Tax Quarry

One of the ways in which the Canadian government has tried to maintain cultural programming in film and television is by providing tax incentives that are focused on rewarding film producers who develop programs with significant Canadian cultural content.  Many film producers rely on these tax incentives to allow them to make films they otherwise would not be able to make because of limited resources and funding.  However, to qualify for this funding, producers should be careful to ensure that certain requirements are met.  If they don’t, they may find that they are responsible for paying the entire production cost like what happened to the taxpayer in Global Video Inc. v. The Queen.[i]

Section 125.4 of the Income Tax Act (Canada)[ii], provides film producers with a refundable tax credit of 25% of qualified labour expenses[iii] incurred when making a film. To be eligible for this credit the film must be made by a qualified corporation and certified as a Canadian film or video production (“CFVP”) by the Canadian Audio-Visual Certification Office (“CAVCO”).  One of the main objectives behind offering the credit is to provide an incentive for Canadian film producers to make films with a focus on Canadian content.  The credit is also administered to ensure that Canadian producers maintain a beneficial interest and a strong position of control over their productions.[iv]  Being certified as a Canadian production is based on the number of key positions in a production that are filled by Canadians.  In addition, salaries and wages paid to Canadians must account for at least 75% of the total cost of production to be certified.  Presumably, once a film is certified it should have access to the tax credit under 125.4.  However, this is only the first hurdle.  The company producing the film must also be a qualified corporation to be eligible for the credit.  This was the issue in Global Video.

In Global Video, the taxpayer Global, a Canadian corporation, was a film production company established in 1996.  Global’s business was focused on the production of documentaries and advertising films.  In September 2001, the corporate taxpayer received a Canadian film production CFVP certificate for the production that is the subject of this case.[v]  After receiving the certificate Global began filming with the expectation that the production would be eligible for the CFVP tax credit.  Accordingly, in filing its tax return for 2001, Global claimed production costs of $125,047 for the film and a corresponding tax credit for $15,006, 25% of the labour costs associated with the production.  Global’s total production cost for the year was $435,669.  The Minister denied Global’s CFVP tax credit claim.  Global appealed to the Tax Court of Canada.

The Minister argued that Global was not a qualified corporation because it did not primarily carry on a CFVP business as required under the Act.  A qualified corporation is defined under the Act as:

… 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.[vi]

The Minister determined that the subject production was Global’s only Canadian film or video production for the year.  Further, since Global’s total production cost for the subject production was only $125,047, which accounted for less than 30% of the total production costs of the company, it did not meet the qualified corporation definition since the CRA generally interprets primarily to mean more than 50%.[vii]  Although both parties agreed with the Minister’s interpretation of primarily they disagreed on what criteria it should be applied to.  The Minister considered all sources of revenue generated by a corporation.  Global, on the other hand, believed that the determination should be made based on the total costs of a particular production. Global argued that the Minister’s application of 125.4(1) was too restrictive and that it created inequitable results.  In essence, Global’s position was that the interpretation presented by the Minister would require the incorporation of a separate entity solely for the purposes on producing certified productions, which would essentially permit the taxpayer to accomplish indirectly through a shell corporation what it could not do directly.  Global argued that if it did not meet the requirements it should be permitted to claim the credit on equitable grounds since subject production met the requirements under the definition. 

Judge Lamarre Proulx disagreed with Global.  The court found that the language of the Act clearly stated that the film production corporation is entitled to a credit under 125.4 if it primarily conducts a CFVP business.  Judge Lamarre Proulx went on to say that the general rule for interpreting a statute requires that the courts use the plain and ordinary meaning of the words in a statute where they are clear and unambiguous.  In support of this proposition, the Judge referred to the Supreme Court of Canada’s decision in Canada Trustco Mortgage Co. v. Canada where the court stated:

Where the words of a provision are precise and unequivocal, the ordinary meaning of the words play a dominant role in the interpretive process.

…

Where Parliament has specified precisely what conditions must be satisfied to achieve a particular result, it is reasonable to assume that Parliament intended that taxpayer’s would rely on such provisions to achieve the result they prescribe.[viii]

Presumably, where separate records are kept for each type of production, those that qualified for the credit could be justified in making a claim if the appropriate labour costs can be attributed to each production.  However, the Act clearly states that the credit is based on the corporation’s activities.  The Act does not provide an assessment based on individual productions.  This was likely the intention of Parliament.  The provision was likely worded in this way to limit opportunities for abuse. Accordingly, based on the literal interpretation of the provision, the Minister’s assessment and the Tax Court of Canada’s decision were correct.  Global did not produce any evidence to indicate that a purposive interpretation of the section was required.  Nor did they provide an alternative criteria for determining that the primary purpose of their company’s business was to produce CFVP throughout the relevant taxation year.      

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