BETWEEN:
and
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
____________________________________________________________________
Appeal heard on July 8, 2005 at Montréal, Quebec
Before: The Honourable Justice Louise Lamarre Proulx
Appearances:
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____________________________________________________________________
JUDGMENT
The appeal from the assessment made under the Income Tax Act for the taxation year ending August 31, 2001, notice of which is dated June 14, 2002, is dismissed in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 29th day of November 2005.
Translation certified true
on this 22nd day of December 2005
Audra Poirier, Translator
BETWEEN:
GLOBAL VIDEO INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
[1] This is an appeal concerning the taxation year ending August 31, 2001.
[2] When the hearing began, the parties informed the Court that the only issue was whether the appellant was a qualified corporation within the meaning of section 125.4 of the Income Tax Act ("Act") and was thus entitled under that provision to a Canadian film or video production tax credit for the taxation year in question.
[3] For the purposes of this case, I will quote the relevant portions of section 125.4 of the Act and section 1106 of the Income Tax Regulations ("Regulations").
125.4(1) The definitions in this subsection apply in this section.
"Canadian film or video production" has the meaning assigned by regulation.
"Canadian film or video production certificate" means a certificate issued in respect of a production by the Minister of Canadian Heritage
(a) certifying that the production is a Canadian film or video production, and
(b) estimating amounts relevant for the purpose of determining the amount deemed under subsection 125.4(3) to have been paid in respect of the production.
"qualified corporation" for a taxation year means a corporation 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 (as defined by regulation) in Canada of a business that is a Canadian film or video production business.
125.4(3) Tax credit
Where
(a) a qualified corporation for a taxation year files with its return of income for the year
(i) a Canadian film or video production certificate issued in respect of a Canadian film or video production of the corporation,
(ii) a prescribed form containing prescribed information, and
(iii) each other document prescribed in respect of the production, and
(b) the principal filming or taping of the production began before the end of the year,
the corporation is deemed to have paid on its balance-due day for the year an amount on account of its tax payable under this Part for the year equal to 25% of its qualified labour expenditure for the year in respect of the production.
The relevant portion of subsection 1106(4) of the Regulations reads as follows:
Canadian Film or Video Production
1106(4) Subject to subsections (6) to (9), for the purposes of section 125.4 of the Act, this Part and Schedule II, "Canadian film or video production" means a film or video production, other than an excluded production, of a prescribed taxable Canadian corporation in respect of which the Minister of Canadian Heritage has issued a certificate (other than a certificate that has been revoked under subsection 125.4(6) of the Act) and that is
. . .
The relevant portion of the definition of "excluded production" in subsection 1106(1) of the Regulations reads as follows:
"excluded production" means a film or video production, of a particular corporation that is a prescribed taxable Canadian corporation,
. . .
(b) that is
(i) news, current events or public affairs programming, or a programme that includes weather or market reports,
(ii) a talk show,
(iii) a production in respect of a game, questionnaire or contest (other than a production directed primarily at minors),
(iv) a sports event or activity,
(v) a gala presentation or an awards show,
(vi) a production that solicits funds,
(vii) reality television,
(viii) pornography,
(ix) advertising,
(x) a production produced primarily for industrial, corporate or institutional purposes, or
(xi) a production, other than a documentary, all or substantially all of which consists of stock footage.
Subsection 1106(2) of the Regulations reads as follows:
Prescribed Taxable Canadian Corporation
(2) For the purposes of section 125.4 of the Act and this Division, "prescribed taxable Canadian corporation" means a taxable Canadian corporation that is a Canadian, other than a corporation that is
(a) controlled directly or indirectly in any manner whatever by one or more persons all or part of whose taxable income is exempt from tax under Part I of the Act; or
(b) a prescribed labour-sponsored venture capital corporation, as defined in section 6701.
The definition of "Canadian" in subsection 1106(1) of the Regulations is as follows:
"Canadian" means a person that is
(a) an individual who is
(i) a citizen, as defined in subsection 2(1) of the Citizenship Act, of Canada, or
(ii) a permanent resident, as defined in subsection 2(1) of the Immigration and Refugee Protection Act, or
(b) a corporation that is a Canadian-controlled entity, as determined under sections 26 to 28 of the Investment Canada Act.
