11 December 2001 External T.I. 2001-0111495 - MATCHABLE EXPENDITURES

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: grandfathering if expenditures not paid before Sept 18, 2001

Position: yes, if other conditions met

Reasons: "made" is broader than "paid"

		2001-011149
XXXXXXXXXX 	Denise Dalphy, LL.B.
(613) 957-9231
December 11, 2001

Dear XXXXXXXXXX:

Re: Proposed Grandfathering of Draft Amendments to Section 18.1 of the Income Tax Act (the "Act")

We are writing in reply to your letter dated November 15, 2001 wherein you enquired about our interpretation of certain transitional relief, if enacted.

FACTS

Our understanding of the relevant facts is as follows:

Subsection (2) of the Notice of Ways and Means tabled in the House of Commons on September 18, 2001 states:

"(2) Subsection (1) applies in respect of expenditures made by a taxpayer on or after September 18, 2001 in respect of a right to receive production, (in this subsection referred to as the "right"), except if

(a) the expenditure is

(i) required to be made under a written agreement made by the taxpayer before September 18, 2001,

(ii) made under, or described in, the terms of a prospectus, preliminary prospectus or registration statement that is, before September 18, 2001, filed with a public authority in Canada in accordance with the securities legislation of Canada or of a province and, if required by law, accepted for filing by the public authority before September 18, 2001, or

(iii) made under, or described in, the terms of an offering memorandum distributed as part of an offering of securities if

(A) the memorandum contains a complete, or substantially complete, description of the securities contemplated in the offering as well as the terms and conditions of the offering,

(B) the memorandum was distributed before September 18, 2001,

(C) solicitations in respect of a sale of the securities contemplated in the offering have been made before September 18, 2001, and

(D) the sale of the securites contemplated in the offering is substantially in accordance with the memorandum;

(b) the expenditure is made before 2002;

(c) the expenditure is paid in consideration for services that are rendered in Canada before 2002 in respect of an activity, or a business, all or substantially all of which is carried on in Canada;

(d) there is no agreement, or other arrangement, under which the obligation of any taxpayer in respect of the expenditure can be changed, reduced or waived if there is a change to, or an adverse assessment under, the Act;

(e) if the right is, or is related to, a tax shelter investment, a tax shelter identification number in respect of the tax shelter was obtained before September 18, 2001; and

(f) if the expenditure is made under, or described in, the terms of a document that is a prospectus, a preliminary prospectus, a registration statement or an offering memorandum (and regardless of whether the expenditure is also made under a written agreement)

(i) all of the funds raised pursuant to the document that may reasonably be used to make a matchable expenditure are raised before 2002,

(ii) all or substantially all of the securities distributed pursuant to the document for the purpose of raising the funds described in subparagraph (i) are acquired before 2002 by a person who is not

(A) a promoter, or an agent of a promoter, of the securities,

(B) a vendor of the right,

(C) a broker or dealer in securities, or

(D) a person who does not deal at arm's length with a person referred to in clause (A) or (B), and

(iii) all or substantially all of the funds raised pursuant to the document before 2002 are used to make expenditures that are required to be made pursuant to agreements in writing made before September 18, 2001."

You advised in your aforementioned letter:

"... a number of meetings were held between industry representatives and representatives of the Department of Finance in order to broaden the transitional relief...Ultimately, it was agreed that one of the criteria would be that the production services limited partnership had begun incurring production expenses prior to September 18, 2001. In this context, it was agreed by the Department of Finance that expenses would be incurred by a production services limited partnership prior to September 18, 2001, even if no cash payment has been made by such date, provided that as of such date the ultimate responsibility for such expense rested with the production services limited partnership. As contemplated in the advance income tax rulings, the production services limited partnership is responsible for all production expenses notwithstanding that a long form production services agreement is not generally entered into a closing (which occurs after some production expenditures have been made)."

On October 26, 2001, Mr. Len Farber, of the Department of Finance, stated in a letter to The Canadian Motion Picture Distributors Association, inter alia,:

"We have considered these representations and are prepared to recommend additional transitional relief to the Minister of Finance. In general terms, this would provide relief for a film or video production that began before September 18 and that is to be produced in Canada, in respect of expenditures, other than expenditures in respect of advertising, marketing, promotion or market research, made before April 2002 (determined without reference to the Act's limited-recourse debt provisions in respect of debt repaid before 2003). Such relief would be provided where the production meets all [emphasis added] of the following [seven] conditions:

1. some expenditures were made by the production services partnership in respect of the production before September 18, 2001. For the purpose of this test, the Act's limited-recourse debt provisions would not apply to deem the expenditure to be made when the debt is paid, unless the debt remains unpaid after 2002; ...etc" (the "FIRST CONDITION")

You have enquired whether the FIRST CONDITION would be satisfied where:

1. "The production services partnership was in existence prior to September 18, 2001;

2. pursuant to an agreement or arrangement made before September 18, 2001 (whether or not in writing as of such date) the production services partnership was obligated to pay for an expense in respect of the production or to reimburse any other person that had paid for that expense; and

3. a written agreement is entered into before 2002 that confirms the obligations of the production partnership described above."

You also asked us to confirm that "the expense need not have been paid for prior to September 18, 2001 for the expenditure to be considered as having being made by such date provided that the liability to pay such expenditure had accrued as of such date."

OUR COMMENTS

Written confirmation of the consequences inherent in particular transactions are given by this directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R4 (the "Circular"). Where the particular transactions are partially completed or completed, the enquiry should be addressed to the relevant Tax Services Office. Notwithstanding the foregoing, we are providing the following comments.

In our view, the FIRST CONDITION would generally be satisfied where:

? The production services partnership was in existence prior to September 18, 2001;

? pursuant to an agreement or arrangement made before September 18, 2001 (whether or not in writing as of such date, but provided that there is evidence supporting the existence and relevant terms of such agreement or arrangement) the production services partnership had a legal obligation before September 18, 2001 to pay for some expenditures in respect of the production that it had incurred before September 18, 2001 or the production services partnership was legally obligated before September 18, 2001 to reimburse any other person that was legally obligated to pay for some expenditures in respect of the production that the other person had incurred before September 18, 2001;

? a written agreement is entered into before 2002 that confirms the legal obligations of the production services partnership and any other person described immediately above; and

? there is no evidence that any of the legal liabilities referred to above are contingent.

We also agree that the expense need not have been paid for prior to September 18, 2001 for the expenditure to be considered as having being made by such date, provided that all of the conditions described immediately above are satisfied.

The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 22 of the Circular, the above comments do not constitute an income tax ruling and accordingly are not binding on the Canada Customs and Revenue Agency. Our practice is to make this specific disclaimer in all instances in which we provide an opinion.

Further, the above opinion should not be construed as an indication of any income tax consequences relating to an investment in a film partnership, other than as provided above. In particular, we express no opinion on:

(a) whether any other conditions in the proposed grandfathering (either in the Notice of Ways and Means or in the Oct 26 and Nov 5, 2001 letters from the Department of Finance) of the draft amendments to section 18.1 of the Act will be satisfied;

(b) whether any party is legally obligated to pay for an expenditure;

(c) whether any expenditure is reasonable

(d) the fair market value of any expenditure;

(e) whether of any of the parties carries on business or carries on business with a reasonable expectation of profit;

(f) whether, or the time when, any expenditure may be deducted in computing income under the Act; or

(g) whether an agency relationship exists between any parties;

Yours truly,

Steve Tevlin
for Director
Business and Partnerships Division
Income Tax Rulings Directorate

- 5 -