Canadian Film or Video Production Tax Credit (CPTC) Guidelines - Qualified labour expenditure

The determination of the qualified labour expenditure is done in two steps: 1) the determination of the eligible cost of production and 2) the computation of the labour expenditure.

1. Eligible cost of production

The Canadian Film or Video Production Tax Credit may not exceed 15 per cent (12 per cent before November 14, 2003) of the cost of production after deduction of any assistance. Production costs are also limited to those amounts which have been incurred in respect of the property owned by the corporation. Ownership may be shared in cases where there is a Canadian co-production, a treaty co-production, or through an investment by a prescribed person or another qualified production corporation. Where the ownership of a production is shared among Canadian co-producers, each production corporation will calculate its production costs and labour expenditures based on their percentage of ownership in the production.

Assistance means any financial assistance from any source, including grants, subsidies, provincial tax credits, forgivable loans, contributions, services or certain advances and any other similar forms of assistance. For the purpose of calculating the estimates, deferrals are not included in the eligible cost of production. Assistance is defined in paragraph 12(1)(x) of the Act.

Since November 14, 2003, all public investment will be treated as assistance in the calculation of the tax credit for all productions utilizing the 60 per cent cap.

Given that any assistance received or to be received has an impact on the estimate of eligible expenses and the tax credit to be received, CAVCO will not issue a Canadian film or video production certificate (Part A) until all the components of the financing plan are in place and until it has received copies of all financing agreements. The producer is required to report any assistance that is known or anticipated at the time of the application. The Canada Revenue Agency has the responsibility to determine whether an amount received by the corporation represents assistance that should reduce the tax credit to which it is entitled. Please note that the Act provides for the repayment of assistance under certain conditions21.

2. Labour expenditures

The eligible labour expenditures of a corporation in respect of a Canadian film or video production must meet four criteria:

  1. be reasonable in the circumstances,

  2. included in the cost or, in the case of depreciable property, the capital cost to the corporation, of the property,

  3. incurred for the stages of production of the property from the production commencement time to the end of the post-production stage, and iv)

  4. directly attributable to the production of the property.22

CAVCO will provide an estimate of the total labour expenditure of a production. However, only the labour expenditures incurred after 1994 and in the taxation year, or the preceding taxation year, and paid by the corporation in the year or within 60 days after the end of the year, will qualify as labour expenditures for a given year when applying to the Canada Revenue Agency for the tax credit.

The labour expenditure of a corporation is the total of three categories:

  1. salary or wages;
  2. portion of the remuneration, other than salary or wages;
  3. reimbursement by a wholly-owned corporation to its parent.

The labour expenditure of a corporation which is not a qualified corporation is nil.

  1. Salary or wages.

    The salaries or wages must be directly attributable to the production and incurred and paid by the corporation for the stages of production of the property, from production commencement time to the end of the postproduction stage. Salaries or wages paid to non-Canadian citizens are no longer eligible unless they are residents of Canada. Salaries or wages paid to Canadian citizens, whether they are residents of Canada or not, are eligible. Salary and wages are defined in section 248 of the Act. Only benefits that are taxable in the employees' hands would qualify (e.g. 4 per cent vacation, RRSP's but not pension plans). Producers may consult representatives of the Canada Revenue Agency, Audit Directorate, with respect to this matter.

  2. Remuneration (other than salary or wages)

    The portion of the remuneration, other than salary or wages, is considered to be a labour expenditure if it is directly attributable to the production of the property and is paid to:

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

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

      2. is attributable to and does not exceed the salary and wages of the individual's employees for personally rendering services for the production of the property.
        If the payment to these non-employees includes a non-labour component (e.g. goods provided by the service provider, profit margin or the employer's share of government deductions), this portion does not form part of the remuneration. Only the labour component is eligible for the calculation of the labour expenditure.
    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.

