Application Policy


Purpose

These guidelines were developed to provide stakeholders in the film, video and television industry with guidance regarding the treatment of amounts received in respect of a production. It cancels and replaces Application Policy FAS 2008-01 – Bona Fide Loan.

Application

These guidelines are applied by the Canada Revenue Agency (CRA) when auditing the qualified labour expenditure for the purposes of the Canadian Film or Video Production Tax Credit (CPTC) and the qualified Canadian labour expenditure for the purposes of the Film or Video Production Services Tax Credit (PSTC). The guidelines may also apply to other similar provincial tax credits that are administered by the CRA. Where provincial tax credit legislation differs from the federal legislation, the provincial legislation will apply.

Reference

  • Definition of “assistance” in subsections 125.4(1) and 125.5(1) of the Income Tax Act
  • Paragraph 12(1)(x) of the Act
  • Definition of “qualified labour expenditure” in subsection 125.4(1) of the Act
  • Definition of “qualified Canadian labour expenditure” in subsection 125.5(1) of the Act
  • Similar provincial legislative provisions

Discussion and Guidelines

Calculation of the CPTC and the PSTC

1. The refundable CPTC and PSTC are based on a percentage of certain eligible labour expenditures. The requirements to qualify as an eligible labour expenditure for the purposes of these tax credits are specified in sections 125.4 and 125.5 of the Act.

2. The CPTC is a refundable tax credit equal to 25% of a corporation’s “qualified labour expenditure” (QLE). However, the QLE must not exceed 60% of the cost of the production, net of any assistance, at the end of the tax year.

3. The PSTC is a refundable tax credit equal to 16% of a corporation’s “qualified Canadian labour expenditure” (QCLE). The QCLE is not capped. However, assistance must be deducted when calculating a corporation’s QCLE.

Definition of “corporation”

4. For simplicity, the use of the term “corporation” throughout this document refers to a “qualified corporation” as defined in subsection 125.4(1) of the Act for the purposes of the CPTC and an “eligible production corporation” as defined in subsection 125.5(1) of the Act for the purposes of the PSTC.

Overview of assistance

5. An amount of assistance includes any government or non-government funding that a corporation has received, is entitled to receive or can reasonably be expected to receive from Canadian or foreign sources. In accordance with subparagraph 12(1)(x)(iii) of the Act, this includes any amount received as an inducement, whether as a grant, subsidy, forgivable loan, deduction from tax, allowance or any other form of inducement, and in accordance with subparagraph 12(1)(x)(iv) of the Act, this includes a refund, reimbursement, contribution, or allowance, whether as a grant, subsidy, forgivable loan, deduction from tax, allowance or any other form of assistance.

The information that follows will provide guidance in determining whether or not these amounts are considered assistance for purposes of the CPTC or PSTC.

6. When paid by a government, municipality, or other public authority, these amounts are usually considered to be assistance for the purposes of calculating the CPTC. Such amounts are usually also considered to be assistance for the purposes of calculating the PSTC unless they were paid to acquire an interest in the corporation or the corporation’s business or property (for example, an equity investment by Telefilm Canada).

A government means a federal, provincial or foreign government. A public authority generally refers to an entity which:

  • has a duty to the public;
  • is subject to a significant degree of governmental control; and
  • uses its profits for the benefit of the public.

7. When paid by a person or partnership, these amounts are usually considered to be assistance for the purposes of calculating the CPTC and the PSTC, if:

  • the person or partnership paid the amounts in the course of earning income from a business or property; or
  • the person or partnership paid the amounts in order to achieve a benefit or advantage for itself or for persons with whom the person or partnership does not deal at arm’s length.

However, when paid by such a person or partnership in order to acquire an interest in the corporation or the corporation’s business or property, these amounts are not considered to be assistance for the purposes of calculating the CPTC or the PSTC.