Subsection 28(2) of the Income Tax Budget Amendment Act (assented to on June 20, 1996) reads as follows:
(2) Subsection (1) applies to the 1995 and subsequent taxation years except that, in applying the definition "qualified corporation" in subsection 125.4(1) of the Act, as enacted by subsection (1), in respect of a film or video production the principal photography of which began before July 1996, the words "are primarily" in that definition shall be read as "include".
[4] The facts on which the Minister of National Revenue ("Minister") relied in making the assessment are set out in paragraphs 11 and 11.1 of the Amended Reply to the Notice of Appeal. I am reproducing the parts of those paragraphs that relate to the issue in this case:
[TRANSLATION]
(a) in its tax return for the taxation year ending August 31, 2001, the appellant reported, in relation to the "Aujourd'hui Pelchat" production, $125,047 in production costs and $60,023 in expenditures (48% x $125,047) for the purpose of calculating the Canadian film or video production tax credit;
(b) the appellant thus claimed a Canadian film or video production tax credit of $15,006 ($60,023 x 25%), which the Minister of National Revenue disallowed;
(c) . . .
(d) the appellant is not a corporationthe activities of which in the 2001 taxation year were primarily the carrying on of a business that was a Canadian film or video production business;
(e) the majority of the appellant's productions are not Canadian film or video productions;
(f) the "Aujourd'hui Pelchat" production in respect of which a Canadian film or video production tax credit was claimed for the 2001 taxation year is the appellant's only Canadian film or video production certified by the Minister of Canadian Heritage;
(g) that single certified production represents only a small proportion (less than 25%) of the appellant's activities for the 2001 taxation year, since the cost of that production, net of the assistance received, was $102,539 while total production costs for the year were $435,669;
(h) . . .
11.1 The Deputy Attorney General of Canada adds that, during the 2001 taxation year, the appellant primarily made advertising films in its business.
[5] Paragraphs 16 to 19 of the Notice of Appeal read as follows:
[TRANSLATION]
16. Moreover, the Agency's interpretation is totally contrary to the principles of tax fairness that must guide Parliament in dealing with taxpayers.
17. As a result of the Agency's interpretation, it will become the norm for producers to do indirectly what cannot be done directly.
18. This is because the Agency's interpretation leads to the incorporation of "shell" companies whose only notional asset is a specific film production, thereby resulting in automatic qualification for the CFVP tax credit.
19. As an operating company, the Appellant is being unfairly penalized, since, although the majority of its productions were not certified by the Department of Canadian Heritage, it is indeed a film or video production business.
[6] Mario Turcotte, the appellant's president, acted as its agent at the hearing. He explained that the appellant, a Canadian-controlled private corporation, has been involved in film or video production since May 1996. In particular, it produces documentaries and advertising films for private and Crown corporations.
[7] During the taxation year at issue, the appellant claimed the Canadian film or video production ("CFVP") tax credit for its production entitled "Aujourd'hui Pelchat". That production was duly certified by the Minister of Canadian Heritage.
[8] Mr. Turcotte explained the steps involved in financing a production. The first step is to submit the proposed television show to a broadcaster. If the broadcaster is interested, the producer establishes the budget. The producer determines how much the production will cost and whether the production company is entitled to federal and provincial tax credits and other possible grants. Mr. Turcotte applied for certification from the Société de développement des entreprises culturelles ("Sodec"), which issued the appropriate certificate. The same application was made to Canadian Heritage's Canadian Audio-Visual Certification Office (CAVCO), which issued a Canadian film or video production certificate on September 7, 2001 (Exhibit A-1). The appellant began production after receiving broadcaster approval and obtaining the Sodec and CAVCO certificates. According to Mr. Turcotte, tax credits are important in financing a production. For example, out of a budget of $100,000 for a production, a production company can expect to receive $30,000 in assistance from tax credits from the two governments.
[9] "Aujourd'hui Pelchat" was a one-hour show. The witness said that the show had been broadcast in November 2001 on TVA with acknowledgment of the Government of Canada for the federal tax credit and the provincial government for the provincial tax credit.
[10] The appellant filed the Completion Certificate as Exhibit A-3. It is dated January 22, 2004.
