6 January 1983 Income Tax Severed Letter B-4078

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.

XXX

This is in reply to your Round Trip Memorandum of December 14 requesting our assistance in replying to a letter you received from the subject taxpayer.

The taxpayer is concerned as to the tax implications inherent in the following types of payments:

• 1. The acquisition of a film distribution agreement and the subsequent payment to a non-resident based on sales and performance in a given territory in Canada.
• 2. A film guarantee payment to a non-resident for exclusive distribution rights in a given territory in Canada, based on the usage and distribution, the subsequent payments to the non-resident being based on the amounts earned and taking into account the guarantee payment.
• 3. The outright purchase in perpetuity where the Canadian corporation owns all distribution and ownership rights in the property and makes only an initial payment for purchase price of the property. No further sums are due for the use of the product in the territory.
• 4. The purchase for a limited period (usually five to seven years) of the exclusive film distribution rights for a given territory in Canada for a fixed sum unrelated to usage and exhibition in Canada. The initial payment is the only payment for the property and is unrelated to the use of the product in the territory. The term of the exclusivity usually covers the "useful" life of the property in the territory.

It is our view that in situations 1, 2 & 4 above, the payments are subject to Part XIII tax under subsection 212(5) of the Act. With respect to the situation in 3 above, it is the Department's position that the provisions of subsection 212(5) are not applicable if the Canadian resident has purchased all the rights in the film. This would be the case where what is involved is the irrevocable acquisition in perpetuity of the unrestricted right to use the film. It would not be the case where the Canadian -purchases the rights to distribute a film only in Canada or in some other specific area (as in 4 above), or if some interest in the film has been retained by the non-resident. This position was established by the Department in January 1981 when considering whether or not to appeal the 1981 Tax Review Board case involving Peliculas Sari S.A. [[1980] C.T.C. 2864] (see Greenie dated October 30, 1981). A review of the subject contract would be necessary in order to make a determination.

The provisions of subsection 212(5) may of course be overridden by a reciprocal international tax agreement.

With respect to the deducibility by XXX of the various payments, we suggest advising the taxpayer that such specific predeterminations are not normally made but that generally speaking, periodic royalty payments are deductible as an expense in the year incurred, the cost of acquiring a film (as in 3 above) would be capitalized and included in class 10 (part(s)), class 12 (part (n)) or class 18, the cost of acquiring a license for a limited period of time would be capitalized and included in class 14 (se-e IT-477) and any prepaid expense should be written off over the period to which it relates; i.e., in accordance with generally accepted accounting principles.

Should the taxpayer wish us to consider the matter further, we would require a copy(s) of the relevant contract(s).

paid on NHA Mortgages: 212(1)(b)(ii)(C)