5-911294
Dear Sirs:
Re: Revenue guarantee - certified production
We are writing in response to your letter of May 9, 1991, in which you requested our interpretation of the following hypothetical situation.
1. Partnership acquires a certified production as defined in Subsection, 1104(2) of the Income Tax Regulations ("Regulations") the first television episode of which will be delivered in September of 1991 and the last episode of which will be delivered in March of 1992. The acquisition is made pursuant to a contract made prior to the commencement of principal photography of the first episode.
2. Partnership appoints a bona fide film or tape distributor under a distribution agreement which provides that the partnership is entitled to receive a prescribed revenue guarantee (within the meaning of Section 7500 of the Regulations).
3. The revenue guarantee is payable in January, 1993.
4. No amounts are paid to the distributor by film users until 1993. This is in accordance with industry practice for the timing of payments.
You have requested our confirmation that in these circumstances the income of the partnership would include the revenue guarantee amount in 1993. You wish us to confirm that the Department would not seek to include any portion of the revenue guarantee amount in the computation of the income of the partnership for 1991 and 1992.
Our Comments
The question you are asking is primarily one of fact, and we are not able to provide a definite answer. We can however make the following general comments which may not in all circumstances apply to your particular situation.
Provided that it is industry practice to defer payment of the revenue guarantee and to defer payment of amounts by the film users to the distributor and by the distributor to the partnership for the period you have indicated, we are of the opinion that the Department would not seek to include any portion of the revenue guarantee in the computation of the income of the partnership, if it has not been paid.
We wish to point out that there could be a potential accelerated inclusion if the distributor receives revenue from the users of the film television production and does not pay such revenue to the partners a period of time that is longer than that common to the film or television industry. Such undue delay in payment of the revenues by the distributor to the partnership could result in an income inclusion in a year prior to the actual payment of the revenue. An income inclusion could also result if the payment of revenue by the film users to the distributor is not paid within a period conforming to the usual practice of the industry.
The foregoing opinions are not advance rulings and are not binding on the Department.
We trust you will find our comments helpful.
Yours truly,
for DirectorBilingual Services and Resource Industries DivisionRulings Directorate