8. Amounts might also be considered to be assistance for the purposes of calculating the CPTC or the PSTC when they are paid indirectly. When a person or partnership pays amounts to a corporation, these amounts are usually considered to be assistance if it is reasonable to conclude that the person or partnership would not have paid the amounts if the person or partnership had not itself received amounts from a government, municipality, or public authority, or from a payer under the circumstances described in paragraph 7 above. For example, an individual pays an amount to a corporation that would ordinarily not be considered to be assistance. However, if it is reasonable to conclude that the individual would not have paid this amount had he not received a grant from a government (i.e., one that would have been considered assistance had it been paid directly to the corporation), the amount paid by the individual would be considered to be assistance.

However, when such amounts are paid indirectly in order to acquire an interest in the corporation or the corporation’s business or property, they are not considered to be assistance for the purposes of calculating the PSTC (although they would be considered to be assistance for the purposes of calculating the CPTC).

9. When calculating the CPTC, a corporation must only deduct an amount of assistance if it relates to the allowable production costs. Similarly, when calculating the PSTC, a corporation must only deduct an amount of assistance if it relates to its allowable Canadian labour expenditures.

10. The amount of assistance to be deducted in calculating the corporation’s CPTC or PSTC for a tax year excludes any repayments made before the corporation files its T2 corporation income tax return for the year, but only to the extent that the repayments were made pursuant to a legal obligation.

11. If the corporation repays an amount of assistance pursuant to a legal obligation in a period subsequent to the tax year in which it was received, it may file a CPTC or PSTC claim for the year in which the repayment was made if the reduction in the amount of assistance results in an additional amount of CPTC or PSTC.

12. Note that the CPTC is not considered to be assistance for the purposes of calculating the CPTC itself, and the same principle applies when calculating the PSTC.

13. Appendix A contains a flowchart to help in determining if an amount is considered to be assistance when calculating the CPTC. Appendix B contains a similar flowchart for the PSTC.

Forms of financing

14. A corporation that carries on a film or video production business or film or video production services business must usually obtain financing to either produce a Canadian film or video production or provide its production services. There are many forms of financing available and it is important to consider how each of these may impact the corporation’s CPTC or PSTC claim. Some of the most common forms of financing are discussed below.

License fee top-up contributions from the Canada Media Fund

15. The definition of “assistance” in subsection 125.4(1) of the Act excludes a “prescribed amount” for the purposes of the CPTC. Subsection 1106(11) of the Income Tax Regulations defines a “prescribed amount” as an amount paid or payable under the License Fee Program of the Canadian Television Fund (CTF) or as a licence fee top-up contribution from the Canada Media Fund (CMF).

16. It should be noted, however, that any funding received in the form of an equity investment by the CMF is not a “prescribed amount” and is therefore considered to be assistance for the purposes of calculating the CPTC. However, an equity investment by the CMF would not be assistance for the purposes of calculating the PSTC.

17. Since the definition of “assistance” in subsection 125.5(1) of the Act does not exclude a “prescribed amount”, an amount received under the License Fee Program of the CTF or as a licence fee top-up from the CMF is considered assistance for the purposes of the PSTC.

Provincial film tax credits

18. If a corporation claims a provincial film tax credit in addition to the CPTC or PSTC for the same production costs and/or labour expenditures, the amount of provincial film tax credit is considered to be assistance for the purpose of calculating the CPTC and the PSTC. The following are examples of provincial film tax credits:

  • British Columbia Film and Television Tax Credit
  • British Columbia Production Services Tax Credit
  • Manitoba Film and Video Production Tax Credit
  • Ontario Film and Television Tax Credit
  • Ontario Production Services Tax Credit
  • Ontario Computer Animation and Special Effects Tax Credit
  • Newfoundland and Labrador Film and Video Industry Tax Credit

Forgivable loans vs. bona fide loans

19. As stated in paragraph 5 above, forgivable loans are considered to be a form of assistance. However, when establishing whether the amounts received by the corporation are considered to be assistance for the purposes of calculating the CPTC or the PSTC, all other legislative requirements, such as those discussed in the above paragraphs 6 to 13, must also be considered. A forgivable loan generally means that the creditor will agree to forgive the loan under specific conditions, such as the failure of the production to meet a certain revenue target. Other conditions could cause the loan to be forgiven by the lender. If you are not sure, contact one of the CRA’s Film Services Units for clarification.

