Ontario Sound Recording Tax Credit

Corporate and Commodity Taxation Branch
Tax Legislation Bulletin Number 01-4, March 2001

INDEX
1. Introduction
2. Eligible Sound Recording Company
3. Business Reorganizations and Restructuring
	3.1 Amalgamations
	3.2 Winding-up a Subsidiary Controlled Corporation
	3.3 Business Restructuring
4. Qualifying Expenditures
5. Government Assistance
6. Eligible Canadian Sound Recording
7. Emerging Canadian Artist or Group
8. Qualifying Music Video
9. Certification and Making a Claim for the OSRTC
10. For Further Information

1. Introduction

This bulletin replaces bulletin 00 -1 issued in January 2000.

The Ontario Sound Recording Tax Credit (OSRTC) is a 20 per cent refundable tax credit for certain expenditures incurred by a qualifying corporation in the production of "eligible Canadian sound recordings" by "emerging Canadian artists or groups".

This bulletin provides a general overview of the OSRTC for corporations wishing to claim this tax credit. This bulletin is based on the legislation in section 43.12 of the Corporations Tax Act ("CTA") and in Part IX of Regulation 183 under the CTA. For precise details, the reader should consult the legislation.

In this bulletin, terms defined in the OSRTC legislation (e.g., "eligible Canadian sound recording") are highlighted with quotation marks and references to the Ontario Media Development Corporation are with the letters "OMDC".

2. Eligible Sound Recording Company

A corporation is an "eligible sound recording company" if it meets the following conditions:

• the corporation primarily carries on a "sound recording business" for at least 24 months ending immediately before the beginning of the taxation year and carries on that business mainly through a permanent establishment in Ontario,
  
  
• for a taxation year that commences before May 2, 2000, more than 50 per cent of its taxable income is allocated to Ontario in either the current or preceding taxation year,
  
  
• for a taxation year that commences after May 1, 2000, more than 50 per cent of its taxable income is allocated to Ontario in the preceding taxation year,
  
  
• the corporation is "Canadian-controlled" as determined under sections 26 to 28 of the Investment Canada Act,
  
  
• the corporation bears the financial risks or is related to a "Canadian-controlled corporation" that bears the financial risks, and
  
  
• the corporation has within the12 months preceding the first taxation year for which an OSRTC is being claimed for the recording, developed an acceptable distribution plan, in the opinion of OMDC, for the commercial exploitation of at least one sound recording.

A "sound recording business" is a business in which the main activities are managing artists, publishing music, producing, marketing or distributing sound recordings, or a combination of those activities carried out under contract with musicians, vocalists or copyright holders. An "eligible sound recording company" must have an acceptable distribution arrangement in place to market its "eligible Canadian sound recordings".

Corporate members of a partnership may share the OSRTC for each "eligible Canadian sound recording". Limited partners are not eligible for the OSRTC.

3. Business Reorganizations and Restructuring

Where a corporate reorganization or restructuring occurs, the rules outlined in section 2 above are modified to prevent corporations from being disqualified as eligible sound recording companies.

3.1 Amalgamations

If a new corporation is formed as a result of an amalgamation or merger of two or more corporations (predecessor corporations):

1. The new corporation is deemed to have carried on a sound recording business for at least 24 months ending immediately before the beginning of the taxation year as required under paragraph 1 in section 2 above if:
   
   
   1. one of the predecessor corporations has carried on a sound recording business for the 24 months ending immediately before the beginning of the taxation year, or
      
      
   2. the new corporation plus one of the predecessors corporations have, in total carried on a sound recording business for 24 months ending immediately before the beginning of the taxation year.
      
      
2. The new corporation is deemed to have more than 50 per cent of its taxable income allocated to Ontario for the purposes of paragraphs 2 and 3 in section 2 above, if more than 50 per cent of the combined taxable income of the predecessor corporations is allocated to Ontario.
   
   
3. The new corporation is deemed to have developed an acceptable distribution plan for the commercial exploitation of one sound recording in accordance with paragraph 6 of section 2 above, if one of the predecessor corporations meets the conditions in that paragraph.

3.2 Winding-up a Subsidiary Controlled Corporation

If a subsidiary controlled corporation is wound up into its parent corporation:

1. The parent corporation is deemed to have carried on a sound recording business for at least 24 months ending immediately before the beginning of the taxation year as required under paragraph 1 in section 2 above if:
   
   
   1. the subsidiary controlled corporation has carried on a sound recording business for the preceding 24 months ending immediately before the beginning of the taxation year, or
      
      
   2. the parent corporation plus the subsidiary controlled corporation have, in total, carried on a sound recording business for 24 months ending immediately before the beginning of the taxation year.
      
      
2. The parent corporation is deemed to have more than 50 per cent of its taxable income allocated to Ontario for the purposes of paragraphs 2 and 3 in section 2 above, if more than 50 per cent of the combined taxable income of the parent and subsidiary controlled corporations is allocated to Ontario.
   
