Appendix VI - Income Tax Act And (Draft) Regulations

Overview of the Legislation

Section 125.4 of the Act

125.4(1) Definitions
- assistance

- Canadian film or video production

- Canadian film or video production certificate

- investor

- labour expenditure

- qualified corporation

- qualified labour expenditure

- salary or wages

125.4(2) Rules governing labour expenditure of a corporation

125.4(3) Tax credit

125.4(4) Exception

125.4(5) When assistance received

125.4(6) Revocation of a certificate

Application

Section 125.4 of the Act applies to the 1995 and subsequent taxation years except for the definition "qualified corporation" in subsection 125.4(1) where in the case of a film or video production the principal photography of which began before July 1996, the words "are primarily" are replaced by "include".

Draft Regulations

1100(1)(m) Additional CCA for property in 1101(5k.1)

1100(2)(a)(iii) Application of half-year rule

1101 (5k.1) Depreciable property class regarding property that qualifies under

section 125.4 (Class 10(x) of Schedule II)

1106 Certificates Issued by Minister of Canadian Heritage

1106(1) Definitions

- Canadian

- Canadian government film agency

- excluded production

- producer

- remuneration

- treaty co-production

1106(2) Prescribed Taxable Canadian Corporation

1106(3) Canadian Film or Video Production

1106(4) Creative Services

1106(5) Lead Performer/Screenwriter

1106(6) Documentary Production

1106(7) Prescribed Person

Application

Proposed Regulation 1106 applies to the 1995 and subsequent taxation years except for the definition "excluded production" in subsection 1106(1) of the proposed Regulations where a Canadian film or video production certificate is obtained before 1997, the mention of "25-year period" is replaced by "5-year period".

Income Tax Act, Part I

Definitions

125.4(1) "The definitions in this subsection apply in this section.

"assistance" means an amount, other than an amount deemed under subsection (3) to have been paid, that would be included under paragraph 12(1)(x) in computing the income of a taxpayer for any taxation year if that paragraph were read without reference to subparagraphs (v) to (vii).

"Canadian film or video production" has the meaning assigned by regulation.

"Canadian film or video production certificate" means a certificate issued in respect of a production by the Minister of Canadian Heritage

  1. certifying that the production is a Canadian film or video production, and

  2. estimating amounts relevant for the purpose of determining the amount deemed under subsection (3) to have been paid in respect of the production.

"investor" means a person, other than a prescribed person, who is not actively engaged on a regular, continuous and substantial basis in a business carried on through a permanent establishment (as defined by regulation) in Canada that is a Canadian film or video production business.

"labour expenditure" of a corporation for a taxation year in respect of a property of the corporation that is a Canadian film or video production means, in the case of a corporation that is not a qualified corporation for the year, nil, and in the case of a corporation that is a qualified corporation for the year, subject to subsection (2), the total of the following amounts to the extent that they are reasonable in the circumstances and included in the cost or, in the case of depreciable property, the capital cost to the corporation of the property:

(a) the salary or wages directly attributable to the production that are incurred after 1994 and in the year, or the preceding taxation year, by the corporation for the stages of production of the property, from the final script stage to the end of the post-production stage, and paid by it in the year or within 60 days after the end of the year (other than amounts incurred in that preceding year that were paid within 60 days after the end of that preceding year),

(b) that portion of the remuneration (other than salary or wages and other than remuneration that relates to services rendered in the preceding taxation year and that was paid within 60 days after the end of that preceding year) that is directly attributable to the production of property, that relates to services rendered after 1994 and in the year, or that preceding year, to the corporation for the stages of production, from the final script stage to the end of the post-production stage, and that is paid by it in the year or within 60 days after the end of the year to

  1. an individual who is not an employee of the corporation, to the extent that the amount paid

    • is attributable to services personally rendered by the individual for the production of the property, or

    • is attributable to and does not exceed the salary or wages of the individual's employees for personally rendering services for the production of the property,

  2. another taxable Canadian corporation, to the extent that the amount paid is attributable to and does not exceed the salary or wages of the other corporation's employees for personally rendering services for the production of the property,

