Film Distribution Qualifying Activities
Film and Television International Distribution
Income derived from selling, assigning or licensing rights to a non-resident to distribute a film or television production outside Canada or to exploit anything related to the production outside Canada qualifies as eligible income under the IBA program.
BC’s Film and Television Advantages
- Generous refundable and bankable tax credits are available for production;
- British Columbia’s ideal location on Canada’s west coast is in the same time zone as studios in California and only a 2.5-hour flight from L.A.;
- The province is equipped to handle every aspect of production. British Columbia has a sophisticated industry infrastructure from purpose-built stages to state-of-the-art post-production and visual effects facilities, as well as the capacity to service multiple projects;
- With more than 60 world-class studios, British Columbia is one of the top three international full-service production centres in North America;
- A skilled, experienced crew base of over 25,000 provides full services from set construction and casting to post-production and visual effects, and can handle more than 40 projects simultaneously;
- Production companies spent approximately $2 billion on a total of 287 domestic and international productions in British Columbia in 2014/15.
- Film Co. is in the business of producing and distributing film/ TV through its wholly-owned subsidiaries, A Production Co. and A Distribution Co., respectively.
- A Production Co. is in receipt of refundable federal tax credits under the Canadian Film or Video Production tax credit program and refundable BC Tax credits under the BC Film Tax Credit program.
- A Distribution Co. has entered into a number of arrangements to license to non-residents of Canada the rights to distribute outside of Canada the film or television production.
- A Distribution Co. registers with the BC Government under the International Business Activity Act (IBAA) program and becomes a member of AdvantageBC.
- The income earned by A Distribution Co. from international distribution of the film or TV production is eligible for a BC corporate income tax refund.
- What is the optimum structure to allow for the claiming of federal and BC film tax credits as well as refunds under the International Business Activity Act (IBAA)?
- In many cases a separate distribution company will be the preferred corporation to be registered under the IBAA program and to be a member of AdvantageBC for the following reasons:
- Any refunds claimed under the IBAA program in respect of international distribution of the film/ TV program will be limited to the amount of net BC tax payable. Net BC tax payable is reduced by any BC film and TV credits claimed (see section 19.1 of IBAA). Therefore, the claiming of any BC Film/TV tax credits claimed in the same year that international distribution income is earned may erode the IBAA BC tax refund claim.
- A separate distribution company can facilitate the segregation of revenue and expenses in determining income from qualifying income for IBAA purposes distinct from production and other activities.
- It is often standard practice to use a separate production company to produce the film or TV production for liability purposes and to allow for separate accounting of tax credits. Moreover, the federal film tax credits require that the production company be primarily involved in the production of films or videos or film/video production services; therefore, the exploitation of the film rights earned after the wind-up of the production company will normally have to occur in a separate company, such as a separate distribution company.
- Foreign withholding tax on international revenues may apply to revenues from international distribution of film and/or TV rights. The withholding rate is normally reduced in accordance with any Tax Treaty; Canada may have with the foreign country.This withholding tax on cross border licensing fees can be claimed as a Foreign Tax Credit against Canadian Federal and Provincial tax. Therefore, in some cases, the full amount of the foreign withholding tax is a credit against Canadian income tax and as such does not represent an additional cost.However, the foreign withholding tax is applied on gross revenues earned, while the Canadian corporate income tax is applied on net income. Therefore, if the withholding tax on gross revenues is more than the corporate income tax on net income, the withholding tax will not be fully recovered. If the international licensing revenue can be earned in a separate company, this structure may allow the company to maximize the recovery of any foreign withholding tax and allow recovery of BC taxes under the IBA program.If the unrecoverable amount of foreign withholding tax is significant, the company can consider putting an offshore structure for the licensing revenues in place to allow the international revenues to be earned with little or no withholding tax.For US licensing revenue the insertion of a US distribution company to earn US licensing revenues can provide for a structure to avoid withholding tax. In order to utilize such a structure, A Distribution Co. would have to sell/ assign (not license) the US distribution rights to its US distribution company. The assignment or sale of the film/ TV rights is not subject to US withholding tax under the Canada/ US Tax Treaty. The income earned from the sale of the licensing rights to the US distribution company should be eligible under the IBA program.
- A separate company for international distribution of film/TV may also assist with maximizing claims by the corporate group for the small business deduction at the BC provincial level for Canadian Controlled Private Corporations (CCPCs). A reduced rate of BC tax applies on the first $500,000 of active business income. If this reduced rate of BC tax is claimed in the same company which is claiming the IBAA refund, the IBAA refund will be limited to the net BC tax after any small business deduction claim. Therefore it would be preferable to claim the small business deduction against any tax liability in another company within the group. A separate company for film distribution may allow flexibility for the corporate group to maximize both IBAA and small business deduction claims.
- It is important that the distribution company is actually able to sell, assign or license rights to the film or TV production. It is not sufficient that the distribution company is providing a service of assisting with the distribution of the film or TV production (such as a third party distributor who earns a commission and may act as an agent in the distribution but is not legally able to license or assign rights).
- The federal Canadian film or video production tax credit program contains restrictions with respect to the transfer of copyright. Therefore, it will normally be advisable that the copyright remain with the production company until production is complete and the production company has been wound up.
- The distribution company will need to be able to sell, assign or license the international rights to the production. The distribution company may acquire these rights as part of the initial assignment of rights to the production as part of financing the film or TV production. This would be the simplest approach. On the other hand, certain of the rights associated with the film or TV production may need to be assigned to the distribution company in order to allow the distribution company to fully exploit all international rights associated with the production. If these rights are assigned or transferred to the distribution company, consideration should be given to issuing at least one share of the capital stock of the distribution company in exchange for any rights assigned. An election under section 85 of the income tax act can ensure that no gain for tax purposes is inadvertently trigged on the assignment or transfer of any rights from the production company to the distribution company.