Douglas Barrett is a partner and the head of the KNOWlaw group of the Toronto law firm McMillan Binch.

Recently there’s been a flurry of concern that, because of a proposed amendment in the recent federal budget, the payments made by the ctcpf Licence Fee Program may soon be treated as ‘assistance’ for the purposes of calculating the federal tax credit.

Given that many of the tax credit programs offered by the provinces are modeled after the federal program, this would also have an effect on the calculation of some of the provincial credits.

The industry’s concern has arisen largely because, until the budget, the funds provided by the lfp seemed to many observers to be the only form of structural support which did not grind down the tax credit calculation base.

Since this ‘morning after’ headache of the budget was discovered, ctcpf representatives have been meeting with officials in the Department of Finance, Revenue Canada and the Department of Canadian Heritage to address this issue and have received a sympathetic response.

Last week, Garry Toth, executive director of the ctcpf’s Licence Fee Program, wrote to various industry associations and other interested parties to inform them that Revenue Canada officials had agreed to meet with the ctcpf over the next few months in order to find a solution to the problem. In the meantime, Toth announced that Finance Minister Paul Martin had written to the ctcpf offering transitional relief to the budget provision until Aug. 31, 1998.

Effectively, Minister Martin has promised that any project funded by the Licence Fee Program whose principal photography commences prior to Aug. 31 will not have the licence fee contribution treated as assistance for the purpose of calculating the tax credit.

How did this come about?

That’s the current status of the issue. Here’s what’s been going on during the past year or so.

Because cavco administers the certification processes for the purpose of calculating the credit, and because cavco was uncertain as to how to treat the lfp payments, it sent a letter early in 1997 to Revenue Canada asking for its opinion on the issue. The ctcpf became aware of this request and asked Revenue Canada for the opportunity to make submissions. Revenue Canada readily agreed to the request.

In the subsequent meetings with Revenue Canada it became clear there were two issues of interest to Revenue Canada:

1. Were the lfp payments to producers genuinely part of the broadcaster licence fees paid for exhibition rights to programs qualifying for ctcpf support?

2. Did the ctcpf, as an independent, non-government, non-profit corporation, meet certain conditions set out in the Income Tax Act related to its status and the nature of its activities (the ‘payor condition’)?

Without referring to the extremely technical analysis of the Act which took place, it became apparent that the lfp payments would not be treated as assistance if Revenue Canada reached one of the following two conclusions:

1. The lfp payments were genuine licence fees, or

2. The ctcpf did not meet the payor condition.

Ultimately, Revenue Canada concluded that the ctcpf did not meet the payor condition and so informed cavco. This resulted in a continuation of the practice of not treating the lfp payments as assistance. Given this conclusion, it was not necessary for Revenue Canada to address the issue of whether or not the lfp payments were genuine licence fees.

Wanted: a permanent solution

The lfp thus achieved the objective of ensuring that its payments weren’t treated as assistance, but did so without establishing to the satisfaction of Revenue Canada that its payments are genuine licence fees.

Martin’s February budget proposed to amend the rules so the payor condition would be satisfied where the indirect source of an lfp payment met the payor condition. Since Revenue Canada had never concluded that the lfp payments were genuine licence fees, the budget took the issue back to square one.

It is now generally understood that the proposed amendment was not specifically directed at the Licence Fee Program, and that an effort should be made to find a satisfactory solution for both the government and the ctcpf. Such a solution would be one which permits the government to solve the technical problem in the Income Tax Act without resulting in the treatment of lfp payments as assistance.

Given that the transitional relief offered by the government only applies to projects funded by the lfp whose principal photography commences before Aug. 31, it’s critical that an appropriate solution be found as soon as possible.

The ctcpf has undertaken to keep the principal industry associations informed of developments as they unfold.

(This article contains general comments only. It is not intended to be exhaustive and should not be considered as advice on any particular situation.)