  3. another taxable Canadian corporation all the issued and outstanding shares of the capital stock of which (except directors' qualifying shares) belong to an individual and the activities of which consist principally of the provision of the individual's services, to the extent that the amount paid is attributable to services rendered personally by the individual for the production of the property, or

  4. a partnership that is carrying on business in Canada. to the extent that the amount paid

    • is attributable to services personally rendered by an individual who is a member of the partnership for the production of the property, or

    • is attributable to and does not exceed the salary or wages of the partnership's employees for personally rendering services for the production of the property, and

(c) where

  1. the corporation is a subsidiary wholly-owned corporation of another taxable Canadian corporation (in this section referred to as the "parent"), and

  2. the corporation and the parent have agreed that this paragraph apply in respect of the production,

the reimbursement made by the corporation in the year, or within 60 days after the end of the year, of an expenditure that was incurred by the parent in a particular taxation year of the parent in respect of that production and that would be included in the labour expenditure of the corporation in respect of the property for the particular taxation year because of paragraph (a) or (b) if

(iii) the corporation had such a particular taxation year, and

(iv) the expenditure were incurred by the corporation for the same purpose as it was by the parent and were paid at the same time and to the same person or partnership as it was by the parent.

"qualified corporation" for a taxation year means a corporation that is throughout the year a prescribed taxable Canadian corporation the activities of which in the year are primarily the carrying on through a permanent establishment (as defined by regulation) in Canada of a business that is a Canadian film or video production business." (In the case of a film or video production the principal photography of which began before July 1996, the words "are primarily" are replaced by "include".)

"qualified labour expenditure" "of a corporation for a taxation year in respect of a property of the corporation that is a Canadian film or video production means the lesser of

(a) the amount, if any, by which

(i) the total of

(A) the labour expenditure of the corporation for the year in respect of the production, and

(B) the amount by which the total of all amounts each of which is the labour expenditure of the corporation for a preceding taxation year in respect of the production exceeds the total of all amounts each of which is a qualified labour expenditure of the corporation in respect of the production for a preceding taxation year before the end of which the principal filming or taping of the production began

exceeds

(ii) where the corporation is a parent, the total of all amounts each of which is an amount that is the subject of an agreement in respect of the production referred to in paragraph (c) of the definition "labour expenditure" between the corporation and its wholly-owned corporation, and

(b) the amount determined by the formula

A - B

where

A is 60 per cent of the amount by which

(i) the cost or, in the case of depreciable property, the capital cost to the corporation of the production at the end of the year,

exceeds

(ii) the total of all amounts each of which is an amount of assistance in respect of that cost that, at the time of the filing of its return of income for the year, the corporation or any other person or partnership has received, is entitled to receive or can reasonably be expected to receive, that has not been repaid before that time pursuant to a legal obligation to do so (and that does not otherwise reduce that cost), and

B is the total of all amounts each of which is the qualified labour expenditure of the corporation in respect of the production for a preceding taxation year before the end of which the principal filming or taping of the production began.

"salary or wages" does not include an amount described in section 7 or any amount determined by reference to profits or revenues.

125.4(2) Rules governing labour expenditure of a corporation

(2) For the purpose of the definition "labour expenditure" in subsection (1),

(a) remuneration does not include remuneration determined by reference to profits or revenues; and

(b) services referred to in paragraph (b) of that definition that relate to the post-production stage of the production include only the services that are rendered at that stage by a person who performs the duties of animation cameraman, assistant colourist, assistant mixer, assistant sound-effects technician, boom operator, colourist, computer graphics designer, cutter, developing technician, director of post production, dubbing technician, encoding technician, inspection technician - clean up, mixer, optical effects technician, picture editor, printing technician, projectionist, recording technician, senior editor, sound editor, sound-effects technician, special effects editor, subtitle technician, timer, video-film recorder operator, videotape operator or by a person who performs a prescribed duty.

125.4(3) Tax credit

(3) Where

(a) a qualified corporation for a taxation year files with its return of income for the year (i) a Canadian film or video production certificate issued in respect of a Canadian film or video production of the corporation,

  1. a Canadian film or video production certificate issued in respect of a Canadian film or video production of the corporation,

  2. a prescribed form containing prescribed information, and

  3. each other document prescribed in respect of the production, and

(b) the principal filming or taping of the production began before the end of the year, the corporation is deemed to have paid, on the day referred to in paragraph 157(1)(b) on or before which the corporation would be required to pay the remainder of its tax payable under this Part for the year if such a remainder were payable, an amount on account of its tax payable under this Part for the year equal to 25 per cent of its qualified labour expenditure for the year in respect of the production.