      As discussed above, only the labour portion of the invoice sent to the production company, net of any profit margin, materials or the employer's share of government deductions, may be included as a labour expenditure. If an exact amount for net labour expenditures is not known, CAVCO will accept 65 per cent of the invoice as being a reasonable estimate of the labour expenditure directly attributable to the production subject to the Canada Revenue Agency's analysis of particular circumstances. Technically, the salary or wages must be paid to the corporation's employees. The corporation must be Canadian and taxable. Please note that some Canadian broadcasters are not taxable corporations (e.g. Radio-Québec, TVOntario, Knowledge Network, SCN).

    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.

      If the recipient corporation meets all of these criteria, then the whole remuneration qualifies as a labour expenditure.

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

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

      2. 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.

    5. Reimbursement by a wholly-owned corporation to its parent

      Where

      1. a production corporation is a subsidiary wholly-owned corporation of another taxable Canadian corporation (parent), and

      2. the corporation and the parent have agreed (by agreement23) that this paragraph applies 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 the 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) above if:

        1. the corporation had had such a particular taxation year, and

        2. 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,

          is an eligible labour expenditure.

          If all the criteria listed in c) above are not met, payments to the parent company will become payments to another taxable Canadian corporation (as described under (b)(ii) above). Consequently, only the labour expenditure with respect to the salary or wages of the parent corporation's employees will qualify. The labour expenditure that has been paid to a subcontractor will not qualify.

The term remuneration includes salaries, wages, fees and other taxable benefits. Thus, per diems, travel and living expenses, car rentals, etc. should not be included as labour expenditures unless they have been included in the income of the recipient as a taxable benefit. Share option benefits and amounts determined by reference to profits or revenues are excluded from the concept of "salary or wages".

3. Labour expenditure during post-production

The Act provides a specific rule governing labour expenditures of a corporation incurred during the post-production stage. The following list of services applies only when the labour expenditure is paid to another corporation. When the postproduction is done in-house, payments are made in the form of salary or wages as in a) above. When labour expenditures are paid to another taxable Canadian corporation (see (b) above), producers may only include those services that are rendered by a person who performs a function during post-production that is directly attributable to the production of the property.

In order to help producers estimate post-production labour expenditures at the Part A stage, a scale is provided in these guidelines (Appendix II), for reference purposes only. Producers should request that post-production service entities break down the labour component of their invoices, as this information may be requested by the Canada Revenue Agency's auditors.

Example

Director's fees will fall into one of the previously defined categories, depending on the manner in which they are paid:

  1. if a salary is paid directly to an individual director (excluding a foreign citizen who is not a resident of Canada), then the salary would be a labour expenditure, in accordance with a) above;

  2. if the remuneration is paid to another taxable Canadian corporation which provided the services of the director, then the salary or wages attributable, net of profit and employer's charges, to the production may be included, in accordance with b)(ii) above;

  3. if the remuneration is paid to another taxable Canadian corporation which is wholly owned by the director and which solely provided the services of the director, then the whole remuneration may be included, in accordance with b)(iii) above;

  4. if the remuneration is paid to a non-Canadian corporation which provided the services of the director, even if the latter is Canadian, the remuneration does not meet any of the criteria listed above, and hence is deemed ineligible.

4. Determination of the qualified labour expenditure

CAVCO provides estimates of the appropriate amounts for determining the qualified labour expenditures for the purposes of calculating the tax credit for a given production. The authority to confirm these estimates lies with the Canada Revenue Agency.

Producers may estimate the qualified labour expenditure for a particular production based on the lesser of the net labour expenditure and the eligible production cost multiplied by 60 per cent. The qualified labour expenditure must then be multiplied by 25 per cent in order to calculate the tax credit. Therefore, the tax credit may not exceed 15 per cent of the cost of production, net of assistance.

Notes

21 Subparagraph 125.4(1)(b)(ii) of the Act, under the definition of "Qualified Labour Expenditure".
22 Subsection 125.4(1) of the Act under the definition of "Labour Expenditure".
23 Unlike the English version, the French version of the Act mentions "a conclu une convention" (an agreement has been reached).

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