CAVCO Public Notice 2017-01

Gatineau, March 6, 2017

Platforms that can be used to meet the "shown in Canada" requirement of the Canadian Film or Video Production Tax Credit program

Section A: Preamble

Purpose

  1. This public notice outlines the circumstances under which Canadian audio-visual productions shown exclusively via online platforms can now meet the “shown in Canada” requirement of the Canadian Film or Video Production Tax Credit (CPTC) program. The final policy (see “Section C: Policy statement”) takes into account comments received on this issue in response to CAVCO Public Notice 2016-03. The policy also provides a coming-into-force date as of which it will be deemed to be in effect.

Background

  1. The CPTC is administered pursuant to section 125.4 of the Income Tax Act ("Act") and section 1106 of the Income Tax Regulations ("Regulations"). The eligibility requirement to have a production “shown in Canada” is found in subsection 1106(1) of the Regulations under the definition for “excluded production”:

    1106(1)

    "excluded production" means a film or video production, of a particular corporation that is a prescribed taxable Canadian corporation,

    (a) in respect of which

    (iv) there is not an agreement in writing, for consideration at fair market value, to have the production shown in Canada within the two-year period that begins at the earliest time after the production was completed that it is commercially exploitable,

    • (A) with a corporation that is a Canadian and is a distributor of film or video productions, or
    • (B) with a corporation that holds a broadcasting license issued by the Canadian Radio-television and Telecommunications Commission [CRTC] for television markets, or

    (v) distribution is made in Canada within the two-year period that begins at the earliest time after the production was completed that it is commercially exploitable by a person that is not a Canadian.

  2. For the purpose of the agreement with either a CRTC-licensed broadcaster or a Canadian distributor, having a production “shown in Canada” has previously been interpreted to mean that it must be broadcast on television (including licensed video-on-demand (VOD) services), shown theatrically, or distributed on DVD. Productions appearing on online platforms have also been eligible for the CPTC, but only if they were also made available to Canadian audiences in one of the aforementioned ways.

  3. In February 2016, the Canadian Audio-Visual Certification Office (CAVCO) issued Public Notice 2016-03, which sought written comments on a proposed new policy allowing for a more flexible interpretation of the “shown in Canada” requirement. Under this policy, productions shown exclusively on online platforms could also be eligible for the CPTC.

  4. CAVCO recognizes that Canadian audiences increasingly view linear audio-visual content on online platforms, and that it is important for the Government to support the growth and global success of the Canadian audio-visual production industry. As a result, and in light of the feedback received for Public Notice 2016-03, the “shown in Canada” requirement of the CPTC program will now be interpreted to allow a production being shown exclusively on an online platform to be eligible for the CPTC, provided that the platform meets the criteria outlined in the policy statement below, and that the production otherwise continues to meet all other program eligibility requirements.

Section B: Comments on CAVCO Public Notice 2016-03

  1. In response to the call for comments in Public Notice 2016-03, CAVCO received 106 submissions, including from production companies, industry associations, broadcasters, and other federal and provincial funders. All comments were taken into consideration in drafting the final policy. While the key principles of the policy as proposed in Public Notice 2016-03 remain unchanged, a number of sections have been rewritten based on the comments received, to add more detailed explanations or clarification of key elements of the policy where necessary.

  2. A number of issues raised by respondents are discussed directly below, while others have been addressed directly through the final policy statement in Section C.

Requiring an agreement with a Canadian distributor

  1. Some respondents suggested that when they are dealing with an online video service that is not a Canadian broadcaster-owned one, it should not be mandatory for a production company to have to work through a Canadian distributor; instead they should be able to contract directly with the service, without affecting a production’s eligibility for the CPTC.

  2. Removing the requirement for an agreement with a distributor would require a change to subparagraph 1106(1)(a)(iv) of the definition “excluded production” in the Regulations, which is beyond the scope of this consultation process. Therefore, in all cases where a production is being shown exclusively online, the production company will continue to need an agreement in writing with either a licensed Canadian broadcaster or a Canadian distributor to meet the requirement.