125.4(4) Exception

(4) This section does not apply to a Canadian film or video production where an investor, or a partnership in which an investor has an interest, directly or indirectly, may deduct an amount in respect of the production in computing its income for any taxation year.

125.4(5) When assistance received

(5) For the purposes of this Act other than this section, and for greater certainty, the amount that a corporation is deemed under subsection (3) to have paid for a taxation year is assistance received by the corporation from a government immediately before the end of the year.

125.4(6) Revocation of a certificate

(6) A Canadian film or video production certificate in respect of a production may be revoked by the Minister of Canadian Heritage where

(a) an omission or incorrect statement was made for the purpose of obtaining the certificate, or

(b) the production is not a Canadian film or video production,

and, for the purpose of subparagraph (3)(a)(i), a certificate that has been revoked is deemed never to have been issued.

(2) Subsection (1) applies to the 1995 and subsequent taxation years."

12(1)(x) Inducement, reimbursement, etc. - "any amount (other than a prescribed amount) received by the taxpayer in the year, in the course of earning income from a business or property, from

  1. a person who pays the amount (in this paragraph referred to as the "payer") in the course of earning income from a business or property or in order to achieve a benefit or advantage for the payer or for persons with whom the payer does not deal at arm's length, or

  2. a government, municipality or other public authority where the amount can reasonably be considered to have been received

  3. as an inducement, whether as a grant, subsidy, forgivable loan, deduction from tax, allowance or any other form of inducement, or,"

  4. "as a reimbursement, contribution or allowance or as assistance, whether as a grant, subsidy, forgivable loan, deduction from tax, allowance or any other form of assistance, in respect of the cost of property or in respect of an outlay or expense to the extent that the amount"

  5. not applicable,

  6. not applicable,

  7. not applicable,

  8. "may not reasonably be considered to be a payment made in respect of the acquisition by the payer or the public authority of an interest in the taxpayer or the taxpayer's business or property,"[1]

Additional Allowance - Canadian Film and Video Production

1100(1)(m) "such additional amount as the taxpayer claims in respect of property for which a separate class is prescribed by subsection 1101(5k.1) not exceeding the lesser of

  1. the taxpayer's income for the year from the property, determined before making any deduction under this paragraph, and

  2. the undepreciated capital cost to the taxpayer of the property of that separate class at the end of the year (before making any deduction under this paragraph for the year);"

Applicable: To the 1995 and subsequent taxation years.

Schedule II, Class 10:

(w) "a certified production acquired after 1987 and before March 1996, or"

(x) "a Canadian film or video production."

Applicable: To the 1995 and subsequent taxation years.

Half-Year Rule:

The half-year rule applies to new Class 10(x), i.e. not exempted by Regulation 1100(2)(a):

(iii) "property included in paragraph (1)(v), paragraph (w) of Class 10 or any of paragraphs (a) to (c), (e) to (i), (k), (l) and (p) to (s) of Class 12."

Applicable: To property acquired after December 12, 1995.

Separate Class: Canadian Film or Video Production

1101(5k.1) "A separate class is hereby prescribed for all property of a corporation included in Class 10 in Schedule II because of paragraph (x) thereof that is property

  1. in respect of which the corporation is deemed under subsection 125.4(3) of the Act to have paid an amount, or

  2. acquired by the corporation from another corporation where

    • the other corporation acquired the property in circumstances to which paragraph (a) applied, and

    • the corporations were related to each other throughout the period that began when the other corporation acquired the property and ended when the other corporation disposed of the property to the corporation."

Applicable: To the 1995 and subsequent taxation years.