   
3. The parent corporation is deemed to have developed an acceptable distribution plan for the commercial exploitation of one sound recording in accordance with paragraph 6 of section 2 above, if the subsidiary controlled corporation meets the conditions in that paragraph.

A subsidiary controlled corporation is a corporation of which more than 50 per cent of the issued share capital (having full voting rights) belongs to another corporation (parent corporation).

3.3 Business Restructuring

If all or substantially all of the assets used in a sound recording business have been transferred by a corporation (the transferor) to another corporation (the transferee) and section 85 of the Income Tax Act (Canada) applies, the transferee is deemed to be a continuation of the transferor for purposes of determining the eligibility criteria enumerated in section 2 above.

If a sound recording business carried on by the corporation was previously carried on by a sole proprietor or a partnership, the sole proprietor or partnership is deemed to have been a corporation during that time and is a continuation of that deemed corporation for purposes of the eligibility criteria in section 2 above.

4. Qualifying Expenditures

A "qualifying expenditure" is an expenditure with respect to an "eligible Canadian sound recording" incurred by an "eligible sound recording company" after January 1, 1999. The expenditure must be incurred no later than 24 months from the date that the first qualifying expenditure is incurred. "Qualifying expenditures" are the aggregate of:

1. Sound recording production costs incurred primarily in Ontario by the corporation such as:
   
   
   1. engineering and producer fees,
      
      
   2. musician session fees,
      
      
   3. artist royalties,
      
      
   4. tape and supplies,
      
      
   5. studio and equipment rentals,
      
      
   6. mixing and mastering,
      
      
   7. graphics i.e. creative artwork, photography, layout, and colour separations, and
      
      
   8. software, digital scanning, programming, beta testing and graphics,
      
      
2. Qualifying music video (defined in section 8) production costs incurred primarily in Ontario by the corporation such as:
   
   
   1. remuneration paid to a director, writer or a film, lighting, sound or editing crew,
      
      
   2. set design, and
      
      
   3. studio, editing facilities and equipment rentals,
      
      
3. Direct marketing expenses incurred primarily in Ontario by the corporation such as:
   
   
   1. advertising,
      
      
   2. in-store promotions,
      
      
   3. media-kits,
      
      
   4. the following sound recording launch costs:
      
      
      1. sound and light equipment and facilities rentals,
         
         
      2. the amount of expenses for food or beverages or entertainment as determined under section 67.1 of the Income Tax Act (Canada),
         
         
      3. event planning services,
         
         
      4. invitation design, printing and mailing,
         
         
      5. security,
         
         
      6. business location permits and licences,
         
         
      7. photography,
         
         
      8. promotional gifts and souvenirs, and
         
         
   5. fees paid to consultants for public relations or marketing and salaries and wages paid to employees whose primary functions are in public relations and marketing,
      
      
4. Fifty per cent of the types of expenses referred to in (2) and (3) above that were incurred by the corporation outside Ontario, and
   
   
5. Repayment of "government assistance", to the extent it reduced the amount of this credit for a previous taxation year.

"Qualifying expenditures" do not include expenditures for touring costs in connection with a concert or live performance such as:

1. equipment transportation,
   
   
2. stage set-up,
   
   
3. crew costs, or
   
   
4. travelling.

5. Government Assistance

"Qualifying expenditures" are to be reduced by any "government assistance".

"Government assistance" means assistance from any government, municipality or other public authority in any form including a grant, subsidy, forgivable loan, deduction from tax and investment allowance.

For purposes of determining qualifying expenditures, the OSRTC is not considered "government assistance" and thus will not reduce qualifying expenditures. However, the OSRTC is to be included in the taxpayer's income in the taxation year that gives rise to the tax credit.

6. Eligible Canadian Sound Recording

To qualify as an "eligible Canadian sound recording", a recording must first meet the definition of a "sound recording".

A "sound recording" means a recording of music, with or without lyrics, that is on a vinyl record, a compact disc, a digital versatile disc, or audio tape and is produced by analogue, digital or similar technology.

A sound recording is an "eligible Canadian sound recording" if it meets the following conditions:

1. The recording has been produced by an "eligible sound recording company",
   
   
2. The artist or group is an "emerging Canadian artist or group" at the time the contract was made with the "eligible sound recording company" for the production of the recording, and
   
   
3. At least one of the following conditions is met:
   
   
   1. the music was composed primarily by individuals or groups, at the time the music was composed, who were "qualified Canadians" or "Canadian groups",
      
      
   2. at the time the lyrics were written, they were primarily written by individuals or groups who were "qualified Canadians" or "Canadian groups", or
      
      
   3. substantially all production activities were performed in Ontario.
      
