Canadian Film or Video Production Tax Credit (FTC)

The CCRA's Perspective

September 2000

Table of Contents

• The role of the CCRA 3
• Filing your claim 4
• Processing your claim 4
• Speeding up the processing of your claim 5
• Information needed during an audit 6
• Scope of the audit 6
• Re-auditing the same claim 7
• Objecting to an unfavourable outcome 7
• Regulations 8
• Guide to Form T1131 8
• Technical issues 8
• • Copyright ownership 9
  • Production cost 9
  • Determination of "assistance" 11
  • Amounts to be included in an employee's "salary or wages" 13
  • Assignment of the film tax credit 13

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The role of the CCRA

The Canadian Film or Video Production Tax Credit (FTC) program is jointly administered by the Department of Canadian Heritage through the Canadian Audio-Visual Certification Office (CAVCO) and by Canada Customs and Revenue Agency (CCRA).

CAVCO is responsible for:

• certifying that the production is a Canadian film or video production (CFVP);
• estimating the qualified labour expenditure of a qualified corporation; and
• issuing certificates that allow Canadian producers to claim the FTC.

However, we at the CCRA verify the qualified labour expenditures used in determining the FTC. We are responsible for:

• providing assistance to claimants;
• interpreting and applying section 125.4 of the Income Tax Act (the Act) and all other provisions in the Act and the Income Tax Regulations (the Regulations) that may have an impact on the FTC;
• reviewing or auditing FTC claims within a reasonable time frame;
• assessing the corporation's T2 income tax return; and
• issuing timely refund cheques.

As co-administrator of this program, and in accordance with our mandate, we are responsible for ensuring that corporations claiming this tax credit are qualified corporations and that the amounts claimed comply with the Act and the Regulations.

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Filing your claim

As a qualified corporation, you have to submit a completed Form T1131, Claiming a Canadian Film or Video Production Tax Credit, to claim your credit. You also have to attach the certificate issued by CAVCO, or a copy, to your T2 Corporation Income Tax Return for the year. For each production for which you are claiming a film tax credit, you have to file a separate Form T1131. We consider each episode in a series to be a production. However, we will accept one form for episodes in a series that are certified CFVPs.

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Processing your claim

A properly completed form is important to limit the delays in processing your claim. If Form T1131 and the CAVCO certificate are attached to your corporation's income tax return, your claim is considered complete and the tax centre will immediately forward it to the contact person in your tax services office to be selected for review or audit. If Form T1131 or the CAVCO certificate is missing, your claim will be considered incomplete and processing will be delayed. We will write to you to obtain the missing documents and you will have 30 days to send the information to the tax services office. If we do not receive the requested information within 30 days, we may process the return without the FTC.

Our objective is to refund the FTC claim to production corporations within a reasonable time once the claim is complete. Generally, we will issue a refund cheque within 60 days where no audit is performed and within 120 days in cases where we do perform an audit.

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Speeding up the processing of your claim

To help us process your current-year claim as quickly as possible, here are a few tips:

• Use the latest version of Form T1131;
• File a complete claim. If your claim is not complete, the processing of your return will be delayed and your claim may be disallowed;
  • Each Form T1131 has to be completed to facilitate the review of your claim. The "cost of production" and the "labour expenditure" shown on Form T1131 should only include the reasonable amounts that have been paid for your share of the production. For example, if the laid-down cost of production represents only 60% of the total cost of production, you should only include as "cost of production" and "labour expenditure" the corresponding amounts. Furthermore, any assistance received, receivable, or expected to be received for the production (such as provincial tax credit, forgivable loans) reduce your cost of production.
  • It is also important to indicate as "labour expenditure" on Form T1131 only your corporation's share of the salary or wages as well as your corporation's share of each category of remuneration paid to individuals, taxable Canadian corporations (multi-owned and solely owned), and partnerships. If this information is not provided, we will have to request it from you. This may delay the processing of your claim.
• Place the completed Form T1131, along with the original or a copy of the Canadian film or video production certificate (Part A) issued by CAVCO, on top of your T2 return for quick identification;
• For subsequent years, place the completed Form T1131 and, where appropriate, the original or a copy of the completion certificate (Part B), as well as a copy of the audited statement of production costs and notes submitted to CAVCO, on top of the T2 return;
• Keep all financial documents to support your claim;
  • Ensure that invoices you receive from third parties indicate separately the labour component from any other charges such as rental fees, goods provided, travel or administrative expenses, administrative fees, mark-up, etc.. Work with your suppliers to make sure that this breakdown is shown on the invoice.
• File your claim with your tax centre. Filing it with a tax services office could cause processing delays; and
• Respond to our request for more information in a timely manner.

If you file a copy of the Part A or Part B certificate instead of the original, you must keep the original document that was issued by CAVCO for future reference. We may request the original document when your claim is audited.

