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: Do investor rules apply?
Position: yes
Reasons: Disposition of beneficial interest in production December 1, 2000
SR & ED Directorate Partnerships Section Financial Legislation Application Section Denise Dalphy Mel Machado, Manager (613) 957-9231
Attention: Alain Marchand 2000-005368
Canadian Film or Video Production Tax Credit - "Investor Rules"
This is in response to your memorandum dated October 30, 2000, wherein you have asked for our views on the income tax consequences of a contract ("Contract") dated XXXXXXXXXX between XXXXXXXXXX ("Producer"), and XXXXXXXXXX ("Distributor") as it relates to the film, XXXXXXXXXX (the "picture").
Facts
The Contract provides:
XXXXXXXXXX
Issues
You have enquired about the income tax consequences relating to the amount paid by Distributor to producer, as described above. In particular, you have asked whether Distributor is an "investor" within the meaning of subsection 125.4(4) and whether Distributor acquired a beneficial interest in a portion of the copyright in the production.
Analysis and Conclusion
Based on the information that you have provided, it is our opinion that Distributor is an "investor" and has acquired a beneficial interest in the copyright of the production.
"Investor rules"
It is our understanding that Distributor is not a prescribed person for the purposes of the definition of "investor" in subsection 125.4(1) of the Act, and there is no information before us that would suggest that Distributor is engaged on a regular, continuous and substantial basis in a Canadian film or video production business. We understand that Distributor is a foreign company. Since we do not know whether Distributor would be able to deduct an amount in respect of the production in computing its income in Canada for any taxation year, we cannot determine whether the proposed "investor rules" would apply to deny film or video production tax credits in respect of the production.
Beneficial ownership
The following factors would support your view that Producer disposed of a portion of the production to Distributor:
- Distributor pays Producer an amount that approximates XXXXXXXXXX% of Producer's production costs.
- Distributor receives complete distribution rights for XXXXXXXXXX and Producer has no participation in revenues from these territories. These rights are granted to Distributor for a term of XXXXXXXXXX years, and it is renewable.
- Distributor receives XXXXXXXXXX% of U.S. distribution rights. The term is to be based on sales, but is not further described in the Contract.
- Distributor agreed to the "financial and structural terms" set by the XXXXXXXXXX, CAVCO and OFTTC authority.
We do not expect that the above terms mirror typical commercial distribution agreements. It is our understanding that tax incentives for the film and video production industry are not intended to benefit passive investors in a production and that the producer should be the only person to benefit from the exploitation of the production. In our view, the above arrangement violates tax policy as well as the provisions of the Income Tax Act and Regulations.
Excluded production
Ms. Wynter of CAVCO stated, in her letter dated October 26, 2000, "I am not convinced that the deal was made prior to the film being produced so as to make this an excluded production". It is not apparent to us why the production would not be an "excluded production" within the meaning of subsection 1106(1) of the Regulations. Although the written contract between Producer and Distributor is dated XXXXXXXXXX, the terms in the Contract, in particular, the payment schedule and the clause whereby Producer and Distributor agreed to "work collectively in obtaining the Leading Cast", indicate that the actual agreement was made, and a beneficial interest in the production was transferred to Distributor, at an earlier date.
There is no indication that the Distributor is a co-producer of the production or that Producer acted as agent of the Distributor in making the production. As such, the issue of allocating costs of production or film tax credits between Producer and Distributor does not arise.
Allocating costs to co-producers
Finally, Mr. Marchand requested our opinion as to what costs of a production would form part of the film tax credit computation in the following situation. Company A and Company B pay 25% and 75%, respectively, of the costs of a production. They each have a right to receive 50% of the profits from the production. It has been determined that one of the companies is not eligible to claim FTCs.
In E9912975 we gave the following opinion on a co-production: "in determining the amount of any FTC for each co-producer, the total amount of production expenditures would generally be allocated on a pro rata basis between the co-producers, in accordance with their respective interests in the production. Neither party will be able to claim a FTC in respect of another co-producer's production expenditures." If Company A is not permitted to claim tax credits, notwithstanding that Company B owns 50% of the production, Company B would not be entitled to claim costs paid by Company A. If Company A is not entitled to claim tax credits, you may want to consider whether it would be appropriate to allow a more generous allocation of ownership (and allocation of total costs of the production) than 50/50.
Please contact the writer at 957-9231 if we can be of further assistance.
Steve Tevlin
for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch