Marsha Henry is a lawyer at the Toronto law firm of McMillan Binch Mendelsohn LLP.

As a little girl, I remember asking my dad for 25 cents to buy my favorite candy. He quickly granted my request. I went to him for a second time within 10 minutes and asked again, and he answered with a lecture on how money does not grow on trees and refused to grant any more funds for my candy habit – unless I could prove that I was deserving of his philanthropy.

When I failed to make my case, he refused to advance the funds.

Little did I know that my dad was teaching me a very important lesson: to be very diligent about making requests for money from others. This is the message that the court also sent last year to Quebec-based Global Video when it refused to grant its claim for a refund for production expenses under the Canadian Film or Video Production Tax Credit (CPTC). However, Global Video’s failure to prove its case cost the company $15,000.

Anyone acquainted with film and video production is aware that producers can receive a refundable tax credit of 25% of qualified labor expenses incurred when making a film. To qualify for this incentive, producers must meet certain requirements.

First, the 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. Certification depends on the number of key positions occupied by Canadians at the company and requires that at least 75% of the total production costs are paid to Canadians as wages or salary.

Second, the company producing the film must also be a qualified corporation throughout the entire year for which the credit is being claimed. This second hurdle is what tripped up Global Video.

Global Video is a film production corporation established in 1996 that produces documentaries and advertising. In September 2001, it received a CFVP certificate for a production – and began filming.

Expecting to qualify for the tax credit, Global Video claimed costs of $125,047 and a corresponding $15,006 tax credit on its 2001 tax return, based on 25% of the labor costs related to the film. The company’s total cost for all productions that year was $435,669.

The Canada Revenue Agency, the tax review agency for the Ministry of National Revenue, denied the claim, finding that Global Video was not a qualified corporation under the Canadian Income Tax Act. Global Video appealed to the Tax Court of Canada, but the court refused to grant Global the credit.

During the appeal, the MNR argued that the company did not primarily carry on a CFVP business, as the act requires. The act defines a qualified corporation as one ‘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 in Canada of a business that is a Canadian film or video production business.’

Essentially, this means only a corporate taxpayer that runs a CFVP business in Canada can claim the CPTC. Also, this must be the primary business of the taxpayer.

In support of its position, the MNR argued that because Global Video only had one CFVP for the relevant year and because the film’s $125,047 cost accounted for less than 30% of the company’s total production costs that year, the company did not meet the general interpretation of ‘primarily’ – which means over 50%. The MNR considered all sources of revenue Global Video generated in arriving at this conclusion.

Global Video, on the other hand, argued that the total costs of only the CFVP should be considered. Global Video urged the court to disregard the MNR’s restrictive application of the CPTC requirements because it would create inequitable results – in that producers would need to incorporate a separate entity that only produced certified productions and accomplish indirectly through a shell corporation what it could not do directly by producing both CFVP and non-CFVP productions in one company.

Global Video also asserted that in the event the courts determined that it did not meet the requirements based on a literal interpretation, it should be granted the CPTC on equitable grounds because it produced a CFVP that furthered the tax policy goals of promoting Canadian culture.

The court disagreed, reiterating the MNR’s position that the credit could only be granted if Global Video primarily conducted a CFVP business in the entire year for which the credit was claimed, which must be determined with reference to the company’s total productions.

The court found that a literal reading of the CPTC provision in the act clearly supported the MNR’s assessment. In the court’s opinion, the provision unequivocally states that it is based on a corporation’s CFVP activities throughout the year and makes no mention of individual productions. Further, Global Video produced no evidence to persuade the court to apply a purposive interpretation of the section.

In any event, Global Video would not likely have succeeded with this argument, because when Parliament changed from a tax shelter to a tax credit system in the mid-1990s, the technical history of the provision indicates that it was intentionally worded to require that a corporation satisfy the requirements for obtaining the credit and allow the CRA to monitor claims, limit the opportunities for abuse by individuals and encourage producers to make long-term commitments to producing films in Canada instead of one-off productions. In this respect, the literal reading and the purposive reading of the section would have achieved the same result.

The decision in this case sends a clear warning to producers thinking about claiming the CFVP: make sure you fully meet the requirements or you will end up footing the entire bill for the production. In this case, the courts have made it evident the law means just what it says.

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

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