Canada’s film and television industry is among the most vibrant in the world, due in part to its generous federal and provincial tax incentives. These include the Canadian Film or Video Production Tax Credit (“CPTC”), a fully refundable tax credit jointly administered by the Canada Revenue Agency (“CRA”) and the Canadian Audio-Visual Certification Office (“CAVCO”). The CPTC entitles an eligible production company to claim a tax credit equal to 25% of eligible labour expenditures.

To access the CPTC, proper corporate structuring is crucial. This article explores some key structuring considerations to ensure your production company qualifies for this valuable credit.[1]

Who qualifies for the CPTC?

To be eligible, a production company must meet the definition  of “qualified corporation” under the ITA. In essence, this means a corporation must:

  • be a Canadian tax resident incorporated federally or under a provincial jurisdiction;
  • be controlled by one or more Canadian citizens or permanent residents;
  • not be controlled by tax-exempt entities;
  • not be a labour-sponsored venture capital corporation as defined in the regulations to the ITA;
  • be primarily (i.e 50%) in the business of producing CAVCO-certified films or videos; and
  • maintain a permanent establishment in Canada.[2]

Is the production company under Canadian control?

A common pitfall producers encounter is failing to ensure Canadian control of the production company when working with foreign investors. Such control, for purposes of the CPTC, must be analyzed by referring to the Investment Canada Act (“ICA”), which lists a set of rules to determine whether a corporation is Canadian-controlled.

For example, one of the ICA rules provides that where one Canadian, or two or more members of a voting group who are Canadians, own(s) a majority of the voting shares of a corporation, such corporation is considered Canadian-controlled.[3] However, even when the majority of the voting shares are held by a Canadian or Canadians, the CRA and the CAVCO may nevertheless determine that the production company is not Canadian-controlled after considering any information and evidence provided, including shareholder agreements.[4] This is usually referred to as the de facto control test.

For example, consider a situation where a production company has two shareholders: a Canadian citizen holding 60% of the voting shares, and a foreign investor holding the remaining 40%. On paper, it appears to be Canadian-controlled since the majority voting interests are held by a Canadian citizen. However, if a shareholder agreement gives the foreign investor veto rights over key decisions, the CRA and CAVCO could conclude that the production company is not under Canadian control, disqualifying it from the CPTC.[5]

Consequently, when in the presence of non-resident shareholders, it is important to be careful of the proportion of voting shares issued and to whom, but also in how the relationships and rights between shareholders are structured, including in the drafting of shareholder agreements.

Is CAVCO-certified film or video production the primary business?

Another common pitfall is mixing eligible production activities with ineligible ones since one of the criteria to qualify as a “qualified corporation” is that at least 50% of the production company’s activities must consist of producing films or videos certified by the CAVCO.

If the production company also engages in activities such as equipment rentals, distribution or production of ineligible films or videos, it may be prudent to create a single-purpose production company focused on producing CAVCO-certified content.

Provincial tax credit structuring

Most provinces offer additional tax credits for the film industry. Examples are the Ontario Film and Television Tax Credit, the British Columbia Film Incentive BC, and the Québec Crédit pour productions cinématographiques québécoises.

Each provincial tax credit has its own requirements. For example, the Crédit pour productions cinématographiques québécoises in Québec notably requires that the production company be controlled during the year and in the 24 months prior by Québec residents, and that it acts at arm’s length with a holder of a broadcasting licence issued by the Canadian Radio-television and Telecommunications Commission (CRTC) or with an online video service.

Therefore, additional structuring considerations must be accounted for in the corporate structure of a production company to meet both federal and the applicable provincial criteria.  

Maximize your entitlement to government tax credits

The CPTC and similar provincial credits are powerful tools for financing Canadian content. However, eligibility depends on how your production company is structured, including ownership and control, to the proportion of eligible production activities. Moreover, each provincial credit has its own eligibility criteria.

Members of our Corporate Tax and Entertainment and Media teams can help you secure your entitlement to both federal and provincial film or video production tax credits.

[1]     Section 125.4 of the Income Tax Act (Canada) (“ITA”) and section 1106 of its regulations sets out a range of conditions that a production company must satisfy to claim the CPTC. These requirements encompass various aspects, including the identity of the producer, the nature of the production itself, and distribution of the production. A comprehensive analysis of each eligibility criterion is beyond the scope of this article.

[2]     Ss. 125.4(1) “qualified corporation” ITA.

[3]     Ss. 26(1)(a) ICA.

[4]     Ss. 26(2.1) ICA.

[5]     If the corporation is not eligible for the CPTC, it could alternatively qualify for the Film or Video Production Services Tax Credit, which allows a corporation to claim 16% of its qualifying labour expenditures.