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Information needed during an audit of your claim

The person who has been assigned your FTC claim will set up a meeting with your contact person and will ask for access to documents that support the claim. To help us in our work, we ask for the co-operation of everyone involved (i.e., the shareholder, accountant, tax specialist, and/or external auditor) in having the requested information available as quickly as possible.

While auditing your claim, we may ask for the following documents:

• the complete file supporting the application submitted to CAVCO;
• the minute book of the qualified corporation and any related corporations;
• the books and records as well as supporting documents of the corporation;
• agreements between the qualified corporation or any other related corporations and Telefilm Canada, Société de développement des entreprises culturelles (SODEC), financial institutions, and any other agency concerning financing and distribution of the production;
• agreements between actors, producers, directors, and other persons and the qualified corporation; and
• any other documents that may be needed to support your claim.

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Scope of the audit

We will normally limit our audit to the film tax credit claim(s) made by the qualified corporation for a given year. However, other points that could have an impact on the tax credit claimed by the corporation may also be audited. At the end of the audit, we will send a letter to your production corporation to let you know that the audit is completed and that, under normal circumstances, the film tax credit will not be audited again for that year.

Re-auditing the same film tax credit claim

We may conduct a second audit of a film tax credit claim that we have already audited or approved without an audit if any of the following situations occurs:

• an expenditure for salary or wages or other remuneration that was included in the production cost was not paid within 180 days after the end of the corporation's tax year;
• fraud or misrepresentation of fact is subsequently identified;
• the certificate issued by CAVCO is revoked; or
• unusual circumstances affecting the FTC arise after the end of the corporation's tax year.

We may also select the qualified corporation's T2 return for audit under our regular audit program. In that case, the FTC will not be re-audited unless one of the above-mentioned situations applies.

Objecting to an unfavourable outcome

Under the Act, you can generally have us reconsider a tax assessment by filing a notice of objection when:

• you are not satisfied with our explanation of your assessment;
• your request for an adjustment has been denied; or
• there is a dispute over interpretation of the law.

In such a situation, the Appeals Branch will do an independent review of the file. If you are still unsatisfied with the outcome, you can appeal to the Tax Court of Canada.

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Regulations

The Minister of Finance released the draft Regulations for the FTC program on December 12, 1995. However, the proposed Regulations have not yet been passed by Parliament.

Guide to Form T1131

The CCRA prepared and published a guide for Form T1131, which is available in all tax services offices. Guide RC4164, Claiming a Canadian Film or Video Production Tax Credit reflects the new version of Form T1131 and provides instructions for completing the form. Copy of the guide is available at http://www.ccra-adrc.gc.ca/E/pub/tg/rc4164/README.html on the Internet.

Technical issues

The following technical issues have been brought to our attention:

• copyright ownership;
• production cost;
• determination of assistance;
• amounts to be included in an employee's salary or wages; and
• assignment of the film tax credits.

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Copyright ownership

Generally, Canadian co-producers determine at the beginning of the production their respective interest in the copyright of the production. According to the Act, the FTC is based on the qualified labour expenditure of a qualified corporation. In certain situations, there may be a difference between the percentage of copyright ownership in the production and the percentage of the effective laid-down cost incurred by the qualified corporations for the production. We believe that, in normal circumstances, the qualified labour expenditure of a qualified corporation should only include the reasonable amounts that were paid for its share of the production, even though the percentage of costs may not correspond with the percentage of the copyright ownership in the production.

For example, Corporation A and Corporation B have a co-production where there is a 50/50 split of the copyright interest. In addition, there might be an agreement between the co-producers indicating that all cost overruns will be paid by Corporation A. Assuming that there are cost overruns, Corporation A would be entitled to include in its qualified labour expenditures all expenditures including the cost overruns.

This example shows that we would determine the eligibility of expenditures based on the amounts incurred by the co-producer rather than rely on the percentage ownership in the copyright interest.

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Production cost

Since the expression "production cost" is not defined in the Act, it should be calculated according to well-accepted business principles. Generally, where a provision of the Act provides for specific treatment or rules for calculating the amount of expenditure, that provision prevails. In the absence of such a provision, the Courts rely first, on rules of law such as those developed in the case law i.e., interpretive jurisprudence and if there are no rules of law on the point, they rely on interpretive aids such as well-accepted business principles which include but are not limited to generally accepted accounting principles (GAAP).

Paragraph 8 of Interpretation Bulletin IT-285R2 discusses the capital cost of a property as follows:

Generally, the production cost will include the amounts actually incurred to produce the property, such as the cost of materials, labour, and overhead expenses that are directly related to the production. As a result, any expenditure that is not directly related to the production cannot be included in the production cost.

