paragraph 5 above are completed, (ii) Prodco has granted the Master Rights to Aco in return for the distribution advance, and (iii) Old Prodco has been wound up into Aco, all as described above in the proposed transactions. This ruling is based on the Act in its present form and does not take into account the effect of any proposed amendments. Except as expressly stated, our rulings do not imply acceptance, approval or confirmation of any income tax implications of the facts or proposed transactions. In particular, we are not commenting on the fair market value of the shares in Old Prodco that are to be acquired by Aco, as described above in paragraph 9.

Yours truly,

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

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