[11] In March 2002, the appellant received a letter and a draft assessment from the Canada Customs and Revenue Agency ("CCRA"). The letter's subject line reads as follows: [translation] "Claim for Canadian film or video production (CFVP) tax credit for the year ending August 31, 2001". The letter states: [translation] ". . . In light of the information we have been sent, it is our opinion that the claim for the above-mentioned period cannot be allowed under the Income Tax Act" (Exhibit I-3).
[12] The notice of assessment for 2001 is dated June 14, 2002 (Exhibit I-5).
[13] The appellant's tax return for the year ending August 31, 2001 was filed as Exhibit I-1. It includes financial statements. On page 2 of the financial statements, the total production costs are shown as $435,669. Approximately $125,000 is attributable to the "Aujourd'hui Pelchat" production. The balance is for advertising and corporate video activities. "Aujourd'hui Pelchat" was the only production certified by CAVCO.
[14] Testimony was given by René Pétrin, the auditor from the Canada Revenue Agency ("CRA"). He has worked at the CRA for more than 17 years and has been auditing claims for CFVP tax credits for more than 4 years. He was assigned the appellant's file at the time of the initial assessment. His job is to ensure that the corporation is a qualified corporation. If it is, he must determine the amount of the credits and the other related tax consequences.
[15] The witness explained that, in his opinion, the corporation was not a qualified corporation under section 125.4 even though the production was eligible. The corporation's activities did not meet the "primarily" requirement found in the definition of "qualified corporation". The tax credit was disallowed.
[16] The witness stated that, after receiving the file, he had looked at the financial statements. Production costs amounted to about $400,000 in total and about $100,000 for the production certified by CAVCO. He called Mr. Turcotte or his accountant to inquire whether this was the only certified production, and he was told that it was. He then explained to them that the corporation was not a qualified corporation under section 125.4.
[17] The CRA's interpretation of the term "primarily" is that it means 50 percent or more. The witness explained that, to satisfy the "primarily" criterion in section 125.4, what generally happens in the film industry is that there is one corporation that carries on business making certified productions and another corporation in the same group, if any, that carries on business making excluded productions.
[18] The "Guide to Form T1131" for the purpose of "Claiming a Canadian Film or Video Production Tax Credit" was filed as Exhibit I-8. The term "primarily" is discussed as follows on page 13 of the Guide:
. . . To qualify for the FTC, a corporation's activities must consist primarily (more than 50% of the time) of conducting a business that is a CFVP business.
We will look at, among other things, all sources of revenue that a corporation generates to determine whether its activities are primarily the carrying on of a business that is a Canadian film or video production business. A corporation may not be considered a QC if it generates significant revenue from activities such as:
- renting equipment or studios;
- distributing films or videos; or
- producing films or videos that do not qualify as CFVPs.
[19] According to the auditor, the word "include" used in the transitional provision in subsection 28(2) of the Income Tax Budget Amendment Act, quoted above, was interpreted as requiring 20 percent, whereas "primarily" requires 50 percent or more.
Arguments
[20] Mr. Turcotte expressed doubt that the Act must be interpreted as requiring separate corporations for certified film activities. His view was that CAVCO had misled him by accepting his film project without warning him about the "qualified corporation" concept. He would have liked the Canadian film or video production certificate issued to him on September 7, 2001, which, after all, contained quite a few details about the various provisions of the Act, to include a warning that his corporation also had to be a qualified corporation within the meaning of subsection 125.4(1) of the Act in order to be eligible for the Canadian film or video production tax credit.
[21] Counsel for the respondent referred to the decision of Dussault J. of this Court in Transport Jacques Lemieux Inc. v. M.N.R., 91 DTC 503, in which the term "principally" ("principalement" in French, the same term used in the French version of subsection 125.4(1) of the Act) was analysed at page 505:
While the word "principally" would seem to cause little difficulty in that it means for the most part or, expressed as a percentage, over 50 per cent, the disagreement seems to be regarding the factors used to describe it. Whereas space is a relevant factor in speaking of the use of real property (see Mother's Pizza Parlour, [88 DTC 6397]) and number of flying hours is also relevant with relation to the use of an aircraft (see Yorkton Broadcasting Company Limited, [87 DTC 165]), cases cited by counsel for the appellant, what is relevant with regard to the use of a vehicle, and in particular a tanker truck?