The production cost includes a number of expenses, including -- but not limited to -- the following:

• development costs, including the purchase of all the rights to a novel, script, or idea;
• the cost of scripts, musical arrangements, and materials such as props and costumes;
• salary or wages and other remuneration of writers, executive and associate producers, directors, performers, musicians, technicians, and production personnel;
• employer's contributions to various social plans;
• the rental or other cost of a studio and of photographic, lighting, sound-recording, and other equipment;
• the cost of sets; and
• post-production expenses such as editorial labour, rental of editorial equipment, laboratory costs, sound effects, sound mixing, titles, and translation.

The production cost does not include expenses incurred for marketing, promoting, and distributing the production such as prints and ads. These types of costs are considered to be a cost of distribution, not production. However, unit publicity (press expenses, still photography, promotion, videotapes, public relations, and other similar expenses) is related to the production and can be included in the cost of production. Also, dubbing in both official languages and sub-titling for the hearing impaired are included in the cost of the production.

Furthermore, the production cost does not include amounts payable in the future (deferrals) which are considered to be contingent liabilities. A deferral is considered to be a contingent liability if the payment of the amount is dependent on a future event, generally the earning of revenue. However, if the deferred amount is a legitimate liability of the qualified corporation, the amount would be included in the production cost. A legitimate liability must not be dependent on a future event, and must be based on a contractual arrangement that is enforceable by the recipient.

Finally, "development costs" should not include an outlay or expense incurred by the production corporation or by any related corporation that is not directly related to the particular production.

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Determination of "assistance"

Assistance is defined in subsection 125.4(1) of the Act, and it refers to the definition of inducement and reimbursement in paragraph 12(1)(x) of the Act. Generally, assistance includes any amount received from public or private Canadian sources or from foreign sources, such as grants, subsidies, provincial tax credits, forgivable loans, deductions from tax, allowances, or any other form of inducement or assistance.

For example, a loan arrangement where the loan repayments are contingent on future revenues of the production is assistance that will reduce the cost of the production because it is considered to be a forgivable loan under paragraph 12(1)(x) of the Act.

The film tax credit is considered to be assistance received in the year for a qualified production. As a result, it will reduce the undepreciated capital cost of the Class 10(x) assets. However, when the cost of production is considered to be inventory, the assistance would be included in the income of the qualified corporation under paragraph 12(1)(x) of the Act. Finally, the film tax credit is not considered to be assistance for purposes of calculating the qualified labour expenditure of a corporation for a particular tax year.

The assistance to be taken into account is the assistance for the cost to the corporation of the production at the end of the year, that --at the time of the filing of the return of income of the corporation for the year-- the corporation or any other person or partnership has received, is entitled to receive, or can reasonably be expected to receive. As a result, only assistance received, entitled to be received, or expected to be received in a tax year to achieve certain milestones or production targets of that year should reduce the cost of the production for that year.

Also, we have to consider all the facts and documents involved in each situation to decide whether or not an amount is assistance. If it appears that a particular arrangement is structured to provide assistance while at the same time avoiding the application of the film tax credit provisions relating to assistance, we would have to decide whether the general anti-avoidance rules contained in the Act should be applied. One indication of such an arrangement would be if the facts do not indicate commercial reality, for example, or an overpayment for an equity interest.

Please refer to the current version of Interpretation Bulletin IT-273 for general comments on the treatment of assistance received by a taxpayer.

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Amounts to be included in an employee's "salary or wages"

For the purpose of calculating the labour expenditure of a qualified corporation, salary or wages means income from an office or employment but does not include stock options and any amounts determined by reference to profits or revenues. Thus, the salary or wages of an employee includes vacation pay, statutory holiday pay, sick leave pay, and any benefit taxable in the hands of the employee under section 6 of the Act.

In addition, salary or wages do not include the employer's contributions to:

• the Canada Pension Plan or the Quebec Pension Plan;
• Employment Insurance;
• the Worker's Compensation Board or the Commission de la santé et de la sécurité du travail du Québec; or
• any registered pension plan, dental care plan, or medical care or optical care plan for the employee.

Also, do not include in salary or wages an expenditure for extended vacation or extended sick leave of an employee. We consider that an extended leave is not directly related to the production because it is more than the usual annual leave earned by an employee.

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Assignment of the film tax credit

The FTC may be assigned to lenders as security for bridge financing of the CFVP. This is provided for under subsections 220(6) and (7) of the Act. The assignment of the FTC does not affect the CCRA's legal rights of set-off in its favour. In other words, we have no obligation towards the assignee, and the assignee's rights are subject to the legal rights of set-off in our favour. Even if an assignment has been made, we will continue to issue the refund cheque in the name of the qualified corporation.

If we receive a written request, we may send a refund cheque to an address other than your regular mailing address ("c/o" address). To arrange this, forward a letter requesting this with your income tax return, or directly to Corporation Services at your tax centre. When requesting this service, please ensure that you clearly state that only your refund cheque is to be sent to another address. Otherwise, all correspondence from us will be sent to the c/o address.