To promote cultural programming in film, the Canadian government provides tax incentives to producers who make films with significant Canadian cultural content. Many producers rely on these tax incentives to make Canadian films they otherwise could not afford. However, to qualify for this incentive, producers must meet requirements. Producers falling short of the requirements could find themselves responsible for the entire production costs, like the unfortunate producer in Global Vrdo Inc. v. Ihe Queen.1
Section 125.4 of the Income Tax Act (Canada)2 gives film producers a refundable tax credit of 25% of qualified labour expenses3 incurred making a film. To be eligible, a 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 tax credit's main objectives is to motivate Canadian producers to make films focussed on Canadian content. The credit also ensures that Canadian producers maintain a beneficial interest in and strong control over their productions.4 Certification as a Canadian production depends on the number of key positions Canadians occupy and at least 75% of the total production costs being paid to Canadians as wages or salary. Film certification is only the first hurdle for receiving the tax credit. The company producing the film must be a qualified corporation throughout the entire year the credit is being claimed for to maintain eligibility This second hurdle is the one that tripped up the taxpayer in Global.
The taxpayer in Global was a Canadian film production corporation established in 1996 that produced documentaries and advertising films. In September 2001, Global Video Inc.5 received a Canadian film production CFVP certificate for a production and began filming. Expecting the production to qualify for the CFVP tax credit, on its 2001 tax return, GVI claimed costs of $125,047 and a corresponding $15,006 tax credit, based on 25% of the labour costs associated with the production. GVI's total cost for all productions that year was $435,669. When the Minister denied GVI's CFVP tax credit claim finding that it was not a qualified corporation under the Act, GVI appealed to the Tax Court of Canada.
On appeal, the Minister argued that GVI did not primarily carry on a CFVP business as the Act requires. The Act defines a qualified corporation 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.6
The Minister argued that because the CFVP certified production was GVI's only Canadian film or video production that year and the production's $125,047 cost accounted for less than 30% of the company's total production costs that year, GVI did not meet the CRA's general interpretation of "primarilyn to mean over 50%.7 Although the parties agreed with the Minister's interpretation of "primarily", they disagreed on the costs that the criteria should apply for GVI. The Minister had considered all sources of revenue GVI generated, while GVI argued that the total costs of only the certified production should be considered.
GVI urged that the Minister's restrictive application of subsection 125.4(1) would create inequitable results in that producers would need to incorporate a separate entity to produce certified productions and accomplish indirectly through a shell corporation what it could not do directly. GVI asserted that if it did not meet the requirements on a literal interpretation, it should be granted the credit on equitable grounds because its production was a CFVP.
Judge Lamarre Proulx disagreed with GVI, finding that the language of section 125.4 clearly allows the credit only if GVI primarily conducted a CFVP business the entire year for which the credit was claimed. Noting that when interpreting statutes courts must use the plain and ordinary meaning of the words in the statute where they are clear and unambiguous, the Court cited the Supreme Court of Canada's decision in Canada Trustco Mortgage Co. v. Canada as requiring:
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.8
In Global, the statute's literal interpretation clearly supports the Minister's assessment and Tax Court's decision. Section 125.4 unequivocally states that the credit is based on a corporation's CFVP activities throughout the year and makes no mention of individual productions. Further, GVI produced no evidence to persuade the court to apply a purposive interpretation of the section. GVI would not likely have succeeded with this argument at any rate given that Technical Notes on the section indicate that the CFVP credit was introduced to replace a previous tax shelter that helped producers obtain funding. Parliament changed from a tax shelter to a tax credit system mainly to encourage producers to make long-term commitments to producing films in Canada instead of one-off productions. The provision was clearly worded to require corporations to satisfy the requirements for obtaining the credit and allow the Minister to monitor claims and limit the opportunities for abuse.
The decision in this case sends a clear warning to producers thinking about claiming this credit: make sure you fully meet section 125.4 requirements. In this case, the law means just what it says.
1. 2005 DTC 18 18 (TCC) (French Text).
2. R.S.C. 1985, c. 1 (5th Supp.) (the "Act"). All statutory references in this article are to the Act unless otherwise stated.
3. The credit claim is limited to 12% of the total production cost.
4. See Canadian Heritage website, Canadian Audio-Visual Certification Office: http://www.pch.gc.ca/progslac-ca/progs/bcpac-cavco/pubs/2001 -02/ra-ar/prog_e.cfm#3. 1.1 (Accessed: April 17, 2006).
5. Hereinafter referred to as GVI.
6. Subsection 125.4(1).
7. See Guide to Form T1131 entitled, "Claiming a Canadian Film and Video Production Tax Credit."
8. 2005 DTC 5547.
The foregoing provides only an overview. Readers are cautioned against making any decisions based on this material alone. Rather, a qualified lawyer should be consulted.
© Copyright 2006 McMillan Binch Mendelsohn LLP