Tax Quarry

On April 12, 2006 the Canada Revenue Agency (“CRA”) issued a Technical interpretation[i] in response to a taxpayer’s request to confirm that there would be no double counting of broadcast licensing and distribution fees received by a producer for a particular production. 

In the situation presented to the CRA, the Canadian production company was eligible to claim the Canadian film or video production (“CFVP”) tax credit under the Income Tax Act (Canada).[ii]   The company receives licensing and distribution fees throughout the taxation year.  The taxpayer is concerned about the appropriate treatment of the fees.

In response, the CRA noted that provided that the fees would not be characterized as proceeds of distribution for any portion of the company’s ownership interest in the production or treated as the payor’s cost to acquire an ownership interest for the purposes of reducing its undepreciated capital cost, the fees may be included in computing the company’s income. 

Further, the CRA indicated that to the extent that the fees received are to be treated as proceeds of disposition and this results in a reduction to the production company’s undepreciated capital cost, the fees would not also be characterized as current income for the purpose of computing the company’s taxable income for that taxation year. 

In essence, they determined that the fees will not be double counted as long as the taxpayer clearly makes a decision to either treat the fees as taxable income or as proceeds of disposition that reduce undepreciated capital cost. 

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