Tax Quarry

Recently, I wrote a paper for my Masters of Taxation Tax Policy course that reviewed the various tax incentives available to the film and television industry and analyzed the effectiveness of these incentives based on the overall tax policy goals of the government. 

If you would like to review the paper, you can download it by clicking on the attached link.

Download tax_incentives_directed_at_the_film_industry.DOC

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Sometimes when a widow has inherited the family home as a life tenant and eventually remarries she may want to change the way the family home is held in order to benefit her new spouse after her death.  One option that is often considered is a transfer of the house to an alter ego trust (the “Trust”).  The transfer of the house to Trust raises some potential tax issues.  In particular, there is a concern that if the Trust designates the home as a principal residence the children as beneficiaries to the Trust might be precluded from designating their own homes as a principal residence. 

Under the Income Tax Act (Canada) (the “Act”) an alter ego trust can designate a property as a principal residence, with certain exceptions.  A trust is prevented from designating a property as a principal residence where a “specified beneficiary”, or a member of the specified beneficiary’s family unit, has already made the designation with respect to another property.  A specified beneficiary is a person who was beneficially interested in a trust that designated a property as a principal residence and who ordinarily inhabited the home.  A person may be beneficially interested in the home although they do not have an income or capital interest.  It is the CRA’s view that an individual with a life interest would be considered beneficially interested in a trust that provided the use of the property. 

Where the trust designates the property as its principal residence no other property can be designated as a principal residence by a member of the specified beneficiary’s family unit.  A family unit includes the specified beneficiary’s spouse or common-law partner and children under 18 years old.  The CRA has expressed the opinion that while a family unit does not generally include an adult child, or a married child, a parent who is beneficially interested in the trust but does not ordinarily inhabit the home will be treated as a specified beneficiary if the housing unit held by the trust is inhabited by the child of that individual regardless of the age or marital status of the child.  This is intended to prevent an individual from making two principal resident designations where they are part of one family unit.  In this situation, the parent or the trust can make a designation but not both. 

The CRA has also provided further clarification in response to an issue that was raised about whether beneficiaries of a trust who do not reside at the home will be prohibited from designating their homes as their principal residence.  The CRA’s view is that where a trust owns a property which is occupied by a life tenant the principal resident designation by the trust will not prevent capital beneficiaries from making a principal resident designation on the house where they reside, provided they do not live in the same house as the life tenant.

Therefore, it is likely that if an individual resides in the house with their new spouse and none of the children who are beneficially interested in the trust will reside there, in light of previous CRA published opinions on this issue, the trust will be entitled to designate the house as its principal residence without affecting the children’s ability to designate their own homes as their principal residence.

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Like many provincial jurisdictions eager to remain competitive in the film and video production industry, Nova Scotia has increased the value of its tax incentives.  Last year the province increased its general film tax credit by five percent which, according Nova Scotia’s fiscal report, saved film industry producers about $2 million.  The province was able to reap the benefits through increased productions within its borders.  However, there was a limited amount of productions that were filmed outside of the main centres. As a result, the province decided to further adjust its film tax credit to encourage more productions in the outskirts of the province. As of July 1, 2006, productions that are primarily filmed outside of the Halifax Regional Municipality (HRM) are eligible for a five percent regional bonus.  This bonus applies to the entire production.  This is an improvement to the previous incentive, which limited the application of the bonus to the production costs incurred outside of the HRM.

It is expected that this move will increase film production traffic in these less populated vicinities.

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          Italy has been the home production center for many blockbuster movies shown on the big screen in Canada and the United States.  Movies such as Gangs of New York, Oceans Eleven, The Passion of the Christ, The Italian Job and the Gladiator; and television programs such as The Soprano’s and Angels in America have taken advantage of the country’s picturesque beauty and extremely talented team of executive producers. 

         One of the more popular areas in Italy for filming has been the Lazio Region.  Lazio has not only grown in popularity because of its pleasant and hospitable hotel service, tasty native dishes, wonderful weather, mesmerizing landscaping or historic architecture, but also because it offers advanced technical expertise in film production and provides a financial advantage to foreign film producers.  Production executives and the government have been working together to increase the Region’s ability to service foreign producers.  The executives have committed to upgrading its production facilities with more advanced technology to allow film professionals to produce better quality final film product, while the government has improved the process for claiming film tax incentives. 

          There have been two significant changes to the government incentive programs.  First, the process for recovering the value added tax credit (VAT) has been modified.  Producers wanting to recover VAT must:   

1.      Film the majority of the production in the Lazio Region;

2.      Submit a credit reimbursement application to the Internal Revenue Office;

3.      Submit an application for the assignment of the credit to the local film fund organization and an accredited bank (with supporting documentation);

          Once the producer has fulfilled these steps, the government will grant the incentive to all qualifying applicants.  Applicants who qualify will receive a VAT tax exemption for most of the costs related to the production.  This process is better from the previous administration of the credit because it improves access to government financial support for filming in the Region. 

          Second, International co-producers filming in the Region are eligible funding of 50% of the production.  The administering body does not impose minimum spending requirements.  Co-financing and development productions filmed in partnership with a Lazio based film production company are also eligible for venture capital funds of up to 50% off funding. 

          If the stunning scenery of this Italian province or the financial and technical benefits it offers has piqued your interest, it may be time to take a trip to Italy and contact the Italian Film Commission for information about how you can qualify for funding and the tax incentives for your next production.

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