  3. With respect to the related suggestion that an online video service could itself be deemed to be a “distributor”, there are two issues to consider:

    • (1) Entities whose role is solely to provide an exhibition platform (for example, an online video service) are not in fact performing functions traditionally associated with those of a distributor.
    • (2) Under subparagraph (a)(v) of the “excluded production” definition in the Regulations, a distribution cannot be made in Canada by any entity that is not Canadian (see paragraph 2 of this public notice). Therefore, any effort to automatically characterize these services as distributors would make any production with which they are associated ineligible for the CPTC, by virtue of subparagraph (a)(v). In other words, if a non-Canadian online video service were in fact considered a distributor, then CPTC-supported productions could not be shown on the service for the first two years that they are exploitable.

For the purpose of this policy, restrict online services to those that are Canadian

  1. Canadian broadcasters were broadly supportive of allowing productions to be shown exclusively online, although many of them, as was also the case with two other industry groups, suggested that acceptable online services for the purpose of the policy should be restricted to those that are Canadian.

  2. While a production company must have an agreement with a Canadian broadcaster or distributor to have their production shown in Canada, there is no requirement under the Act or Regulations that an entity making productions available to the Canadian public (for example, an online service, a DVD rental or download service, or a retailer) be Canadian.

  3. In addition, in light of the fact that the tax credit was designed to support Canadian independent producers, and the Government’s broader policy objective of ensuring that Canadian-made content be made available as widely as possible to both domestic and global consumers, it is reasonable for CAVCO to adopt an interpretive approach giving producers the flexibility to make their productions available on the platform that makes the most sense for them creatively and from a business perspective.

Determining whether a production meets “fair market value” requirements or whether revenue-sharing agreements for a production are acceptable

  1. A few producers noted that online productions may more commonly involve non-traditional arrangements with respect to funding or the sharing of revenues, and that CAVCO should adopt a flexible approach in assessing these requirements.

  2. With respect to the “fair market value” as expressed under the terms of an agreement, CAVCO will defer to the mutually agreed-to terms as determined by the two parties involved, in accordance with the Canada Revenue Agency’s definition of “fair market value”. See paragraph 33 of Section C for more information.

  3. Similarly, CAVCO recognizes that revenue sharing arrangements (including the details of the calculation of gross revenues or net revenues for a production) may follow a number of different models. CAVCO’s responsibility is to ensure that any production (other than treaty co-productions) must meet the CPTC program requirements with respect to the retention of an “acceptable share of revenues” under subsection 125.4(1) of the Act. More information on this requirement can be found in the CPTC guidelines, available on CAVCO’s website.
Relevance of the new policy in the context of the broader “Canadian content in a digital world” consultations initiated by the Minister of Canadian Heritage in April 2016
  1. A few respondents noted that the Minister of Canadian Heritage had recently launched a series of consultations seeking input from Canadians on how to strengthen the “creation, discovery and export of Canadian content in a digital world”, and that this may have been a more appropriate forum for members of the industry to provide feedback on the CAVCO policy on online-only productions.

  2. While the broader consultation may touch on issues related to CAVCO’s new policy, it is intended to be a forward-looking initiative examining a wide range of issues related to the Government’s current cultural policy toolkit, including in the context of audio-visual productions and other cultural industries such as books, music or magazines. The policy that is the subject of this public notice is intended to respond to immediate audio-visual industry needs, and is focused on providing a modernized interpretation of a specific program requirement in the context of CAVCO’s current administration of the CPTC program on a day-to-day basis.

  3. As noted below (see section C, paragraph 47), the new policy will be subject to a regular and ongoing review by CAVCO, considering feedback from the industry directly or, if applicable, feedback received in the context of the Minister’s broader consultations.

Submitting separate applications for web-based productions related to television productions

  1. Some respondents suggested that applicants should be allowed to apply for the certification of web-based series as part of the same application being submitted for a related television series. However, due to the likelihood of differences between the two projects (for example, their titles and distributor or broadcaster agreements) as well as the Department’s use of aggregated production data for statistical, reporting and long-term policy purposes, CAVCO’s position as outlined in Public Notice 2016-03 does not change under the final version of this policy.

  2. For clarity, the total administrative fee payable to CAVCO for these separate applications would be the same as for an application combining both projects, as the fee is based on production costs. In addition, recent improvements to CAVCO’s online eSubmission application system now allow applicants to more easily use or copy information that is common to more than one application. See CAVCO Public Notice 2016-04 for more information.