Certificates issued by Minister of Canadian Heritage

Definitions

1106.(1) "For the purposes of this section and paragraph (x) of Class 10 in Schedule II,

"Canadian" means a person that is

  1. a Canadian citizen as defined in the Citizenship Act,

  2. a permanent resident within the meaning assigned by the Immigration and Refugee Protection Act (2001), or

  3. a corporation that is Canadian-controlled, as determined for the purposes of sections 26 to 28 of the Investment Canada Act;

"Canadian government film agency" means a federal or provincial government agency the mandate of which is related to the provision of assistance to film productions in Canada;

"excluded production" means a film or video production or a prescribed taxable Canadian corporation

  1. in respect of which

    • the Minister of Canadian Heritage has not issued a certificate of completion, within 30 months after the end of the corporation's taxation year in which the production's principal photography began, certifying that the production was completed within two years after the end of the year,

    • where the production is not a treaty co-production, neither the corporation nor another prescribed taxable Canadian corporation related to the 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 (within the meaning assigned by subsection 1106(7)), the exclusive worldwide copyright owner in the production for all commercial exploitation purposes for the 25-year period that begins at the first time the production had been completed and is commercially exploitable,"
        (Where a Canadian film or video production certificate is obtained before 1997, the words "25-year period" are replaced by "5-year period".)

      • "controls the initial licensing of commercial exploitation, and

      • retains a share of revenues, that is acceptable to the Minister of Canadian Heritage, from the exploitation of the production in non-Canadian markets,

    • there is not an agreement in writing for consideration at the fair market value with to have the production shown in Canada within the two-year period that begins at the first time the production has been completed and is commercially exploitable, or

      • a corporation that is a Canadian and is a distributor of film or video productions, or

      • a corporation that holds a broadcasting license issued by the Canadian Radio-television and Telecommunications Commission for television markets,

    • a distribution is made in Canada within that two-year period by a person who is not a Canadian, or

  2. that is

    • news, current events or public affairs programing, or a programme that includes weather or market reports,

    • a talk show,

    • a production in respect of a game, questionnaire or contest (other than a production directed primarily at minors),

    • a sports event or activity,

    • a gala presentation or an awards show,

    • a production that solicits funds,

    • reality television,

    • pornography,

    • advertising,

    • a production produced primarily for industrial, corporate or institutional purposes,

    • a production, other than a documentary, all or substantially all of which consists of stock footage.

"producer" of a film or video production does not include a person unless the person is the individual

  1. who controls and is the central decision maker in respect of the production,

  2. who is directly responsible for the acquisition of the production story or screenplay and the development, creative and financial control and exploitation of the production, and

  3. who is identified in the production as being the producer of the production;

"remuneration" does not include an amount determined by reference to profits or revenues;

"treaty co-production" means a film or video production the production of which is contemplated in a co-production treaty entered into between Canada and another country.

Prescribed taxable Canadian Corporation

(2) For the purposes of section 125.4 of the Act and this section, "prescribed taxable Canadian corporation" means a taxable Canadian corporation that is a Canadian, other than a corporation that is

  1. controlled directly or indirectly in any manner whatever by one or more persons all or part of whose taxable income is exempt from tax under Part I of the Act; or

  2. a prescribed labour-sponsored venture capital corporation.

Canadian Film or Video Production

(3) For the purposes of section 125.4 of the Act, this Part and Schedule II, "Canadian film or video production" means a film or video production, other than an excluded production, of a prescribed taxable Canadian corporation and that is

  1. a treaty co-production, or

  2. a film or video production other than a production the certification of which has been revoked under subsection 125.4(6) of the Act by the Minister of Canadian Heritage.

    • at all times during the production of which the producer of which is a Canadian,

    • in respect of which the Minister of Canadian Heritage has allotted not less than six points in accordance with subsection (4),

    • in respect of which not less than 75 per cent of the total of all costs for services provided in respect of producing the production (other than excluded costs) was payable to, and in respect of services provided by individuals who are, Canadians, and for the purpose of this subparagraph, excluded costs are

      • costs determined by reference to the amount of income from the production,

      • remuneration payable to, or in respect of, the producer or individuals described in any of clauses (4)(a)(i)(A) to (H) and (ii)(A) to (F) and subparagraph 4(a)(iii),

      • amounts payable in respect of insurance, financing, brokerage, legal and accounting fees, and similar amounts, and

