44 97-1 J.F. Oulton (613) 995-1787
July 14, 1983
Dear XXXX
This is in reply to your letter dated May 19, 1983 in which you requested our opinion with respect to the following hypothetical situation:
An investor purchases an ownership interest in a feature film for a purchase price, 20% of which is payable in cash and the balance of which is payable upon delivery to the purchaser of a laboratory receipt letter evidencing that the film is ready for delivery in accordance with the terms of the purchase agreement, together with evidence that the film has received preliminary certification by the Minister of Communications as a certified feature production and approval by the Canadian Radio-television Telecommunications Commission as "Canadian" within the meaning of the Canadian Television Broadcasting Regulations. A bank letter of credit, issued to support the obligation to make payment of the balance of price, is payable upon delivery of the laboratory receipt letter and evidence of the other approvals mentioned. The vendor covenants that he will ensure that the film is completed in accordance with the budget and is ready for distribution by a specific date which is approximately one (1) year from the date of the purchase agreement. Similarly, the vendor agrees to ensure that the film is approved as a certified feature production by the Minister of Communications and that it will be assigned an appropriate Canadian program category number by the CRTC. Although it is expected by the parties that the film will be delivered by the required date and will receive the necessary approvals by the Minister of Communications and the CRTC, you indicated that it is possible that the vendor will not be able to comply with his covenants to this effect. In the event of a breach of these covenants, the purchaser will, presumably, be entitled to refuse to pay the balance of price and would likely be entitled to sue the vendor for cancellation of the contract and recovery of the cash down payment. Accordingly, it is your view that although the realization of the conditions attaching to the obligation to pay the balance of price is, from a practical point of view, uncertain as to time only, it is possible that such conditions may not be realized at all.
OPINION:
The opinion given below is based on the assumption that the investor would actually acquire an ownership interest in a film which is certified, such that the 20% cash paid would not be regarded as merely a deposit.
Since there is not an unconditional obligation to pay the balance of the purchase price until the conditions are in fact fulfilled, it is our opinion that the investor is not fully at risk for the entire purchase price when he enters into the purchase contract. In our opinion he must have paid at least 20% in cash and be unconditionally liable for no more than 80% of the purchase price of the film on which the CCA claim is based. We have noted your comments with respect to the 'Mandel' case. Although the Mandel case is distinguishable from the scenario presented, we do not feel, as you seem to suggest, that it is a question of the degree of uncertainty or whether it is "sufficiently certain" that there is an obligation to pay. It is our opinion that it must be absolutely certain that the investor has an obligation to pay the unpaid portion of the purchase price in order to make a CCA claim thereon. If the obligation is in any way conditional, we would argue that an obligation of this nature is a contingent liability and hence not allow a CCA claim on any such unpaid portion, along the lines set forth in the Mandel case. As a result, the investor would only be allowed a CCA claim to the extent of the cash paid. When the conditions are fulfilled by the vendor and the investor becomes unconditionally obligated on the balance of the purchase price, an addition to Class 12 may be made at such later time.
Only at such later time would we be concerned with the four year term described in paragraph 1104(2)(e) of the Regulations which defines certified films. You also asked for our view in the event such conditions are expressed as covenants of the vendor where it is our opinion that the conditions expressed as conditions precedent are fatal to the CCA claim. It is our understanding that where the conditions are expressed as convenants of the vendor, the investor would become fully obligated when he enters the purchase contract. Furthermore, in the event of breach of the contract, the investor would be entitled to sue for damages. Of course, where the investor is fully liable and therefore at risk for the entire purchase price when he enters the contract, it is our view that a CCA claim could be made based on the entire amount.
The foregoing comments are general in nature and hence are not meant to apply to any particular fact situation.
Yours truly, ORIGINAL SIGNED BY for Director Specialty Corporations Rulings Division Corporate Rulings Directorate Legislation Branch