Financing Canadian Films Through Crowdfunding
An unconventional method of financing Canadian film productions may limit eligibility for the Canadian film or video production tax credit (CPTC) under section 125.4.
According to indiegogo.com, over 600 Canadian film and video productions are currently using "crowdfunding"--that is, they are seeking small amounts (perhaps $20 to $40) per person from a large number of people in order to accumulate thousands or hundreds of thousands of dollars of total funding. A particular type of crowdfunding often used for films promises investors only non-financial compensation, such as promotional material or DVDs of the film. This is apparently sufficient motivation, given investors' altruism and their eagerness to see the finished film.
Many Canadian film and video productions receive approximately 8 to 12 percent of their funding from the CPTC. The CPTC is a refundable tax credit equal to 25 percent of the "qualified labour expenditures" incurred by a "qualified corporation." Qualified labour expenditures are limited to 60 percent of the amount by which the cost of the production exceeds any "assistance" in respect of the cost that has not been repaid. (Although the current legislation specifies 48 percent instead of 60 percent, the program as it is being administered uses the latter percentage based on draft amendments to section 125.4 released on July 18, 2005.) The issue is whether the crowdfunding amounts will qualify as "assistance" and thus reduce the corporation's eligibility for the CPTC and for similar provincial tax credits.
"Assistance" is defined in subsection 125.4(1) to include certain amounts that are taxable under paragraph 12(1)(x). In particular, this paragraph includes amounts paid in order for the payer to "achieve a benefit or advantage" and are, in respect of the recipient, an inducement, refund, reimbursement, or contribution. Will the non-financial benefits, such as DVDs and promotional material, constitute a benefit or advantage? And will the funds provided be considered an inducement to provide the benefit or advantage, or will they be considered a contribution to the film company? No CRA commentary or court case has addressed these questions, although it has been reported that the CRA is conducting an examination (Crowdfunding in a Canadian Context: Exploring the Potential of Crowdfunding in the Creative Content Industries (Toronto: Canada Media Fund, August 2012), at 29; available at nordicity.com/reports/CMF-Crowdfunding-Study.pdf). It is possible that the provision of the $20 to $40 investment in return for non-financial compensation might be regarded as the sale of goods at fair market value, and not as assistance at all.
The limited CRA commentary on this issue includes general thoughts on the concept of assistance (CRA document no. 2002-0127307, May 15, 2002) and an indication that assistance would include the granting of certain "ancillary rights" in respect of a production, such as pre-sale arrangements or distribution rights (CRA document no. 9707735, May 5, 1997).
Variations on the crowdfunding model used in other countries include donations and equity investment. Donations do not appear to raise any issues of "assistance," provided that there is no benefit or advantage in any form to the donor. Equity investments through crowdfunding appear to be precluded by securities laws because of the absence of a prospectus, although the Ontario Securities Commission indicated in December 2012 that it was re-examining this issue (Consultation Paper 45-710: Considerations for New Capital Raising Prospectus Exemptions).
Joseph A. Gill
Stevenson Hood Thornton Beaubier LLP, Saskatoon