20. Bona fide loans are not considered to be a form of assistance. The following characteristics are usually associated with a bona fide loan:

  • Carries the same terms and conditions as a transaction completed between two parties dealing at arm’s length.
  • Bears interest (the interest rate must be reasonable under the circumstances).
  • Has a repayment term. For example, arrangements are made for repayment of the loan within a reasonable time and repayment is not conditional upon a future event (e.g., projected revenues).
  • It is the creditor’s intention that the full amount of the loan will be repaid.
  • Security is provided to the creditor (the failure to provide some security for the loan may indicate that no loan was intended).
  • There is a signed note or acknowledgement of the debt in favour of the creditor.
  • The loan is one substantial amount borrowed for one or more specific purposes rather than numerous small amounts received more or less regularly over a period of time.
  • Reasonable efforts are made by the creditor to collect the debt (failure by the creditor to attempt to obtain repayment suggests that the amount paid to the debtor was not a loan).
  • The debtor’s ability to repay the creditor (if the creditor is totally dependent on being repaid from the debtor’s earnings, this would suggest that the amount paid to the debtor was not a loan).

This list is not exhaustive and other criteria may be considered.

Normal commercial arrangements / transactions

21. A corporation may receive amounts related to its film, video or television program from advertisers or sponsors. It may also collect fees from broadcasters or distributors for the right to exploit the production. Such transactions between non-related parties (i.e., arm’s length transactions) are generally considered to be business income of the corporation under section 9 of the Act. These amounts do not impact the calculation of the CPTC or the PSTC. However, if the transaction involves a party with whom the corporation does not deal at arm’s length, the amount transacted must not exceed the fair market value (FMV). Otherwise, the additional consideration (i.e., the amount that is over and above the FMV) that was paid to the corporation may be considered to be assistance for the purposes of calculating the CPTC or the PSTC, or an acquisition of interest in the corporation or the corporation’s business or property, depending on the facts and circumstances of the situation.

Crowdfunding

22. In August 2012, the CMF released a publication called Crowdfunding in a Canadian Context. This provides an overview of the following three models of crowdfunding: the donation model, the lending model and the investment model. Each model has its own unique features, functions and levels of applicability, and may be modified to meet the specific needs of a corporation. The income tax implications of crowdfunding, including the impact on a CPTC or PSTC claim, may therefore vary depending on the facts and circumstances of each situation. For these reasons, we limit our comments to the following general observations.

23. Crowdfunding, sometimes referred to as crowd financing and crowd-sourced capital, is the raising of funds through the collection of small contributions from the general public (known as the crowd) using the Internet and social media. Crowdfunding occurs for any variety of purposes, from disaster relief to citizen journalism to artists seeking support from fans, to political campaigns. In the case of film and video productions, crowdfunding allows producers to finance, in whole or in part, their projects or promotional activities usually in return for non-monetary considerations offered to contributors (i.e., the donation model). For example:

  • A “thank you” on the website for a $10 contribution;
  • A “thank you” in the screen credits and a DVD copy of the production for a $50 contribution;
  • A “thank you” in the screen credits, a DVD, a T-shirt, a poster, and a private screening for a $500 contribution; or
  • A “thank you” in the screen credits, a DVD, a T-shirt, a poster, a private screening and an Executive Producer credit in the film for a $5,000 contribution.