Section C: Policy statement

General

  1. For an audio-visual production to be eligible for certification under the CPTC program, there must be an agreement in writing with either a CRTC-licensed broadcaster or a Canadian distributor to have the production shown in Canada within the first two years of it being completed and becoming available for commercial exploitation. This commitment, often referred to as the "two-year clause", is found in the Regulations and does not change pursuant to this policy.

  2. A production is considered to be “shown in Canada” by being broadcast on television (for example, through conventional, specialty or pay television services, or licensed VOD services), shown in a movie theatre, distributed on DVD, or being made available on an online platform meeting the criteria outlined below in paragraph 38. The objective of the “shown in Canada” requirement is to ensure that Canadians have a legitimate opportunity to view CPTC-supported productions.

  3. A production must be a linear, non-interactive "film or video production" to be eligible for CPTC certification. In other words, it should be possible for a given production to be shown on any of the platforms set out in the previous paragraph.

  4. For clarity, an interactive project requiring some form of viewer intervention to progress the storyline will not be eligible.Footnote 1 Websites, games, podcasts, video blogs, apps, and any similar products that are not “film or video productions” will therefore continue to be ineligible for CPTC certification.

  5. In cases where there is more than one final version of a production, one of which is interactive and one of which is linear and non-interactive, only the linear production is eligible for the CPTC. Costs associated exclusively with an ineligible version of the project need to be removed from all budget and financing documents submitted to CAVCO as part of an application.

Revised interpretation of subparagraph (iv) of the definition “excluded production”

  1. Subparagraph (iv) of the definition “excluded production” in subsection 1106(1) of the Regulations will now be interpreted as follows:

1106(1)(a)(iv)(B) – CRTC-licensed broadcaster
  1. A production can be shown on any platform (for example, TV, VOD, an online service) offered by a CRTC-licensed broadcaster, if the production company has an agreement in writing, for consideration at fair market value, from that broadcaster to show the production in Canada within two years of the production being completed and becoming commercially exploitable.

  2. For greater clarity, an online service of a CRTC-licensed broadcaster is an acceptable platform for the purpose of the previous paragraph, provided that the agreement to have a production shown is directly with the broadcaster.

1106(1)(a)(iv)(A) – Canadian distributor
  1. A production can be shown on any platform – for example, TV, VOD, theatres, DVD, or an acceptable online video service – if the production company has an agreement in writing, for consideration at fair market value, with a Canadian distributor to have the production shown in Canada within two years of the production being completed and becoming commercially exploitable.

  2. It is important to note that for the purposes of the Regulations, a distributor is not seen as the entity that actually "shows" a production. A distributor functions as an intermediary between the production company and the entity that ultimately makes the production available to audiences, and is responsible for overseeing more broadly all aspects of a production’s exploitation, including marketing and promotion, setting release dates, entering into licence agreements, creating sub-distribution agreements where necessary, overseeing pricing, etc.

  3. For all productions being shown exclusively on an online platform, the CPTC applicant must in all cases provide its agreement with the Canadian distributor as well as the duly executed exhibition agreement between the distributor and the online service showing the production. For clarity, it is not sufficient to submit a website link to a production, in lieu of providing an exhibition agreement.

Fair market value

  1. In determining whether a given agreement is for “fair market value”, CAVCO follows the general principle outlined by the Canada Revenue Agency, in a Summary Policy dated October 25, 2002 (CSP-F02) defining “fair market value” as “the highest price, expressed in dollars, that a property would bring in an open and unrestricted market, between a willing buyer and a willing seller who are both knowledgeable, informed, and prudent, and who are acting independently of each other.”

 Distribution in Canada by a non-Canadian entity

  1. Under subparagraph (a)(v) of the definition “excluded production” in subsection 1106(1) of the Regulations, a distribution cannot be made in Canada by a non-Canadian entity during the 2-year period beginning when the production is completed and commercially exploitable.

  2. An online service can be non-Canadian for the purpose of this policy where it is exclusively performing the role of “showing” the production. Where, based on CAVCO’s examination of the distribution and exhibition agreements for a given production, the online service also, or alternatively, appears to have been granted rights in line with the traditional functions of a distributor (see paragraph 31), this may be considered a distribution by a non-Canadian.

