UBC Theses and Dissertations

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UBC Theses and Dissertations

Private motion picture investment and the income tax incentives in Canada Duffus, Andrew J.

Abstract

Private investment in motion pictures is a popular form of tax shelter in Canada, for high income earners. This thesis attempts to determine if the tax shelter facilitated by motion picture investment adequately compensates the investor for the high risk of the investment. This is an investigation therefore, of the motion picture investment environment in Canada and an appraisal of the legal the financial implications of employing a motion picture tax shelter. A thorough unbiased examination of the consequences of private motion picture investment is needed because of the importance to the motion picture industry of this source of financing. From the point of view of the investor it is important to determine if motion picture investment is a viable-tax shelter. If motion picture investment is a viable shelter, it is necessary to determine the minimum marginal tax bracket an investor must be in before considering such an investment. It must be determined what form of financial arrangement the investment must take. An evaluation must be made to determine the type of motion pictures that are most likely to earn a profit. It is also necessary to determine the value of leveraging the initial capital investment vis-a-vis the incremental future investor liability incurred by the private investor. Does the immediate tax shelter benefit offset the future liability of the promissory notes? The method used to answer the questions posed is to examine the current literature on motion picture investments, examine the legal framework of the investments and examine the relevant income tax legislation. Actual motion picture investments are reviewed and a quantitative financial analysis is undertaken to determine the net outcomes to investors under various circumstances. National Revenue, Taxation is the body of the federal government which interprets and administers the Income Tax Act and Regulations. The terminology of the Act is not always precise therefore the tax department must interpret the legislation in accordance with its mandate which is to collect as much income taxes as possible. If a taxpayer disagrees with National Revenue, Taxation's interpretation he has the right of appeal to the Canadian judicial system. At the present time the courts have upheld National Revenue, Taxation's position that a taxpayer is not entitled to claim a capital cost allowance deduction for any amount that he has not personally committed to the motion picture investment. This study evaluates through quantitative analytical techniques the financial outcomes to an investor who invests in a motion picture with and without the leveraged tax shelter facilitated by the signing of promissory notes. A motion picture investment model is designed which generates the net present value of a motion picture investment over a seven year time horizon. Two hypothetical investor income levels are used to evaluate investment in educational video tape programs and theatrical feature length motion pictures. Assumptions are made about the distribution receipts of the two types of motion pictures. The net present value of the investments are found. The outcomes are compared and contrasted and conclusions are drawn. The primary conclusions are that an investor must have a marginal income tax rate greater than fifty percent of his taxable earnings. The motion picture investment must have a structure which facilitates leverage of the investor's initial capital investment for income tax purposes. The future liability necessary for leverage must be at least partially offset by a minimum distribution revenue guarantee. The leverage will reduce the investor's potential loss through the reduction of income taxes. However, the investor will not realize a net gain unless the motion picture earns revenue exclusive of the minimum revenue guarantee. If the motion picture does not generate any net distribution revenue for the investor he will be liable in the future for the promissory notes that facilitated the tax shelter Therefore, motion picture investment decisions must be based upon careful and detailed examination of the international commercial merits of the motion picture property.

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