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.
In addition, the term "excluded obligation" is defined in subsection 80(1) and refers, inter alia, to a debt issued by a debtor that has been included in computing the debtor's income. Where a loan is included in income under paragraph 12(1)(x), it is generally excluded from the application of subsection 80(2) because the forgiven amount on the loan would be nil.
Since … the loan from M Co is assistance that is required to be included in Prod Co's income under paragraph 12(1)(x), the conversion of the loan by M Co into shares of Prod Co at the end of the production would not engage the application of subsection 80(2).