24. Under the donation model, while contributors might receive recognition or rewards for their contribution, their payments are not considered to have been made to acquire an interest in the corporation or in its business or property. Generally, most contributors do not contribute funds in the course of earning income from a business or property, nor are they a government, municipality or other public authority. Furthermore, the circumstances described in paragraph 8 above would generally not apply. Thus, generally, it is a question of determining whether the amount was paid “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.” Although the terms “benefit” and “advantage” are not defined in the Act, it should be noted that any gift or reward (including those of nominal value, such as a DVD copy or T-shirt, and other intangible gifts or rewards), would be considered to be a benefit or advantage for this purpose. Furthermore, where contributors have received a gift or reward in return for their contribution, the contribution is considered to have been made in order to receive a benefit or advantage. The result is that the contribution will be considered to be assistance for the purposes of calculating the CPTC or the PSTC.

It should be clarified that a simple “thank you” or a “courtesy screen credit” in recognition of a donation would not be considered to be a benefit or advantage for these purposes (i.e., in the absence of other gifts or rewards). A “thank you” can be in many forms such as a message on the crowdfunding website, an email, a letter, a greeting card, a telephone call, the name of the contributor listed in the credits of the film or television program, or other forms that do not include any other gift or reward.

25. If a corporation uses a lending model that takes on the form of a forgivable loan, a determination must be made as to whether the amount received by the corporation is considered to be assistance for the purposes of calculating the CPTC or the PSTC (refer to paragraph 19 above).

26. The investment model is currently available in select provinces where legislation has been enacted allowing a corporation to raise capital by issuing eligible securities through a crowdfunding initiative, subject to certain conditions. More information can be found in the documents titled “Multilateral CSA Notice 45-316 – Start-up Crowdfunding Registration and Prospectus Exemptions” and “CSA Notice of Publication of Multilateral Instrument 45-108 Crowdfunding” available from the provincial securities regulators. Funds raised through such an initiative would not be considered to be assistance for the purposes of the CPTC or the PSTC.

Issuance of shares

27. A corporation may raise funds by issuing additional shares of its capital stock, such as preferred shares. The funds raised by the corporation would not constitute assistance for the purposes of the CPTC or the PSTC.

Appendix A – Assistance flowchart for CPTC purposes

Description: This flowchart is designed to help determine whether an amount of financing received by a qualified corporation is assistance for the purposes of calculating the CPTC. The flowchart asks if the funds represent amounts described in subsection 1106(11) of the Income Tax Regulations as well as how and for what purpose the amounts were received as described in paragraph 12(1)(x) of the Income Tax Act.

Image described below
Appendix A – Image description

A corporation receives an amount that can reasonably be considered to have been received: - as an inducement, whether as a grant, subsidy, forgivable loan, deduction from tax, allowance or any other form of inducement [12(1)(x)(iii) of the Act] – as a refund, reimbursement, contribution, or allowance or as assistance, whether as a grant, subsidy, forgivable loan, deduction from tax, allowance or any other form of inducement [12(1)(x)(iv) of the Act]

Proceed to Was the amount paid under a license fee top up program of the Canada Media Fund? [1106(11) of the Regulations]

Was the amount paid under a license fee top up program of the Canada Media Fund? [1106(11) of the Regulations]

If the answer is Yes, proceed to Did a government, municipality or other public authority pay the amount? [12(1)(x)(ii) of the Act].

If the answer is No, proceed to The amount is not considered assistance for purposes of the CPTC.

Did a government, municipality or other public authority pay the amount? [12(1)(x)(iii) of the Act]

If the answer is No, proceed to Was the amount paid in the course of earning income from business of property? [12(1)(x)(i)(A) of the Act].

Was the amount paid in the course of earning income from business of property? [12(1)(x)(i)(A) of the Act]

If the answer is Yes, proceed to Was the amount considered to be a payment made in respect of the acquisition of an interest in the corporation or the corporation's business or property? [12(1)(x)(viii) of the Act]

If the answer is No, proceed to Was the amount paid 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? [12(1)(x)(i)(B) of the Act].