  3. In cases where a production company is working with a Canadian distributor, the exhibition agreement (i.e., the agreement to “show” their production) must be directly between the Canadian distributor and the online service. In other words, the involvement of a non-Canadian distributor as an intermediary by way of a sub-distribution agreement will be considered a distribution by a non-Canadian.

    Acceptable:
    Production Company CDN Distributor Online service

    Not Acceptable:
    Production Company CDN Distributor Non-CDN Sub-distributor Online service

Requirements for an online service being used for the purpose of this policy

  1. As noted in paragraphs 28-29, an online service of a CRTC-licensed broadcaster can be used for the purpose of this policy, provided that the agreement to have a production shown is directly with the broadcaster.

  2. In all other cases where a production is being exclusively shown on an online video service, the service must:

    • be an online video service carrying other content pre-screened or pre-qualified by either (a) the online service or (b) the distributor, under an arrangement with the online serviceFootnote 2.
    • be readily accessible to Canadians in Canada; and
    • have Canada as a part of its target audience (i.e., be a service where Canadians would likely look for linear audio-visual content, as opposed to a service primarily intended for foreign territories).
  3. CAVCO will review online video services on a case-by-case basis to determine whether they meet the criteria above. Following its review of the relevant broadcast, distribution and online exhibition agreements submitted with an application, CAVCO will contact the applicant should it require any further information to verify that an online service meets the requirements of this policy.

  4. CAVCO will compile a list of acceptable online services on an ongoing basis. This list will be made available on CAVCO’s website, but will be subject to frequent review given the pace of evolution of online video services.

  5. For the time being, clients may contact CAVCO to verify the status of a given online service, or for more information on obtaining preliminary approval of a service, prior to submitting an application for a production.

Credits for online-only productions

  1. Given that some web-based series do not include on-screen credits in every episode, CAVCO requests that at least one of the episodes submitted with an application have credits, or that CAVCO be provided with a link to where the full credits for all episodes are publicly accessible.

Related projects on different platforms

  1. If a production is being shown on a traditional platform, and a related production (for example, based on the same set of characters or themes) with completely unique audio-visual content is being shown on an online platform (for example, television episodes, and related online episodes in no way duplicating the content shown on television), the content being shown on each platform needs to be certified separately. Production companies must therefore submit separate applications to CAVCO for each platform – each with a distinct budget. For clarity, there must not be any duplication of production costs in these separate applications.

Providing a copy of the production with a Part A CPTC Application

  1. For any production being shown exclusively on an online platform, applicants must provide a copy of the production (at least one episode, where an application is in respect of a series) with their Part A application; this can be a rough cut of the production if this is all that is available at the time the application is submitted. The requirement to provide a copy of the production at this time allows CAVCO to ensure that the production itself is eligible and that there are no obvious issues that could lead to the revocation of a certificate at the Part B application review stage.

  2. Note that applicants must continue to include a final copy of the production (three representative episodes for applications in respect of a series) as part of their Part B application for the production. Since each episode is certified individually, CAVCO reserves the right to request more episodes at any stage of analysis.

Submitting productions on DVD or USB flash drive

  1. Effective immediately, CAVCO will accept the submission of productions on USB flash drives or on DVDs. If you are submitting a USB flash drive, please ensure that the case file number is clearly marked – with a sticker or some other permanent marking – on the outside of the drive. If you are submitting copies of more than one production (i.e., productions with different case file numbers), they must be on separate USB flash drives or DVDs. Episodes of a series can be on the same device.

Policy review

  1. This new policy and the details of its implementation will be reviewed by CAVCO on a regular and ongoing basis. Since this policy does not involve any modifications to the Regulations, it will be possible to make future updates to it quickly (provided they are within the scope of the Regulations), if it becomes clear that the policy is not functioning as intended, or if changes in technology or consumer behaviour render any of the policy’s provisions obsolete.

Coming into force

  1. This policy is effective as of the date of publication. It will apply to any applications currently under review and to new applications received after this date.

  2. Clients with questions about this public notice can send them to CAVCO by email (PCH.bcpac-cavco.PCH@canada.ca) or call CAVCO toll-free at 1-888-433-2200 (Teletypewriter toll-free: 1-888-997-3123).

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