2014-0532801I7 film or video production services tax credit

Principal Issues: whether paragraphs (a) and (b) of the "eligible production corporation" definition are relevant in determining whether the activities of a corporation are primarily those of a film or video production services business for purposes of that definition; whether particular expenditures are considered to be part of a film or video production services business for purposes of the "eligible production corporation" definition

Position: no; question of fact

Reasons: application of the Act

Author: Friedlander, Lara G.
Section: 125.4, "eligible corporation production" definition in 125.5(1), 125.5(2)(d)

                                                                                                                                     November 10, 2014

      XXXXXXXXXX                                                                                                       HEADQUARTERS
                                                                                                                                     Income Tax Rulings
      Attention:  XXXXXXXXXX                                                                                      Directorate
                                                                                                                                     Lara Friedlander

                                                                                                                                     2014-053280

      Definition of “eligible production corporation”

This is in response to your memorandum of May 26, 2014 regarding the definition of “eligible production corporation” in subsection 125.5(1) of the Income Tax Act (the “Act”).

Facts

Prodco A provides film or video services for three different film or video productions.  The first production, Production AA, is accredited by the Canadian Audio-Visual Certification Office (“CAVCO”) as an accredited production and Prodco A has contracted directly with this production’s copyright owner to provide production services in respect of Production AA.  The second production, Production BB, is accredited by CAVCO as an accredited production.  Prodco A has not contracted directly with Production BB’s copyright owner but rather provides production services to Prodco B.  Prodco B has contracted directly with Production BB’s copyright owner.  The third production, Production CC, is not accredited by CAVCO as an accredited production as it is an excluded production.  Prodco A has contracted directly with Production CC’s copyright owner to provide production services for Production CC. 

Prodco B is claiming a film or video film production services tax credit for Production BB for production services it has provided as well as for the eligible production services provided by Prodco A.  No film or video production services tax credit is being claimed by any corporation in respect of Production CC.

Questions

1.    Are Prodco A’s activities pertaining to Production AA, Production BB and Production CC to be considered as those of a film or video production business or a film or video production services business for purposes of the definition of “eligible production corporation” in subsection 125.5(1) of the Act? When determining whether a corporation is an eligible production corporation, must the activities pertain to those for which the corporation either owns the copyright in an accredited production or has contracted directly with the owner of the copyright in an accredited production in order to be considered those of a film or video production business or a film or video production services business for purposes of the primarily business test?

2.    When considering expenditures as a basis for the primarily business test, are expenditures that are not production costs, including amounts in respect of advertising, marketing, promotion or market research, to be considered activities of a film or video production business or a film or video production services business?

Your Views

“Eligible production corporation” is defined in subsection 125.5(1) of the Act as follows (in relevant part):

“eligible production corporation”, in respect of an accredited production for a taxation year, means a corporation, the activities of which in the year in Canada are primarily the carrying on through a permanent establishment (as defined by regulation) in Canada of a film or video production business or a film or video production services business and that (emphasis added)

(a)   owns the copyright in the accredited production throughout the period during which the production is produced in Canada, or
(b)   has contracted directly with the owner of the copyright in the accredited production to provide production services in respect of the production, where the owner of the copyright is not an eligible production corporation in respect of the production,except a corporation that is, at any time in the year…

You are uncertain as to whether the words “and that” at the end of the preamble to the definition of “eligible production corporation” under subsection 125.5(1) of the Act implies that the primarily business test regarding the corporation’s activities must also consider paragraphs (a) and (b) when determining if a corporation’s activities are primarily in a film or video production business or a film or video production services business.  You are of the view that the two requirements found in this definition (the primarily business test and the copyright ownership test) must be met independently of each other.  Accordingly, Prodco A’s activities pertaining to production services relating to an accredited production for which another corporation is claiming the film or video production services credit could still be considered to be activities of a film or video production services business for Prodco A.

Our Comments

1.    Are Prodco A’s activities pertaining to Production AA, Production BB and Production CC to be considered as those of a film or video production business or a film or video production services business for purposes of the definition of “eligible production corporation” in subsection 125.5(1) of the Act?