      
4. The "eligible sound recording company" has exclusive contractual control of the master tape for at least five years after the master tape is completed, and
   
   
5. For the first taxation year in which a tax credit is being claimed for a sound recording, the eligible sound recording company meets either of the following conditions with respect to a distribution plan to commercially exploit the recording :
   
   
   1. the eligible sound recording company enters into an arrangement no later than 3 months after the end of the taxation year to market copies of the recording through a national distributor, or
      
      
   2. in the case of a small eligible sound recording company whose gross revenue in the preceding year did not exceed $500,000, the sound recording company has developed, in the opinion of OMDC, an acceptable marketing plan to commercially exploit the recording.

A sound recording is not an "eligible Canadian sound recording" if:

1. The recording is primarily of the spoken word or of wildlife or nature sounds,
   
   
2. The total playing time is less than 40 minutes,
   
   
3. The recording is produced for use as an instructional tool for advertising or for promotional purposes,
   
   
4. It is a sound recording capable of inciting hatred against an identifiable group, including a section of the public distinguished by colour, race, religion, sex, sexual orientation or ethnic origin,
   
   
5. The dominant characteristic of any lyrics on the sound recording is the undue exploitation of sex or of sex and one or more of crime, horror or cruelty or violence, or
   
   
6. Public financial support for the sound recording would be contrary to public policy.

7. Emerging Canadian Artist or Group

An individual is an "emerging Canadian artist" if:

1. He or she is a musician or a vocalist,
   
   
2. He or she is ordinarily resident in Canada and is either a "Canadian citizen" as defined in the Citizenship Act (Canada) or a "permanent resident" within the meaning of the Immigration Act (Canada), and
   
   
3. Neither the individual nor any musical group in which the individual is or has been a member
   
   
   1. has had one gold sound recording in Canada as tabulated by the Canadian Recording Industry Association, or by its successor, or in one of the following regions as tabulated by the International Federation of the Phonographic Industry, or by its successor: United Kingdom
      France
      Germany
      Asia,
      Latin America, and
   2. has had one gold sound recording in the United States as tabulated by the Recording Industry Association of America, or its successor.

An "emerging Canadian group" of artists is a group of artists where at least 75 per cent of the artists are "emerging Canadian artists".

A "Canadian group" means a group of musicians, vocalists or both where at least 75 per cent of its members are ordinarily resident in Canada and who are either Canadian citizens as defined in the Citizenship Act (Canada) or a permanent resident within the meaning of the Immigration Act (Canada).

8. Qualifying Music Video

A music video is a "qualifying music video" if:

1. It is produced by an eligible sound recording company in connection with an eligible Canadian sound recording,
   
   
2. The primary purpose for producing and distributing the music video is to promote and sell the sound recording,
   
   
3. The principal performer in the audio component of the music video is the same emerging Canadian artist or group that recorded the sound recording, and
   
   
4. The director of the video component of the music video is an individual who is ordinarily resident in Canada and who is either a Canadian citizen as defined in the Citizenship Act (Canada) or a permanent resident within the meaning of the Immigration Act (Canada).

A music video is not a qualifying music video if:

1. It is a sound recording capable of inciting hatred against an identifiable group, including a section of the public distinguished by colour, race, religion, sex, sexual orientation or ethnic origin,
   
   
2. The dominant characteristic of the material in the music video is the undue exploitation of sex or of sex and one or more of crime, horror or cruelty or violence, or
   
   
3. Public financial support for the music video would be contrary to public policy.

9. Certification and Making a Claim for the OSRTC

To be eligible to deduct or claim the OSRTC for an "eligible Canadian sound recording" for a taxation year, corporations must first apply to OMDC for certification that the corporation is an "eligible sound recording company", and the sound recording is an "eligible Canadian sound recording" for the particular taxation year.

Recent financial statements, a catalogue or detail of the company's releases, signed distribution agreements, lyric sheets and a sample of the final manufactured product and any other pertinent information must be submitted with the application. Certain information such as financial statements need only be submitted once within a taxation year.

For application forms or other information, see below.

For every approved application, OMDC will send to the applicant a letter of certification and an OSRTC claim form.

The corporation must then complete the OSRTC claim form which provides details of qualifying expenditures in the three eligible expenditure categories from which is subtracted any government assistance received in respect of those expenditures and any expenditures claimed in previous years.

Both the letter of certification and OSRTC claim form must be filed with the corporation's CT23 tax return for the taxation year.

In situations where the corporation claims expenditures incurred in more than one taxation year for a particular "eligible Canadian sound recording", the corporation must obtain a certificate for each taxation year for that recording.

10. For Further Information

1. For information related to applying for the OSRTC or the related certification process, please contact:

Ontario Media Development Corporation
Ste. 300, North Tower
175 Bloor St. E.
Toronto, On.
M4W 3R8
Telephone: (416) 314-6858 Facsimile: 416 314-6876

2. All other enquiries related to the OSRTC should be directed to:

Ministry of Revenue
Corporations Tax Branch
Tax Advisory
33 King St. W.
Oshawa, On
L1H 8H5
Telephone: (905) 433-6513 Facsimile: 905 433-6747