Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Are the productions in the various situations "excluded productions" as defined in subsection 1106(1) of the Regulations to the Income Tax Act?
Position: The productions in the situations 1 to 3 are not ""excluded productions" but are in situation 4.
Reasons: It depends on whether the ownership of the copyright in the production for the 25 year holding period and control of the initial licensing of commercial exploitation requirements are met.
June 2, 2011
Film Advisory Services Section Income Tax Rulings Directorate
Provincial Compliance Division Ontario Corporate Tax Division
Small and Medium Enterprises Directorate Nancy Shea-Farrow
Compliance Programs Branch 905-721-5099
Attention : Michel Cronier 2010-039013
Canadian Film or Video Production Tax Credit
This is in response to your e-mail that was sent on December 8, 2010 wherein you requested that the Income Tax Rulings Directorate respond to various situations as to whether the productions were "excluded productions" as defined in subsection 1106(1) of the Regulations (the "Regulations") to the Income Tax Act (the "Act") for each situation.
The following are the common assumptions for the hypothetical situations:
Corporation A is a "qualified corporation" pursuant to subsection 125.4(1) of the Act.
Corporation B is a "qualified corporation" pursuant to subsection 125.4(1) of the Act.
Corporation B is not related to Corporation A.
Newco is a wholly-owned subsidiary of Corporation A and is a "qualified corporation" pursuant to subsection 125.4(1) of the Act.
Corporation A claimed the Canadian Film or Video Production Tax Credit (CFVP) for various productions for its 2001 to 2009 taxation years.
The various productions met all of the requirements to claim the credits for each of the 2001 to 2009 taxation years for Corporation A (CAVCO certificates were issued, Corporation A is the exclusive worldwide copyright owner of the productions, etc.).
The production is not a treaty co-production as defined in subsection 1106(3) of the Regulations.
Corporation A controlled the initial licensing of commercial exploitation.
The following are the independent hypothetical situations and our response. The response assumes that all other conditions have been met and is focused primarily on subparagraph 1106(1)(a)(iii) of the definition of "excluded production" of the Regulations.
Situation 1:
In 2010, Corporation A transfers the ownership of the copyright of the various productions to its subsidiary, Newco.
Response:
An "excluded production" as defined in subsection 1106(1) of the Regulations is a film or video production of a particular corporation that is a prescribed taxable Canadian corporation and amongst other things exists where the production is not a treaty co-production, neither the particular corporation nor another prescribed taxable Canadian corporation related to the particular corporation is, except to the extent of an interest in the production held by a prescribed taxable Canadian corporation as a co-producer of the production or by a prescribed person, the exclusive worldwide copyright owner in the production for all commercial exploitation purposes for the 25-year period that begins at the earliest time after the production was completed that it is commercially exploitable, and controls the initial licensing of commercial exploitation.
A "qualified corporation" is defined in subsection 125.4(1) of the Act as a corporation that is throughout the taxation year a prescribed taxable Canadian corporation the activities of which are primarily the carrying on through a permanent establishment in Canada of a business that is a Canadian film or video production business. Corporation A and Newco are both qualified corporations and are therefore also prescribed taxable Canadian corporations.
Related persons are defined in subsection 251(2) of the Act. If one corporation controls the other corporation (subparagraph 251(2)(b)(i) of the Act) the two corporations are related.
A "subsidiary wholly-owned corporation" is defined in subsection 248(1) of the Act as a corporation where all the issued share capital of which (except director's qualifying shares) belongs to the corporation to which it is subsidiary.
Newco is a subsidiary wholly-owned corporation of Corporation A, therefore Corporation A controls Newco and Corporation A and Newco are therefore related. Together, Corporation A and Newco meet the ownership holding period requirement for the copyright in the productions. Corporation A controlled the initial licensing of commercial exploitation therefore the commercial exploitation requirement has been met.
Therefore, each production that Corporation A transferred the ownership of the copyright to Newco would not be an "excluded production".
Situation 2:
In 2010, Corporation B purchases all the shares of Corporation A.
Response:
Corporation A continues to be the exclusive worldwide copyright owner in each of the productions and it controlled the initial licensing of commercial exploitation. The purchase of all the shares of Corporation A by Corporation B which is a qualified corporation means that Corporation A is still a prescribed taxable Canadian corporation. Therefore, the purchase of all the shares of Corporation A by Corporation B does not render the productions to be "excluded productions".
