When the federal budget came down on Feb. 22, it caught some film and television producers by surprise with two measures which targeted tax shelter and Capital Cost Allowance gains. Although the budget was generally good news for arts and culture industries – with no apparent cuts to the agencies and the cbc – these two tax measures will create problems for some producers. Trouble is, some were in the process of arranging production financing on the assumption that these tax-shelter provisions would still exist.

The first measure involves a negative adjusted cost base (acb) which, through partnership and passive investors, allowed producers to take advantage of a tax loophole. Essentially, it meant that investment partners could receive more money through cash distributions and tax deductible losses than they had invested in the production. The budget announced that when returns to limited partnership investors exceeded their original investment, those excesses will be subject to capital gains tax.

The second measure targets cca deductions so that the tax write-offs available to the limited partners can only equal the amount actually invested in a production by those partners.

To assess the long-term impact of the changes, producers will have to consult their lawyers. Film financier Malcolm Silver concludes: ‘I think it’s still too early to assess the impact this will have on the industry because (for now) it’s a question of coming up with a creative solution to these changes. If not, the financing of the industries will be entirely affected.’

Right now, tax-shelter changes are a big headache for some producers. Lawyer Michael Prupas, who works with Heenan Blaikie in Montreal, says the existence of these types of tax shelters can make ‘a huge difference between companies that are marginal and those that are profitable.’

He adds: ‘There’s certainly no reason to panic. But at the same time, (producers) should be concerned that the Canadian government has taken this action, without notice to the industry, that could have an impact on pictures not yet sold (into) limited partnership.’

Producers angry

The morning after the budget came down, Prupas said he’d been on the phone non-stop with producers angry with the government for ‘going after’ these types of tax shelters.

One is Tom Berry of Allegro Films in Montreal. He says he expects a lot of producers are unhappy with the changes. Although he knows a lot of producers who would prefer other financing options, he says many were using – or planning to use – this one. Berry says that by making changes without warning, the federal government has ‘simply put at risk a lot of productions. They’ve really hurt people who are close to’ clinching financing packages and need ‘this piece of the puzzle.’ He says Allegro has a large production slate this year and could well have done without this surprise from Finance Minister Paul Martin.

Berry says the Quebec government acted more responsibly a few years back in phasing out one of its tax credits and replacing it with another after a one-year grandfather period.

Some producers pitching projects at the afm were reported to be caught mid-deal at the market with financing tax-shelter structures abruptly pulled.

Alliance Communications’ vice-president communications, Pauline Couture, confirmed that Alliance Equicap will be affected by the changes: ‘It is true for the portion of Equicap that is cca-driven, but that is a diminishing portion of Equicap. A significant portion of the company is not cca-driven, and is not even production-related, but involves other products.’

Short-term problems

Equicap president Jeff Rayman agrees that the changes to the tax-shelter rules create short-term problems for anyone who had expected to be able to finance part of a deal through a limited partnership shelter. He says a portion of Equicap’s production financing business involves these shelters, but says all production to be done in 1994 is protected from the budget changes by the grandfather clause. Over the next couple of weeks he will assess whether any of Equicap’s deals-in-progress will be affected by the budget.

Down the road, he adds, Equicap will put financing deals together with ‘a couple of different structuring alternatives.’ He’s confident there will be new ways to attract private investors.

with files from susan tolusso.

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