Was the amount paid 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? [12(1)(x)(i)(B) of the Act]

If the answer is Yes, proceed to Was the amount considered to be a payment made in respect of the acquisition of an interest in the corporation or the corporation's business or property? [12(1)(x)(viii) of the Act]

If the answer is No, proceed to Can we reasonably conclude that the person or partnership would not have paid the amount but for the receipt by the person or partnership of amounts from a payer, government, municipality or other public authority? [12(1)(x)(i)(C) of the Act]

Can we reasonably conclude that the person or partnership would not have paid the amount but for the receipt by the person or partnership of amounts from a payer, government, municipality or other public authority? [12(1)(x)(i)(C) of the Act]

If the answer is Yes, the amount is considered assistance for purposes of the CPTC.

If the answer is No, the amount is not considered assistance for purposes of the CPTC.

Was the amount considered to be a payment made in respect of the acquisition of an interest in the corporation or the corporation's business or property? [12(1)(x)(viii) of the Act]

If the answer is Yes, the amount is considered assistance for purposes of the CPTC.

If the answer is No, the amount is not considered assistance for purposes of the CPTC.

Appendix B – Assistance flowchart for PSTC purposes

Description: This flowchart is designed to help determine whether an amount of financing received by an eligible production corporation is assistance for the purposes of calculating the PSTC. The flowchart asks how and for what purpose the amounts were received as described in paragraph 12(1)(x) of the Income Tax Act.

Image described below
Appendix B – Image description

A corporation receives an amount that can reasonably be considered to have been received: - as an inducement, whether as a grant, subsidy, forgivable loan, deduction from tax, allowance or any other form of inducement [12(1)(x)(iii) of the Act] – as a refund, reimbursement, contribution, or allowance or as assistance, whether as a grant, subsidy, forgivable loan, deduction from tax, allowance or any other form of inducement [12(1)(x)(iv) of the Act]

Proceed to Did a government, municipality or other public authority pay the amount? [12(1)(x)(ii) of the Act]

Did a government, municipality or other public authority pay the amount? [12(1)(x)(ii) of the Act]

If the answer is Yes, proceed to Was the amount considered to be a payment made in respect of the acquisition of an interest in the corporation or the corporation's business or property? [12(1)(x)(viii) of the Act]

If the answer is No, proceed to Was the amount paid in the course of earning income from business of property? [12(1)(x)(i)(A) of the Act]

Was the amount paid in the course of earning income from business of property? [12(1)(x)(i)(A) of the Act]

If the answer is Yes, proceed to Was the amount considered to be a payment made in respect of the acquisition of an interest in the corporation or the corporation's business or property? [12(1)(x)(viii) of the Act]

If the answer is No, proceed to Was the amount paid 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? [12(1)(x)(i)(B) of the Act]

Was the amount paid 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? [12(1)(x)(i)(B) of the Act]

If the answer is Yes, proceed to Was the amount considered to be a payment made in respect of the acquisition of an interest in the corporation or the corporation's business or property? [12(1)(x)(viii) of the Act]

If the answer is No, proceed to Can we reasonably conclude that the person or partnership would not have paid the amount but for the receipt by the person or partnership of amounts from a payer, government, municipality or other public authority? [12(1)(x)(i)(C) of the Act]

Can we reasonably conclude that the person or partnership would not have paid the amount but for the receipt by the person or partnership of amounts from a payer, government, municipality or other public authority? [12(1)(x)(i)(C) of the Act]

If the answer is Yes, proceed to Was the amount considered to be a payment made in respect of the acquisition of an interest in the corporation or the corporation's business or property? [12(1)(x)(viii) of the Act]

If the answer is No, the amount is not considered assistance for purposes of the PSTC.

Was the amount considered to be a payment made in respect of the acquisition of an interest in the corporation or the corporation's business or property? [12(1)(x)(viii) of the Act]

If the answer is Yes, the amount is not considered assistance for purposes of the PSTC.

If the answer is No, the amount is not considered assistance for purposes of the PSTC.

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