You have indicated that Prodco’s activities pertaining to Production AA, Production BB and Production CC are all in the nature of the provision of production services.  Accordingly, we assume that all of these activities are those of a film or video production services business (carried on through a permanent establishment in Canada), and that your question focuses more on whether the status of a production as being accredited by CAVCO or whether Prodco has contracted directly with the copyright owner could impact the characterization of Prodco’s activities as being those of a film or video production services business for purposes of the “eligible production corporation” definition in subsection 125.5(1) of the Act.

We agree with your view that the two branches of the “eligible production corporation” test are distinct.  To illustrate the two branches of the test, see below. “Eligible production corporation”, in respect of an accredited production for a taxation year, means a corporation

(A)   the activities of which in the year in Canada are primarily the carrying on through a permanent establishment (as defined by regulation) in Canada of a film or video production business or a film or video production services business and
(B)   that
(a)   owns the copyright in the accredited production throughout the period during which the production is produced in Canada, or
(b)   has contracted directly with the owner of the copyright in the accredited production to provide production services in respect of the production, where the owner of the copyright is not an eligible production corporation in respect of the production, subject to certain exceptions.

In our view, the word “that” (at the beginning of the second branch of the test) refers to the corporation, and not the various businesses.  Accordingly, in our view, whether the production corporation provides services in respect of an accredited corporation, or whether it contracts directly with the copyright owner, is not relevant to the first branch of the test (i.e., the one labelled “A” above, which you have identified as the “primarily business” test).  These facts are relevant in the second branch of the test (i.e., the one labelled “B” above, which you have identified as the copyright ownership test) or the definition of “accredited production” in subsection 125.5(1) of the Act.

Applying this view to your question, Prodco A’s activities pertaining to each of Production AA, Production BB and Production CC would be considered to be film or video production services for purposes of the “primarily business test” in the definition of “eligible production corporation” in subsection 125.1(1).  With respect to the second part of the test (the copyright ownership test), this requirement would be met if Prodco A meets the requirements of (a) or (b) of the “eligible production corporation” in respect of the particular production (Production AA, Production BB or Production CC) in question.

2.    When determining whether a corporation is an eligible production corporation, must the activities pertain to those for which the corporation either owns the copyright in an accredited production or has contracted directly with the owner of the copyright in an accredited production in order to be considered those of a film or video production business or a film or video production services business for purposes of the primarily business test?

No.  The first part of the “eligible production corporation” test (i.e., the one labelled “A” above, which you have identified as the “primarily business” test) is independent of the requirements in paragraphs (a) and (b) of the “eligible production corporation” test (i.e., the one labelled as “B” above, which you have identified as the copyright ownership test).

3.    When considering expenditures as a basis for the primarily business test, are expenditures that are not production costs, including amounts in respect of advertising, marketing, promotion or market research, to be considered activities of a film or video production business or a film or video production services business?

Guide RC4385 (Film or Video Production Services Tax Credit Guide for Form T1177) states the following regarding the first branch of the eligible production corporation test:

To determine whether the activities of a corporation consist primarily of carrying on a business that is a film or video production business or a film or video production services business, all the facts surrounding each of the corporation's various activities must be reviewed.

The following are some of the factors that may be considered:

• the profits realized from each of the corporation's activities;
• the volume and value of the gross sales or transactions for each activity;
• the values of the assets devoted to each activity;
• the capital used in each of the corporation's activities; and
• the time employees, agents, or officers of the corporation spend on each activity.

These guidelines, however, do not address the scope of the activity to be examined, but rather address the determination of when a business is the “primary” business.

In Rulings document 2000-0025183 (XXXXXXXXXX, 2000), the following activities were not considered to detract from a conclusion that production services activities were the taxpayer’s primary business on the basis that they were provided in connection with production services:  XXXXXXXXXX.  Paragraph 125.5(2)(d) of the Act directly addresses the kinds of expenditures you have highlighted, but in relation to a different aspect of the film or video production services tax credit, namely the definition of “Canadian labour expenditure”.  That provision states that “for greater certainty, that definition does not apply to an amount that is not a production cost including an amount in respect of advertising, marketing, promotion, market research or an amount related in any way to another film or video production”.  Accordingly, we considered whether paragraph 125.5(2)(d) applies so that advertising and similar activities will be considered to be part of a business that is different from a “film or video production services business” for purposes of the “eligible production corporation” definition.

XXXXXXXXXX.  Whether such expenditures would be considered to be part of a production or video services business remains, ultimately, a question of fact.

We trust that these comments will be of assistance.

G. Moore
for Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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