1/10/2005
Your Production Audit is Not Your Last Audit: Preparing for Future Audits

By JEFF KULBAK, BComm, CA, Director of Media Services

At long last, your production has completed its final stages of post-production; all elements have been delivered and accepted by either your broadcaster or distributor. The stage is set for your production audit; however, it is unlikely that this will be your final audit. So, how do you begin to prepare for successive audits?

Initiating Preparations

In the Canadian production environment the production audit is just another in a series of audits. It is very likely the production company will be subject to additional audits from the Canadian Revenue Agency (CRA), your Provincial Media Agency or the Provincial Ministry of Finance. With countless audits on the horizon, it is always important for the production company to take stock and account for the future.

If you have interim financed your investment tax credits, the production audit and preparation of tax returns take on added importance. You want everything to proceed smoothly so that you maximize your claim of the investment tax credits in order to repay any bank loans or financings that you have outstanding. At the same time, the quicker you file and ultimately receive your investment tax credit, the lower the interest costs.

Eligible Labour Expenditures

Any audit, either internal or external, requires proper planning, which should take place at the pre-production stage. The accounting software utilized must be designed to properly track the eligible labour expenditures necessary for determining the investment tax credit.

Eligible labour expenditures on productions include:

- Salaries or wages paid to employees of the corporation;

- Remuneration other than salary or wages, paid to a person or partnership that carries on business in Canada; and

- Reimbursement by a wholly-owned corporation to its parent for an expenditure that would otherwise be Canadian labour expenditure if it were made by the wholly-owned corporation.

Labour Codes

All accountants employed by the production (during pre-production, production and post-production) should possess a strong working knowledge of the tax credit system and qualifying labour expenditures. It is strongly recommended that there be an investment in time at the pre-production stage ensuring that labour codes are set up correctly.

Additionally, the accounting software packages in place should provide for the correct coding of Canadian labour expenditures. Most packages include the use of free fields. All accountants should be familiar with those fields when coding and posting labour transactions.

Other Important Preparations

It is also important that the accountants gather all affidavits signed by the production labour force. These affidavits should be filed, as they will be required later in the process when the CRA or Ministry auditors are completing their fieldwork.

If these efforts are made to ensure that the necessary steps are considered in the preparation and review of the qualified labour schedule of expenditures, an accurate listing will result. This will also help reduce the amount of time and number of questions asked by CRA or Ministry auditors and assist in ensuring that the maximum tax credit is claimed.

This article has been prepared for the general information of our clients. Specific professional advice should be obtained prior to the implementation of any suggestion contained in this publication.