      • costs described in subparagraph (iv), and

    • in respect of which not less than 75 per cent of the total of all costs incurred for the post-production of the production, including laboratory work, sound re-recording, sound editing and picture editing (other than costs determined by reference to the amount of income from the production and remuneration payable to, or in respect of, the producer or individuals described in any of clauses (4)(a)(i)(A) to (H) and (ii)(A) to (F) and subparagraph 4(a)(iii)) was incurred in respect of services provided in Canada,

Creative Services

(4) For the purposes of subsection (3) and this subsection,

  1. there shall be allotted in the case of a film or video production

    • that is not an animation production,

      • for the director, two points,

      • for the principal screenwriter, two points,

      • for the lead performer for whose services the highest remuneration was payable, one point,

      • for the lead performer for whose services the second highest remuneration was payable, one point,

      • for the art director, one point,

      • for the director of photography, one point,

      • for the music composer, one point, and

      • for the picture editor, one point,

        if that person is an individual who is a Canadian,

    • that is an animation production,

      • for the director, one point,

      • for the lead voice for which the highest or second highest remuneration was payable, one point,

      • for the design supervisor, one point,

      • for the camera operator where the camera operation is done in Canada, one point,

      • for the music composer, one point, and

      • for the picture editor, one point,

        if that person is an individual who is a Canadian, and

    • that is an animation production, one point where both the principal screenwriter and storyboard supervisor are individuals who are Canadians; and

    • that is an animation production

      • for the place where the layout and background work is done, one point,

      • for the place where the key animation is done, one point,

      • for the place where the assistant animation and in-betweening is done, one point,

        if the place is in Canada;

  2. a production that is not an animation production is deemed not to be a Canadian film or video production unless there are allotted in respect of the production two points under clause (a)(i)(A) or (B) one point under clause (a)(i)(C) or (D); and

  3. an animation production is deemed not to be a Canadian film or video production unless there are allotted in respect of the production

    • one point under clause (a)(ii)(A) or subparagraph (a)(iii),

    • one point under clause (a)(ii)(B), and

    • one point under clause (a)(iv)(B).

Lead Performer/Screenwriter

(5) For the purposes of subsections (4) and (6),

  1. a lead performer in respect of a production is an actor or actress who has a leading role in the production having regard to the performer's remuneration, billing and time on screen;

  2. a lead voice in respect of an animation production is the voice of the individual who has a leading role in the production having regard to the length of time that the individual's voice is heard in the production and the individual's remuneration;

  3. the principal screenwriter of a production is not a Canadian unless

    • each individual involved in the preparation of the screenplay for the production is otherwise a Canadian, or

    • the principal screenwriter is an individual who otherwise is a Canadian and

      • the screenplay for the production is based upon a work authored by a Canadian, and

      • the work is published in Canada.

Documentary Production

(6) Notwithstanding subsection (4), a documentary production that is not an excluded production is deemed to be a Canadian film or video production if all creative positions in respect of the production are occupied by individuals who are Canadians.

Prescribed Person

(7) For the purpose of section 125.4 of the Act, "prescribed person" means

  1. a corporation that holds a television broadcasting licence issued by the Canadian Radio-television and Telecommunications Commission,

  2. a person to whom paragraph 149(1)(l) of the Act applies where the person has a fund which is used to finance Canadian film or video productions,

  3. a Canadian government film agency, or

  4. in respect of a film or video production, a non-resident person who does not carry on a business in Canada where the person's interest in the production is acquired to comply with the certificate requirements of a treaty co-production twinning arrangement."

Applicable: To the 1995 and subsequent tax years.[2]

Note:

  • [1] Disclaimer : The above legislation is not intended to be a substitute for the official government publications and is provided to production companies in a consolidated format for reference use only. CAVCO assumes no responsibility for the use of this legislation and suggests that users consult a qualified professional for advice regarding any application made in connection with this legislation. (Prepared November, 1996)
  • [2] Disclaimer: The above draft regulations are not intended to be a substitute for the official government publications and are provided to production companies in a consolidated format for reference use only. CAVCO assumes no responsibility for the use of these draft regulations and suggests that users consult a qualified professional for advice regarding any application made in connection with these draft regulations. (Prepared November, 1996)

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