Principal Issues: [TaxInterpretations translation] What are the criteria for determining whether CFVP expenses are an expense of a current or capital nature in respect of depreciable property?
Position: Question of fact
Reasons: The Act does not provide any specific criteria in this regard.
October 12, 2010
Consulting services for the film industry Income Tax Rulings Directorate Provincial Compliance Division Business and Partnerships Division Attention:Pierre Mercier, Manager Pierre-Luc Meunier 2010-035576
Canadian film or video production - current or capital expenditure respecting depreciable property
This is further to your email of January 28, 2010 in which you requested our opinion on the above subject.
Unless otherwise indicated, all statutory references herein are to the provisions of the Income Tax Act (the "Act").
Your letter refers to Technical Interpretation 9722707 issued by our Directorate on September 11, 1997. In particular, you have some questions relating to paragraph 4 of the conclusion in this interpretation: [TaxInterpretations translation]
Generally, the cost of preparing a tape will normally be considered a current expenditure where the tape is only of short-term use, either because it is merely of current topical interest or because it is intended to be shown only once (…) In these latter situations, the material is normally retained on the tape for record purposes only. This determination is therefore a question of fact.
You wish to know if there were any criteria other than those in this last paragraph for determining whether a "Canadian film or video production” (footnote 1) (hereafter "CFVP") should be considered a current or capital expenditure on depreciable property.
You also asked whether the terms "news topic" (footnote 2) and "news programming" (footnote 3) have the same meaning.
Finally, you wish to know if the term "screened" has the same meaning as "broadcast", since in a broadcast contract, the parties often agree to more than one broadcast of the production covered by the contract. Therefore, if a contract allows for several broadcasts, would the production covered by the contract be depreciable property?
Our Comments
First, we wish to bring to your attention that the paragraph of Technical Interpretation 9722707 to which you refer is based on the wording of paragraph 1 of Interpretation Bulletin IT-283R2, Capital Cost Allowance - Capital Cost Allowance - Video Tape, Film, Software and Recording Media (Archived) (the "Bulletin") which is archived.
The criteria set out in that paragraph may still be used to distinguish whether the costs of producing a videotape are to be considered current or capital expenditures in respect of depreciable property.
These criteria, which are not set out in the Act or the Income Tax Regulations, are used to illustrate situations where the production of a videotape does not provide a lasting benefit to the producer, given the short useful life of the videotape in question, in which case the production-related costs can be deducted in the year in which they are incurred.
The question of whether costs related to a production should be considered as current, or as capital in respect of depreciable property, is a question of fact that must be considered in light of all the circumstances of a particular situation. In addition to the criteria stated in the Bulletin, we believe that a likelihood of a particular production generating revenues other than those provided for in the original broadcast contract, for example, from the sale of DVDs, the awarding of contracts for broadcasting on the Internet, on specialty channels or in territories not covered by the original broadcast contract, can also be taken into consideration in determining whether the costs related to a production should be considered as capital expenditures in respect of depreciable property.
Since a "news program" is an "excluded production", it is not considered as CFVP. We are of the view that a production dealing with a current events topic is not necessarily a news program (footnote 4) and that a production dealing with a current events topic could, in certain circumstances, qualify for the CFVP tax credit under subsection 125.4(3).
Finally, while we believe that the terms "screened" and "broadcast" do not have exactly the same meaning, a production that is to be broadcast only once and then retained only for archival purposes does not appear to provide a lasting benefit to the producer. On the other hand, in a situation where the broadcast contract covers a period of several years, under which the broadcaster has the right to broadcast the production several times during that period, this would be an argument to support that the costs associated with the production provide a lasting benefit to the producer. Of course, all of the circumstances of a given situation must be analyzed before concluding that it is a capital expenditure for depreciable property.
Access to Information
For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should the taxpayer request a copy of this memorandum, they may request a severed copy using the Privacy Act criteria, which does not remove taxpayer identity. Requests for this latter version should be made by you to Ms. Celine Charbonneau at (613) 957-2137. In such cases, a copy will be sent to you for delivery to the taxpayer.
We hope that these comments are of assistance.
Best regards,
François Bordeleau, LL.B.
Manager
Business and Partnerships Section
Business and Partnerships Division
Income Tax Rulings Directorate.
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 Expression defined in subsection 125.4(1) of the Act, which refers to subsection 1106(4) of the Income Tax Regulations (the "Regulations").
2 Referred to in Technical Interpretation 9722707 and Interpretation Bulletin IT-283R2.
3 See the definition of "excluded production", which uses that expression in subparagraph 1106(1)(b)(i) of the Regulations.
4 The following Internet link provides what the Canadian Audio-Visual Certification Office (CAVCO) of the Department of Canadian Heritage means by "news": http://www.pch.gc.ca/pgm/bcpac-cavco/definition-eng.cfm.