[22] She argued that it is clear that over 50 percent is necessary. Over 50 percent of what? In some cases, it may be thought that this refers to the employees' work; in others, it may be the time spent. In this case, the Minister considers production costs. The costs of the eligible production were about 25 percent of the total production costs, which means that 75 percent of the corporation's productions were not eligible.
[23] Counsel thought that criteria other than production costs could be considered but that those criteria would have to be justified or reasonable.
Conclusion
[24] I refer to Pierre-André Côté's book, The Interpretation of Legislation in Canada, 3rd ed., at pages 282 and 288:
This guideline [if the statute is clear, it is not subject to interpretation] is expressed by the rarely-used Latin maxim interpretatio cessat in claris. The principle appeared in the draft French Civil Code, and was concisely expressed as follows: "When a statute is ambiguous, the letter of the law should not be avoided on the pretext of respecting its spirit".
. . .
In the Multiform Manufacturing case, Lamer C.J. explained it [the plain meaning rule] thus:
When the words used in a statute are clear and unambiguous, no further step is needed to identify the intention of Parliament. There is no need for further construction when Parliament has clearly expressed its intention in the words it has used in the statute.
[25] Recently, the Supreme Court of Canada once again considered the principles for the interpretation of tax legislation in Canada Trustco Mortgage Company v. Canada, 2005 SCC 54. I cite passages from paragraphs 10 and 11:
The interpretation of a statutory provision must be made according to a textual, contextual and purposive analysis to find a meaning that is harmonious with the Act as a whole. When the words of a provision are precise and unequivocal, the ordinary meaning of the words play a dominant role in the interpretive process. On the other hand, where the words can support more than one reasonable meaning, the ordinary meaning of the words plays a lesser role. The relative effects of ordinary meaning, context and purpose on the interpretive process may vary, but in all cases the court must seek to read the provisions of an Act as a harmonious whole.
. . .
Where Parliament has specified precisely what conditions must be satisfied to achieve a particular result, it is reasonable to assume that Parliament intended that taxpayers would rely on such provisions to achieve the result they prescribe.
[26] It may be helpful to refer to the Explanatory Notes issued by the Minister of Finance concerning the legislative proposals to amend the Act. Those of December 1995 on the proposed definition of "qualified corporation" reveal nothing about the reasons that led Parliament to include the term "primarily".
[27] The Explanatory Notes read as follows:
"qualified corporation"
The definition of "qualified corporation" means a prescribed taxable Canadian corporation the activities of which, in the year, are primarily the carrying on through a permanent establishment (as defined by regulation) in Canada of a business that is a Canadian film or video production business. (The Income Tax Regulations will be amended to include the detailed conditions that a taxable Canadian corporation must meet in order to be considered a "qualified corporation".)
[28] Nor do I see anything in the other provisions of the Act that might make me change the ordinary meaning of the term "primarily". In my view, the words of the provision are precise and unequivocal, and the provision must be taken to use the ordinary meaning of the term "primarily". The term used in the French version is "principalement", and the Petit Robert dictionary defines the adjective "principal" as that which is the most important, the first among several. The Minister chose production costs as the criterion. The appellant did not propose any other criterion, since, I believe, it was also clear to the appellant that its activities in the year were not primarily the carrying on of a Canadian film or video production business.
[29] The appeal is therefore dismissed.
Signed at Ottawa, Canada, this 29th day of November 2005.
"Louise Lamarre Proulx"
Lamarre Proulx J.
Translation certified true
on this 22nd day of December 2005
Audra Poirier, Translator
COURT FILE NO.: 2003-1630(IT)I
STYLE OF CAUSE: GLOBAL VIDEO INC. AND HER MAJESTY THE QUEEN
PLACE OF HEARING: Montréal, Quebec
REASONS FOR JUDGMENT BY: The Honourable Justice Louise Lamarre
Proulx
DATE OF JUDGMENT: November 29, 2005
APPEARANCES:
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Agent for the Appellant: |
Mario Turcotte |
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Counsel for the Respondent: |
Valérie Tardif |
COUNSEL OF RECORD:
For the Appellant:
Firm:
For the Respondent: John H. Sims, Q.C.
Deputy Attorney General of Canada
Ottawa, Ontario