Section 125.4

Subsection 125.4(1) - Definitions


Administrative Policy

5 February 1998 External T.I. 9729535 - ASSISTANCE

Discussion of circumstances in which loans to finance a production would be considered to be forgivable loans.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(x) loan repayable out of revenues 65

Paragraph (a)

Administrative Policy

16 May 2005 Internal T.I. 2005-0119061I7 F - Montant d'aide-actions

conversion of loan that was taxable assistance into shares is not itself assistance]

Prod Co, a wholly owned subsidiary of M Co and a "qualified corporation," produces a Canadian film or video production ("CFVP") at a cost of $1,900,000 that is eligible for the s. 125.4(3) credit. M Co funded Prod Co through a loan, which will only be repaid if the production generates revenue, and is not expected to be repaid.

After noting that the loan was assistance for the purposes of s. 12(1)(x) and the definition thereof in s. 125.4(1), and reduced Prod Co's "labour expenditure" as defined in s. 125.4(3) (and after also finding that the funding would not have been “assistance” under s. 125.4(1) if made in the form of a share subscription), the Directorate considered whether there would be such assistance if M Co converted its loan into shares at the end of the production, and stated:

Subject to the possible application of paragraph 80(2)(g.1), there will be a debt settlement if the FMV of the shares is less than the amount of the loan. We are of the view, however, that this debt settlement would not constitute an amount of assistance for the purposes of section 125.4.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(x) - Subpargraph 12(1)(x)(viii) funding of film production company by shares rather than loan would not give rise to assistance 181
Tax Topics - Income Tax Act - Section 80 - Subsection 80(1) - Excluded Obligation - Paragraph (a) conversion of loan that was taxable assistance under s. 12(1)(x) into shares with lower FMV would not give rise to forgiven amount 304
Tax Topics - Income Tax Regulations - Regulation 1106 - Subsection 1106(1) - Excluded Production - Paragraph (a) - Subparagraph (a)(iii) transfer of all the revenues to a film implies a transfer of its copyright 191
Tax Topics - General Concepts - Ownership transfer of the economic benefit of copyright entails transfer of its ownership 149
Tax Topics - Income Tax Act - Section 53 - Subsection 53(1) - Paragraph 53(1)(c) subscription for shares of sub at overvalue constitutes a contribution of capital, generating a s. 53(1)(c) basis bump 80

Qualified Corporation

See Also

Global Video Inc. v. The Queen, 2008 DTC 2621, 2005 TCC 742 (Informal Procedure)

An assessment of the Minister to deny the taxpayer credits on the basis that only about 25% of its total production costs were costs of eligible productions, was confirmed. In reaching this conclusion, Lamarre Proulx, J. stated (para. 28):

"The term used in the French version is 'principalement', and the Petit Robert dictionary defines the adjective 'principal' as that which is the most important, the first among several."

Administrative Policy

2012 Ruling 2011-0426581R3 - Loss and XXXXXXXXXX tax consolidation

Creditco is an indirect subsidiary of Parentco, which is a Canadian corporation. Creditco carries on business in one province, has non-capital losses and unutilized credits and is a qualified corporation (presumably as defined in s. 125.4(1).)

Creditco receives a loan from Parentco (funded by Parentco out of a daylight loan) and on-lends the proceeds in demand loans bearing interest at a market rate to various direct and indirect subsidiaries of Parentco (Aco through to Nco), who use the lent proceeds to subscribe for preferred shares of Creditco bearing a cumulative dividend equal to the interest rate on the demand loans plus a spread. These demand loans do not exceed the respective borrowing capacities of the borrowing subsidiaries. Creditco uses such share subscription proceeds to pay off the loan from Parentco. The arrangement will be unwound in X years.

Interest deduction ruling given re Aco to Nco; and ruling that these transactions will not cause Creditco to cease to be a qualified corporation.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 111 - Subsection 111(1) - Paragraph 111(1)(a) loss shift does not detract from principal business 189

Subsection 125.4(3) - Tax credit


Bacal, Jadd, Thivierge, "Raised the Curtain for Act II: Tax Shelter Reform and the New Film Tax Credit Regime", 1995 Canadian Tax Journal, Vol. 43, No. 6, p. 1965.

Subsection 125.4(4) - Exception

Administrative Policy

9 July 1998 External T.I. 9817185 - TVC INSURANCE AND INVESTOR RULES

In a situation where a loan is made to finance a Canadian film production, although the lender will be an investor it would be viewed as being able to deduct an amount in respect of the loan rather than in respect of the production, so that s. 125.4(4) would not apply unless the producer also transferred an equity interest in the production to the lender. The lender would be considered to have an equity interest if it was entitled to participation payments computed as a percentage of profits from the production with no cap, and there was clearly no connection between the estimated participation payments and the fair market value interest rate. Where time variable contingent insurance was provided by an arm's length non-resident insurer, the insurer would not be an investor for purposes of s. 125.4(4) because it would not be subject to tax in Canada

28 September 1998 External T.I. 9819755 - CANADIAN FILM OR PRODUCTION TAX CREDIT

An investment in shares of a Canadian producer will not normally cause a reduction in the amount of the credit available to the producer.