tax rule

changes

The Canadian Film and Television Production Association says new restrictions for tax-shelter financing announced in Ottawa Dec. 1 ‘will create a climate of considerable uncertainty’ for Canadian film and television producers planning tax-shelter investments for 1995.

When announcing the changes, the Department of Finance also promised February will bring a replacement tax plan for the film industry to be designed by Finance, Canadian Heritage, the cftpa and the Association des producteurs de films et de television du Quebec.

The new measures, in place as of Dec. 1, affect how Capital Cost Allowance shelters are sold and are designed to eliminate no-risk investments (common to film and computer software shelters). All shelters sold after Dec. 1, except those which already have a tax-shelter registration number in place, are affected.

Financing structures

Sandra Macdonald, president of the cftpa, says, ‘The things that were struck down in the last budget and on Dec. 1 never affected the actual film provision in the Income Tax Act; they just affected some of the financing structures that had been developed by brokers to make the deduction more attractive to investors.’

Norman Bacal, a partner in Heenan Blaikie, Toronto, says the impact on the industry is divided between service deals and certified productions. Bacal says service deals, where the beneficiaries of the tax shelter had largely been u.s. studios, are the hardest hit.

‘From what I understand,’ he says, ‘these rules were brought out to have the effect of stopping those types of tax-shelter benefits from arising for investors.’

Bacal claims no one in the tax community was particularly surprised by the announcement, and says the thrust of the changes are directed at the computer software industry.

‘It was clearly set up to look particularly at the types of financing that go on in relation to computer softwareÉlimited recourse financing.’

Nonetheless, the news does mean film and tv production plans for January or February that involve limited recourse loans will be on hold.

The Vancouver industry, which owes 85% of its business to service production, will be particularly hard hit by the new tax-shelter rules.

Stephen Cheikes of Vancouver-based Monarch Entertainment, which offers financial incentives to u.s.-based film producers to shoot their projects in Canada, says the changes have already cost Vancouver and maintains foreign producers are fast losing confidence in Canada as a stable place in which to do business.

Cheikes is currently enlisting the support of the West Coast production community to lobby the government for changes to the new rules.

Michael MacMillan, ceo of Atlantis Communications, has been advised by the company’s brokers, Grosvenor Park, that all Atlantis productions for 1994 are safe and new measures for 1995 can be worked around.

‘Grosvenor is confident that they will be able to continue to do tax-shelter financing on certified films in 1995,’ he says.

Bacal says for certified productions, he’s not sure if the new measures have any particular impact one way or the other. ‘It’s likely if there was to be an ongoing tax-shelter program for Canadian certified productions, that they could continue even in light of these proposals,’ he says.

Susan Cavan of Accent Entertainment says, ‘We’re not stuck, but that’s lucky.’ Accent is not caught, says Cavan, because many of the company’s projects are in development stages and are not looking to be financed until summertime.

Michael Speyer, vice-president of Paragon Financial Ltd., says if a new shelter is introduced in February, brokers will have to adapt. But even if a tax credit replaces the shelter – which is widely anticipated – Speyer says the wait for official word in February will hurt his business.

‘The problem is there is not only general uncertainty, but even greater uncertainty for the people who were planning on starting productions sometime between now and the budget date and were counting on tax-shelter financing,’ he says.

‘Out of luck’

One producer came to Speyer with a movie that was counting on tax-shelter money and would have finished principal photography by February. ‘He’s out of luck for now,’ he says.

In the case of Paragon Financial, a brokerage arm of Paragon Entertainment, Speyer says of a possible tax credit: ‘I don’t want it. The producer fee and brokerage fee go into deficit financing Paragon Productions. I hesitate to say it would probably lead to a reduction in the number of productions we do, but it will heavily hurt the financing of our deficit.’

Speyer fears that a less attractive incentive to investors could lead to less work. ‘Producers that have international projects they were filming in Canada may think of going elsewhere,’ he says. ‘While we have the benefit of the exchange rate, it is my understanding that it could be cheaper to shoot elsewhere. People are shooting all over and the ability to offer the tax shelter helps.’

Steven DeNure, president of Alliance Productions, sees a different priority altogether.

‘The real issue,’ he says, ‘is those projects which are developed and produced by Canadian producers. (If the tax credit) replaces the Capital Cost Allowance revenue, I think producers are indifferent which program that revenue comes from. But it is vital to some indigenous productions like North of 60 or Taking the Falls.’

The tax-credit scenario is unequivocally touted as the best option by producers, provided it is set at a 15% rate or more. Through tax shelters, producers average a 10% return and, as Macdonald explains, with interim financing in the picture, another 2% of a production budget for carrying costs gets factored in. Therefore a 12% rate would be a straight swap.

‘Unusual’

Although the cftpa has asked for a 15% credit, Macdonald recognizes it would be a ‘generous’ credit if granted. ‘To operate on the notion that (Finance is) obligated to give us anything at all is a remarkably arrogant notion. The fact that they have promised to give us anything at all is very unusual,’ she says.

Macdonald believes Ottawa took the extra step to assure film producers because of the case they made for a tax credit. ‘We made a good argument that the system in place has been very important for producers. But the way it has been operating in the past few years has been very inefficient.’

Producers have been getting about 40% of the money under the existing tax shelter, says Macdonald, with the balance going to investors, lawyers and brokers.

‘What we said to (Finance) was this could be a win-win situation. You could reduce the amount of tax you are giving up and we could do as well or better if it went directly to the producer,’ she says.

The cftpa has proposed a tax credit modeled on a merger of the current certification process and the Quebec tax credit. If a tax credit is implemented, the question remains: will it be based on the full production budget, below-the-line costs or some kind of employment basis?

The cftpa recommended a credit that would encompass a rebate of one-third of labor costs up to 45% of the total budget of the project.

Macdonald doesn’t know what the chances are that a refundable tax credit will be in place in ’95. But she says Finance’s preference to keep things outside the tax system as programs rather than inside the system as deductions is a factor. ‘It’s a neatness issue. They would prefer if we agreed to a program. However, we think there are good reasons for keeping it in the tax system.’

Bacal says the big issue in seeing through a new tax-credit system is ‘timing and implementation. I think everyone in the industry would accept that phasing in that kind of proposal could take as much as a year.’

Canadian distributors are also in the picture. The Canadian Association of Film Distributors and Exporters is interested in building the requirement of a Canadian distributor into the Capital Cost Allowance certification process. To date, while film and tv production copyright has required Canadian ownership, all distribution rights – including Canada – could be sold to foreign distributors.

In light of a possible tax credit, the producers associations have stated their support for the change, a stance cafde president Dan Johnson calls ‘intelligent and enlightened.’

Whether such a change will be implemented is not guaranteed, says Johnson, but things look good. ‘We understand that the government has become aware of the value of getting more benefit for the Canadian industry for the same amount of money and that Canadian distribution by Canadian companies will be a prerequisite. Insomuch as anything is in, we understand this is going to happen.’