Completing form T1131, Claiming a Canadian Film or a Video Production Tax Credit
Guide to Form T1131
The Guide RC4164, Canadian Film or Video Production Tax Credit, explains how to complete Form T1131 to claim a Canadian Film or Video Production Tax Credit (CPTC). Step by step instructions on how to complete Form T1131 start on page 9 of the guide.
Generally, Canadian co-producers determine at the beginning of the production their respective interest in the copyright of the production. According to the Income Tax Act, the CPTC 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.
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).
As stated in paragraph 8 of Interpretation Bulletin IT-285, the term "capital cost of property" generally means the full cost to the taxpayer of acquiring the property and includes:
- legal, accounting, engineering or other fees incurred to acquire the property; and
- in the case of a property a taxpayer manufactures for the taxpayer's own use, it includes material, labour and overhead costs reasonably attributable to the property, but nothing for any profit which might have been earned had the asset been sold.
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, videotapes, public relations, and other similar expenses) that is incurred during the production 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.
However, 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 qualified corporation or by any related corporation that is not directly related to the particular production.
Determination of "assistance"
Assistance is defined in subsection 125.4(1) of the Act, and it refers to 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.
The CPTC 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 CPTC 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 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 or, 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 CPTC 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-273R2, Government Assistance – General comments for general comments on the treatment of assistance received by a taxpayer.
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.
However, 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 as a labour 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.
Forms and publications
- Guide RC4164, Canadian Film or Video Production Tax Credit
- Form T1131, Canadian Film or Video Production Tax Credit
- Guide RC4385, Film or Video Production Services Tax Credit
- Form T1177, Film or Video Production Services Tax Credit
- Interpretation Bulletin IT-285, Capital Cost Allowance – General Comments
- Interpretation Bulletin IT-273, Government Assistance – General Comments
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