File #992947 FILM TAX CREDIT - CALCULATION OF LABOUR

Principal Issues: Review draft directive which Audit intends to publish concerning administrative guidelines/positions to assist in the calculation of labour expenditures under the Canadian film or video production tax credit program.

Position: Comments provided on technical matters and no comments provided on administrative positions as these are not technical issues.

Author: ANELSO
Section: 125.4, 125.5

                                                                                        December 17, 1999

Mel Machado                                                                Partnerships Section
Manager                                                                        Allan Nelson
Financial Legislative Application                               (613) 443-7253
SR&ED Directorate

Attention: Kevin Gibson
                                                                                      992947

Canadian Film or Video Production Tax Credit (“FTC”)

We are writing in response to your memorandum dated November 3, 1999, wherein you asked for our comments concerning a draft of a directive you intend to publish. Your directive discusses administrative guidelines in calculating labour expenditures and Canadian labour expenditures for the purposes of the Canadian film or video production tax credit and the film or video production services tax credit, respectively.

Our comments are as follows and are set out under the same headings as those utilized in your draft.

Background

We agree with the general thrust of these comments. However, in order to be more consistent with the wording of the Act, you may wish to consider replacing this section with the following:

Labour expenditures in respect of a qualified corporation’s Canadian film or video production can be comprised of three components, set out in paragraphs (a), (b) and (c) of the labour expenditures definition, and is generally discussed below. These expenditures must be reasonable in the circumstances and must be included in the qualified corporation’s cost or capital cost of the production.

Paragraph (a) describes the first component, which is the total salary or wages directly attributable to the production. These must be incurred after 1994, in the taxation year or the preceding year, and must be for services rendered for stages of production from the final script stage to the end of the post-production stage. The salary and wages must be paid by the corporation in the year or within 60 days after the end of the year. Reference is made to the definition of the term “salary and wages” in subsection 248(1) of the Act and to additional rules concerning the definition of labour expenditure in subsection 125.4(2) of the Act.

Paragraph (b) describes the second component of labour expenditure, which is remuneration (other than salary and wages) that is directly attributable to the production. The remuneration must be for services rendered to the corporation after 1994, in the taxation year or the preceding year, and must be paid in the corporation's taxation year or within 60 days after the end of the taxation year. The services must be rendered for stages of production from the final script stage to the end of the post-production stage. Subparagraphs (i) to (iv) provide further details concerning limits and who the eligible payments must be made to (e.g., certain individuals, corporations or partnerships).

Remuneration of this type is subject to a “look-through” approach in determining the amount of a qualified corporation’s labour expenditures. Only the portion of the total remuneration paid by the qualified corporation to third parties that is attributable to services personally rendered by individuals for the production of the property will be included. This approach is intended to approximate what the labour expenditure would have been if the qualified corporation had directly employed the individuals.

Paragraph (c) describes the third component of labour expenditure, which involves the production corporation’s reimbursement of certain labour expenses previously paid by its taxable Canadian parent corporation in respect of the production. The two companies must have agreed that this provision will apply, and the reimbursement must be paid to the parent within 60 days of the end of the production corporation’s year end.

Policy

* accepting 65% of the labour portion of a third party invoice is an administrative decision and as such we can provide no interpretive comments thereon.

* at the end of the second last sentence in the first paragraph, you may want to delete “accordingly” and add “on some sort of reasonable basis, depending on the facts.”

* at the end of the last sentence in the first paragraph, you may want to add “that would reflect a more reasonable labour expenditure.”

* in the first sentence of the second paragraph, you may want to give some indication as to when an audit of a service provider would be carried out (e.g., where the qualified corporation’s claims appear unreasonable, etc.).

* in the third paragraph you may want to indicate that if in doubt unusual files can be referred to yourselves for guidance.

We hope the above will be of assistance to you.

If you have any additional queries on this matter please feel free to contact us.

Paul Lynch
for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch

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