Vancouver: The elimination of tax shelters on production services’ limited partnerships in last month’s federal budget has Western producers scrambling to find alternative means of attracting private investment to salvage deals with American producers.

Grant Allan, president and ceo of Vancouver-based Beacon Group of Companies, which raises investment capital through tax shelters, is not opposed to the changes, just the timing.

‘Philosophically, I agree with what the government has done,’ says Allan. ‘They have made some changes in the tax-shelter legislation for the film industry that brings it more in line with the practices that apply to normal businesses. But we have $170 million worth of production that has already been signed to come to Canada in 1994, and without transitional relief, it will be lost to Canada.

‘Based on the way we normally do our (investment) structures, it will be a complete redo on the way we raise and invest money. The production services contract, which we pioneered, took us two years to develop. Now we have to start over to create a new structure.’

Wayne Sterloff, president and ceo of British Columbia Film, agrees that change was in order. ‘The federal government probably realized the Capital Cost Allowance was a very inefficient program. It costs the federal government about 15 cents for every tax-shelter dollar, but the producer only gets about eight cents for every tax-shelter dollar. In other words, the program effectively costs about 50% to administer.’

Allan says he has two major concerns. First, to maintain the production that has already been signed to come to Canada, and second, not to embarrass Canada in front of u.s. production sources.

‘We’ve already been hearing some very disturbing kinds of comments from u.s. production sources like, `It’s becoming a nightmare to work in Canada. If it’s not the union squabbles, it’s the border, and if it’s not the border, it’s ever-changing tax regulations.’

‘And since these tax issues keep moving on them, it’s very frustrating for u.s. producers. Part of our job is to make sure that the transition from the old system to the new system is smooth. We have people getting turned off of Canada as a location because they have a bad perception.’

‘Transitional fairness’

Allan says he will be in Ottawa later this month to discuss the issue of ‘transitional fairness’ with government officials. ‘We appreciate that they expect to consult with the industry to the particular problems the industry will be facing. They need to understand that those deals that were put in place (prior to this announcement) would be lost if there is no transitional relief (such as the grandfathering allowed under the Capital Cost Allowance tax shelters).

Enough time

‘If they deal with us fairly,’ he says, ‘we would still be able to preserve that amount of production volume that would be coming to Canada. And that would give us enough time to work with Hollywood for 1995 to see what other programs we can put together to maintain the volume of production coming to Canada.’

Sterloff stresses that these budgetary announcements were a notice of intention and could still be amended before the legislation is introduced in Cabinet.

He says the people who appear to be most severely affected in the production services tax-shelter changes are the smaller and mid-size companies, which do maybe one tax-shelter deal per year on a single project, but would not normally offer that project or certainly not close the deal until much later in the calender year. (Feb. 22 was the cut-off date unless the company had its offering memorandum out already.)

The larger companies were prepared for the announcement and that’s why there is a ‘curious quietness’ about such a major change, says Sterloff. He suspects many have a new ‘financial product’ waiting in the wings.

Colleen Nystedt, whose Vancouver company, New City Productions, was left completely in the lurch by the proposed changes, says the government’s move has forced her to abandon her entire business plan.

‘This is absolutely devastating. We’re dead in the water. My company has already lost over $250,000 worth of business as a result (of last month’s budget news), and that’s not even including the spin-off effects in jobs and money loss in the community.’

Nystedt says she had a project in the works at cbs, with a Canadian writer attached and a Canadian cast planned. Now, she says, ‘there’s no point in my doing it as Canadian content, so I’ll end up working for fees instead of having it as a joint venture with a far higher rate of return.’

‘What about the future of the production industry in Canada? Without having some kind of financial mechanism, we can’t play in the same leagues. We go right back to where we were as service employees. So now I can go back to production managing or move to the States,’ she says. ‘It’s been a hard enough battle for Canadian independent producers to partner and sell in the u.s. market and now they’ve literally taken away the only edge that we had.’