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. whether amounts are charitable "gifts"
2.whether donors are "investors"
3. whether "investor rules apply to deny film tax credit to producer
4. whether amounts are assistance
Position:
1. depends on facts of case
2. yes
3. no if charitable gifts; possibly if not charitable gifts
4. no if charitable gifts; probably if not charitable gifts
Reasons:
1. meaning of "gifts" at law
2. definition of "investor" in 125.4(1) is very broad
3. 125.4(4) question of fact whether amounts are deductible in respect of the production
4.12(1)(x) may apply depending on the facts
June 5, 2000
SR & ED Directorate Partnerships Section
Financial Legislative Application Section Denise Dalphy
(613) 957-9231
Attention: Mel Machado, Manager
2000-000820
Canadian Film or Video Production Tax Credit ("PSTC") - Investor/Investment
This is in response to your memorandum dated February 10, 2000, where you requested our comments on the application of subsections 125.4(1) and (4) in a particular fact situation.
Facts
XXXXXXXXXX
Issue I
Charitable donations
Are the payments to XXXXXXXXXX in fact bona fide "gifts" within the meaning of subsection 118.1(1) and paragraph 110.1(1)(a)?
Response and analysis
The information available to us is not sufficient for us to conclude with certainty whether the amounts paid to XXXXXXXXXX are charitable gifts.
In order for an amount to be a "gift" at law it must be a voluntary transfer of property without consideration. IT-110R3, Gifts and Official Donation Receipts, describes the rules that apply in making such a determination:
"15 (f) A charity may not issue an official receipt for income tax purposes if the donor has directed the charity to give the funds to a specified person or family. In reality, such a gift is made to the person or family and not to the charity. However, donations subject to a general direction from the donor that the gift be used in a particular program operated by the charity are acceptable, provided that no benefit accrues to the donor, the directed gift does not benefit any person not dealing at arm's length with the donor, and decisions regarding utilization of the donation within a program rest with the charity. [emphasis added]
(g) A charity may not issue an official receipt for income tax purposes if the donor has directed the charity to give the funds to a non-qualified donee. [emphasis added] Most foreign charities or foreign affiliates of Canadian charities are not qualified donees, and thus, gifts directed to them are not eligible for an official receipt ... "
If the amounts paid to XXXXXXXXXX were provided on condition that XXXXXXXXXX give the amounts to the Producer, the amounts would not be "gifts" to XXXXXXXXXX, but would be gifts to the Producer. If the Producer is not a registered charity or other qualified donee, no deduction would be available under section 110.1 or 118.1. If, however, the amounts were provided to XXXXXXXXXX for the express purpose of making a program about XXXXXXXXXX , and conditions were not imposed as to who would produce the program or how the funds would be used in making the program, the fact that XXXXXXXXXX has to use the funds to make a program about XXXXXXXXXX, would not, in and of itself, preclude the amounts paid to XXXXXXXXXX from being considered "gifts" to XXXXXXXXXX.
In most cases where a person gives an amount to a charity for the express purpose of making a film about that person, the person would be considered to have received a benefit. However, with respect to XXXXXXXXXX donation to XXXXXXXXXX, it is unlikely since he is benefiting from his donation, XXXXXXXXXX.
Issue II
Definition of "investor" in subsection 125.4(4)
Are the above-noted donors "investors" within the meaning of that term in subsection 125.4(4)?
Response and Analysis
Yes.
The definition of "investor" in subsection 125.4(1) is extremely broad, and includes all persons who are not specifically excluded from the definition. Since the XXXXXXXXXX donors do not fit within the exclusions in the definition, they are "investors" for purposes of the film tax credit.
Issue III
The "investor rules" in subsection 125.4(4)
Will the "investor rules" apply to deny the film tax credit to the Producer?
Response and Analysis
It depends upon the circumstances. If the payments to XXXXXXXXXX are "gifts" to XXXXXXXXXX, subsection 125.4(4) will not apply.
Subsection 125.4(4) applies where an investor may "deduct an amount" (in computing its income) "in respect of the production".
The caselaw has established that the phrase "in respect of" is extremely broad. [see the 1983 Supreme Court cases, Savage and Nowegijick*] However, in order to apply subsection 125.4(4), it is not only necessary to establish that the amounts are "in respect of the production", it is necessary to establish that the person may "deduct an amount in respect to the production". Consequently, there must be a direct linkage between the deduction and the production.
If the amounts provided to XXXXXXXXXX are "gifts" to XXXXXXXXXX, and are therefore deductible by each of the payers by virtue of either section 118.1 or 110.1, it is our view that the gifts would not be "deductible in respect of the production [by the Producer]", but would be deductible in respect of a charitable "gift" to XXXXXXXXXX, since, to be a "gift" XXXXXXXXXX would have retained control as to how it would use the funds in making a program about XXXXXXXXXX.
If, however, the amounts provided to XXXXXXXXXX are not charitable "gifts', it will be necessary to ascertain first, whether the amounts are deductible. From the limited information before us, it is not evident that, if the amounts are not "charitable "gifts", whether they would be deductible. If the amounts are in fact deductible, perhaps as business expenses (perhaps promotion) paid made to the Producer (but routed through XXXXXXXXXX, as an agent or trustee for the Producer), there may be sufficient linkage between the deduction and the production to apply the investor rules.
Issue IV
Assistance
Are the amounts paid to XXXXXXXXXX "assistance" as defined in subsection 125.4(1) [and subparagraphs 12(1)(x)(i) to (iv)]?
Response and Analysis
It will depend on whether or not the amounts were paid by the donors to XXXXXXXXXX as "gifts" or were actually paid by the donors (through XXXXXXXXXX as agent or trustee) to the Producer.
If the amounts were charitable gifts to XXXXXXXXXX, since neither subparagraph 12(1)(x)(i) nor (ii) would apply, the amounts would not be "assistance" within the meaning of subsection 125.4(1).
If the amounts were paid by the donors to the Producer, it is possible that amounts paid by some of the donors may be "assistance" since clause12(1)(x)(i)(A) and subparagraph 12(1)(x)(iv) may apply. With respect to the amount paid by XXXXXXXXXX, however, it would appear that the amount would not be assistance since neither 12(1)(x)(i) nor (ii) would apply.
To summarize, if the amounts paid by XXXXXXXXXX to XXXXXXXXXX are legitimate donations for income tax purposes, the donations will have no impact on the film tax credit as computed under section 125.4 in respect of the program. However, if the amounts are not donations for income tax purposes, it is our view that, other than the contributions by XXXXXXXXXX, the better view is that the contributions would likely be assistance to the Producer for the production of the program rather than amounts to which the investor rules would apply.
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 Directorate
Policy and Legislation Branch
* In Nowegijick, the Supreme Court of Canada stated:
"The words "in respect of" are, in my opinion, words of the widest possible scope. They import such meanings as "in relation to", "with reference to" or "in connection with". The phrase "in respect of" is probably the widest of any expression intended to convey some connection between two related subject matters."
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