The section of the Ministerial Declaration titled Re-Targeted Film Incentive states: ‘(T)he existing cca incentive will be retained for certified Canadian productions acquired before 1996, the principal photography of which is completed before March 1, 1996.’

In 1995, producers can apply for the new tax credit or the cca, but not both.

The industry, through the joint efforts of its primary trade associations, the cftpa and the apftq, had lobbied Ottawa for at least a 12% tax credit, and preferably 15%. They got the lower figure, which hands over about the same return to producers as the former cca.

Sandra Macdonald, cftpa president, says, ‘Pending finalizing of precise details, I don’t think any producer should be negatively affected by the 12% rate.’

As to whether the credit leaves producers more vulnerable than the familiar cca, Macdonald says: ‘I don’t think there is any safe position anywhere. The thing that is preferable about a tax credit is that it is perfectly transparent. Producers are not signing six inches of warranties that expose them to contingent liabilities running out 10 or 15 years, so at least if you qualify, it’s straightforward.’

Atlantis’ MacMillan, who is active in tax credit consultations with Heritage, says, ‘I don’t think we are seeking any significant changes in the eligibility rules. I think they worked quite well under the cca regime.’

Tom Berry, chair of the cftpa tax committee and president of Allegro Films, says a joint cftpa/apftq committee and advisors will meet with representatives from Heritage and Finance in the coming weeks to iron out details.

Producer’s guide

The two associations plan to publish a producer’s guide. Once the proper authorities have approved the document, Berry says it should be ready by mid-April.

Key issues to be worked out include the definition of a Canadian corporation and the definition of wages and salaries (will they be payable to non-residents?).

Allan Garson, partner at Heenan Blaikie in Toronto, says Finance indicated an intention to develop Canadian ownership tests as well as tests for commercial exploitation in Canada by Canadian broadcasters and distributors.

Berry says other issues to be discussed include the treatment of Telefilm’s support, a clarification of the application for equity investments and loans, and the general well-functioning of the certification mechanism.

Impact on service productions

As for the budget’s impact on service production, Harold Tichenor, president of Vancouver-based Crescent Entertainment, says: ‘It’s hard to know the exact implications until the new regulations governing tax credits come down from the government in the next few months. We do know the certification aspect will remain the same, however, the actual regulations as to what costs will qualify under the new tax credit we have no idea about, nor do we know what the criteria for ownership of the shows will be.’

Service production, he says, often involves offshore ownership, and ‘I don’t think the new regulations for refundable tax credits will allow the kinds of structures that were used under the ccas.

‘What we are hearing about the refundable tax credit is that Canadian rights will have to be maintained and handled by Canadian distributors, and the copyright will have to be maintained by the Canadian production company.’

This, he says, could mean good news for the development of the indigenous production industry.

‘Essentially, this should move Canadian production more towards licence production. In other words, a show might be developed in the u.s. but acquired and produced and serviced by a Canadian company and then relicensed back into foreign markets.

Louis Lu, senior vice-president, Alpha Capital, Montreal, says the experience with the Quebec tax credit suggests the federal program isn’t likely to be up and running much before late 1995. He says competent staff has to be hired and a system of checks and balances put in place against potential abuse.

Accounting practices

Lu says there’s a huge volume of production to be considered based on current cca levels, and the issue is further complicated by producers’ current accounting practices, the treatment of deferrals and eligibility.

Adds Garson: ‘In calculating the cost of the production you have to take out any other deficit financing, and it’s not clear how broad that end of it will be.’

While there is no formal notice as to which agency will administer the new tax credit program, cavco looks to be the likely candidate.

Berry says the best model for the federal tax credit program is the Quebec program, ‘universally admired by its clients, while the same can’t be said for ofip (the Ontario Film Investment Program).’

One stipulation in place is an accelerated cca, which allows owners of Canadian certified productions to match revenues against capital cost.

Garson says it is ‘most significant because it likely won’t affect the larger producers like Alliance because of the volume of production, but it probably will have a significant effect on the smaller, more specialized producers.’

Perhaps the most significant issue not addressed in the budget, says Garson, is one of the timing of payments. ‘Obviously the tax credit will be tied to the certification process. We all know that can be a lengthy process, and there is no indication whether there will be an installment system of payments. In addition, there is no indication whether the credit will offer bankability.’

In political terms, Berry says the new tax credit shows the federal government’s ‘generous attitude towards the provinces.’ With the new tax credit program, he says, the provinces recoup their entire 40% share of the cost of the cca.

‘The federal government did not cut a mean-spirited deal. The provinces should now consider being open to allocating some portion of the saving to the industry.’

Figures for 1993 indicate the cost of the cca to government (federal and provincial) – in the form of taxes not collected – was $100 million, although other sources in the industry suggest the cost was as high as $159 million.

Based on these calculations, the provinces are looking at annual savings of between $40 million and $60 million as a result of the elimination of the tax shelter.

The Quebec government has ‘informally’ recognized a saving of at least $10 million, but Berry estimates the saving could be as high as $15 million.

Business easier

The elimination of the ‘stupendously complex’ tax shelter in 1996 ‘will make the business of producing movies easier, (and) allow producers to reduce expenses for professional services or free up professionals in-house for other tasks,’ says Berry.

The stated reason for the phasing out of the cca is that about two-thirds of the program’s benefits went to intermediaries, brokers, lawyers, and the investors.

In Quebec, Suzanne D’Amour, apftq associate director general, and a member of the tax committee, says producers here are pleased with the new tax credit program.

D’Amour says the ministerial declaration announces the creation of a tax credit equal to the lesser of two options – 25% of a production’s labor costs up to a maximum of 48% of the non-public funded portion, or an across-the-board 12% refund rate applied to the total admissible cost of a production.

The publicly sourced portion of the investment in a certified production is not deemed admissible.

For example, for a $1 million production with $580,000 in public investments originating from Telefilm, the Ontario Film Development Corporation or sodec and a provincial tax credit or rebate, the admissible cost of production is $420,000. The value of the federal tax credit, at 12%, is $50,400.

Presale

A sale to a public broadcaster, including cbc and Radio-Canada, is considered a presale, says D’Amour, not an equity investment.

In the case of a $1 million feature film with no public investment other than ofip or the refundable Quebec tax credit (18%), the value of the credit, in this instance to a Quebec producer, is ($820,000 x 12%) or $98,400. For a feature with extensive public financing, the credit can be applied only to the distributor’s advance, and could be as low as 1% or 2% of the overall budget, says D’Amour.

Not eligible

Also proposed by the government in establishing the credit are modifications to limit certifiable productions to fiction, documentary, music and variety programs with plans to exclude news, broadcast commercials, corporate promotions, game shows, live broadcasts, public affairs and what are defined as ‘sexually or violently explicit productions.’ There is no indication of how these areas will be handled, says Garson.

with files from leo rice-barker in Montreal, pamela cuthbert in Toronto and joanne morgan in Vancouver.