Situation 3:
In 2010, Corporation A transfers the ownership of the copyright of the various productions to its subsidiary, Newco. Immediately following this transfer, Corporation B purchases all the shares of Corporation A.
Response:
The transfer of the exclusive worldwide copyright in the productions from Corporation A to Newco does not render the productions to be "excluded productions". Newco is a prescribed taxable Canadian corporation that is related to Corporation A and both the ownership holding period in the copyright and the control of the initial licensing of commercial exploitation have been met.
The subsequent purchase of Corporation A shares by Corporation B also does not render the productions to be "excluded productions". The purchase of all the shares of Corporation A by Corporation B which is a qualified corporation means that Corporation A is still a prescribed taxable Canadian corporation. Corporation A still controls Newco and they are therefore related. Together, Corporation A and Newco meet the ownership holding period requirement for the copyright in the productions. Corporation A controlled the initial licensing of commercial exploitation therefore the commercial exploitation requirement has been met.
Situation 4:
In 2010, Corporation A transfers the ownership of the copyright of the various productions to its subsidiary, Newco. Immediately following this transfer, 100% of the shares of Newco are sold to Corporation B.
Response:
Transfer of Ownership
The transfer of the exclusive worldwide copyright in the productions from Corporation A to Newco does not render the productions to be "excluded productions" since Newco is a prescribed taxable Canadian corporation that is related to Corporation A. The ownership requirement, that for a 25 year period, for the particular corporation (Corporation A) or a prescribed taxable Canadian corporation that is related (Newco) to the particular corporation (Corporation A) that begins at the earliest time after the production was completed that it is commercially exploitable and, the commercial exploitation, that the particular corporation (Corporation A) or a prescribed taxable Canadian corporation that is related (Newco) to the particular corporation (Corporation A) controls the initial licensing of commercial exploitation, are met. Together, Corporation A and Newco, as related corporations satisfy the ownership holding period for the copyright in the productions and the commercial exploitation.
Purchase of Shares
Subsequently when Corporation B purchased 100% of the shares of Newco, this transaction would render the productions to be "excluded productions". The purchase of all the shares of Newco by Corporation B which is a qualified corporation means that Newco is still a prescribed taxable Canadian corporation. Corporation B controls Newco and is therefore related to Newco. Corporation A no longer holds any of the shares of Newco and is therefore no longer related to Newco.
The ownership holding period of the copyright and the commercial exploitation requirements are no longer satisfied for Corporation A and Newco. The ownership requirement, that for a 25 year period for the particular corporation (Corporation A - no longer has ownership) or a prescribed taxable Canadian corporation that is related (Corporation A not related to Newco, the owner of the copyright) to the particular corporation (Corporation A) that begins at the earliest time after the production was completed that it is commercially exploitable, and the commercial exploitation, that the particular corporation (Corporation A controlled the initial licensing of commercial exploitation) or a prescribed taxable Canadian corporation that is related (Corporation A not related to Newco) to the particular corporation (Corporation A) controls the initial licensing of commercial exploitation, are not met. Corporation A is no longer related to Newco, and Newco has ownership of the copyright and Corporation A controlled the initial licensing of the commercial exploitation and owned the copyright beginning when the production was commercially exploitable and before it was transferred to Newco.
The ownership of the copyright and the commercial exploitation requirements are not satisfied for Newco and Corporation B. The ownership requirement, that for a 25 year period for the particular corporation (Newco has the ownership of the copyright) or a prescribed taxable Canadian corporation that is related (Corporation B) to the particular corporation (Newco) that begins at the earliest time after the production was completed that it is commercially exploitable, and the commercial exploitation, that the particular corporation (Newco did not control the initial licensing of commercial exploitation) or a prescribed taxable Canadian corporation that is related (Corporation B did not control initial licensing of commercial exploitation) to the particular corporation (Newco) controls the initial licensing of commercial exploitation, are not met. Together, Corporation B and Newco, as related corporations did not have exclusive ownership of the copyright for 25 years beginning when the production was commercially exploitable, it was Corporation A that had that right at the beginning, and Corporation A is no longer related to Newco. Neither Corporation B nor Newco controlled the initial licensing of commercial exploitation. These productions would therefore be rendered "excluded productions".
We hope that these comments will be of assistance to you.
Sharmini Ratnasingham
Manager
For Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
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