- A Clarifying Development - “Canadian Content” Tax Credit Regulations Amended
- November 21, 2014 | Author: Bob Tarantino
- Law Firm: Dentons Canada LLP - Toronto Office
The October 4, 2014 Canada Gazette (being vol. 148, no. 40), contained something of note for Canadian film and TV lawyers: amendments to the Income Tax Act regulations which govern the “Canadian content” tax credits for audio-visual productions. The full text of the amendment in the Gazette can be accessed at http://www.gazette.gc.ca/rp-pr/p1/2014/2014-10-04/html/reg2-eng.php.
What Was the Problem?
Before the October 4, 2014 amendments, it was not entirely clear who was to be considered an “owner” of copyright in a production, and there was further uncertainty regarding whether licensing someone exploitation rights or granting them a right to share in the revenues of a production could make them qualify as an “owner” of “copyright”. That led to confusion surrounding how to properly structure ownership, licenses and revenue participations so as not to inadvertently fall afoul of the regulations (and thereby render the production ineligible for “Canadian content” tax credits). The confusion was further compounded by some inelegant drafting.
So What Has Changed?
To borrow from the Gazette‘s description of the amendments, the regulation has been changed so that:
- “copyright owner” is now a defined term in the regulation - one which uses terminology found in the Copyright Act (e.g., the definition uses terms such as “maker” and “copyright” that have particular meanings under the Copyright Act);
- it is now definitively stated that a person having the right to share in revenues generated by a production is not in and of itself an interest or a right held by a copyright owner;
- it is now definitely stated that the grant of an exclusive license does not constitute an assignment of copyright for purposes of the tax credit analysis
- the definition of “excluded production” has been re-worded to make it clear that a production will be deemed to be an “excluded production” (and therefore ineligible for “Canadian content” tax credits) if someone other than a “prescribed person” owns copyright at any point during the first 25 years after the production has been completed; and
- the list of “prescribed persons” has been expanded to include Canadian individuals, Canadian taxable corporations, and partnerships of prescribed persons.
The amendments will take effect forty days after October 4, 2014 (so, November 13, 2014), and will not be retroactively applied to any production if before November 13, 2014 (a) the Minister of Canadian Heritage has revoked or refused to issue a certificate of completion for it or (b) the Minister of National Revenue has assessed a return of income on the basis that the production is not a Canadian film or video production and that assessment’s basis is not vacated or varied on or after that date.
That’s Nice. So?
While not changing very much on a substantive level, these changes provide some comfort and further guidance on structuring elements that many of us rely on in structuring productions:
- entering into a license or distribution agreement does not constitute a transfer of copyright
- granting rights to participate in revenues (such as “back-end” or “net profit” participation) will not, in and of itself, cause the production to go “off-side” - while such “back-end” participations have often been granted to individuals providing services in connection with projects (such as directors or actors), these amendments appear to permit “hands-off” investors to be granted such participations as well, something which historically was regarded as somewhat risky
- there is now greater flexibility in structuring productions because the list of acceptable (or “prescribed”) persons who can own a copyright interest in the production has been expanded to include not just Canadian corporations, but also Canadian individuals and Canadian partnerships (all of whose partners are prescribed persons)
Fine. Now Say Something Really Nerdy.
These amendments do something interesting with the term “maker”, which is defined in the Copyright Act as “the person by whom the arrangements necessary for the making of the work are undertaken”. The amendments, in the way that they define “copyright owner”, seem to imply that the “maker” of a production is the first “owner” of copyright in the production - however, a close reading of the Copyright Act reveals that the term “maker” is something of an analytical dead-end: being the “maker” of a production has no bearing on the ownership or authorship of that production for copyright purposes. In other words, by trying to tie “maker” and “owner” together, the amendments do something that not even the Copyright Act does. It’s not a problem - ownership for copyright purposes and for tax purposes can be different things - but it is interesting to note that the regulatory instinct is to rely on “maker” status in a way which is not present in the underlying copyright regime.