debate

goes on

When Finance Minister Paul Martin sent a letter June 2 to the Canadian Film and Television Production Association, he simplified the tangle of tax issues that is currently winding its way through the production industry.

In the letter, Martin retracted new legislation drafted in April for the tax shelter and endorsed the assurance he made in his February budget that 1995 eligible productions could access either the new tax credit or the shelter.

Although the missive went a long way to satisfy producers who use the shelter, the much-anticipated credit – which will replace the shelter at the beginning of 1996 – is raising more than a few thorny issues in its embryonic stage.

A federal government discussion paper sent out May 22 for industry reaction has received over 20 submissions. Key issues include a loan guarantee, turnaround time and eligibility criteria.

Although the paper indicates everything is on the table for discussion, industry sources suggest bankability, or the provision of a loan guarantee, is one key issue that is not negotiable.

Norman Bacal, partner at Heenan Blaikie, Toronto, says, ‘That was clearly what came out of Finance senior officials – from their perspective, they had no intention of making it bankable.’

While the larger companies – with established banking and credit relationships – will be relatively untouched by this issue, the small and medium-sized producers stand to lose, says Bacal.

‘I think the smaller you are the greater the risk is going to be and therefore the more you are going to be paying in intermediary fees.’

He predicts the development of ‘an entire finance business’ where the focus will shift from shelters to banking. ‘To a certain extent,’ he says, ‘it will be open season.’

cftpa president Mirielle Watson, on behalf of the organization, recommends a structure that mimics the Quebec credit, which provides a guarantee through sodec: ‘a two-tiered system which allows for advanced ruling on the amount of the rebate as well as granting both predictability and assignability,’ she says.

Guy Mayson, chief of film and video policy for the Ministry of Heritage, is well aware of the heat generated by the bankability issue. ‘We’ll see what we can do,’ he says, ‘but it will have to be something that is consistent with Finance and tax policy.’

Earlier this month, Bacal and associate Mark Jadd prepared a paper which addresses these and other key concerns surrounding the tax credit.

For one, Bushwhacking Through the Wilderness looks at the issue of timing. Industry consensus wagers, on average, an 18-month waiting period before the credit comes through. In his paper, Bacal suggests that a waiting period of one year is the minimum and as much as two years is conceivable.

Taking into account intermediary costs without a built-in guarantee, Bacal estimates that a producer could see as little as 7% of the 12% credit in the new financing environment.

Another matter – ownership – is a serious issue for the bigger, public companies. The cftpa recommends the credit follow the Investment Canada Act stipulation, whereby a Canadian company is defined by 51% ownership based on voting shares.

Defining Canadian control seems to be up in the air, says Bacal, and the question of whether ownership should be based on equity or voting rights is on the table. At present, ‘it’s one of those issues that no one knows about,’ he says.

In their quest for foreign, and specifically American, investment, the public companies want to ensure that they don’t lose access to the tax credit.

‘What they don’t want is to find out that by going to the u.s. to raise capital they all of a sudden jeopardize access to whatever credits would otherwise be available,’ says Bacal.

Also on the table is the issue of copyright. As Bacal points out in his paper, the federal discussion paper suggests that 100% copyright ownership and distribution control – both held by a Canadian company – are required to qualify for the credit.

Although a special provision for treaty coproductions appears to be in place, Bacal notes it is not clear whether some productions, including coventures, will be eligible. He sees some potential trouble down the road, and by example, suggests that a coventure tv series with 85% Canadian interest would be disqualified.

Bacal calls the stipulation ‘unnecessarily restrictive’ and proposes that copyright ownership be split among a number of investors with the provision that the credit is available only to the Canadian component of the deal.

Also of concern to some producers is the definition of eligible productions as ‘film and videotape,’ thereby possibly excluding new-media projects.

Mayson suggests the government may be hesitant to ‘throw open the doors’ on these definitions. Bacal recommends making the definitions wide open for any new-media project, certain productions such as those made for tv distribution with plans for new-media markets should be eligible.

‘I think the definitions that are in there need to be expanded to deal with what is currently being produced for television at the very least,’ he says.

Plans are to have the credit up and running by early fall, says Mayson, but industry sources expect the credit no earlier than November.

While the creation of the credit is in transition, Bacal says, ‘At the end of the day, the one thing I think we do know for sure is that there is no program that will be able to satisfy everyone.’

Heritage and Finance are reviewing the submissions in a joint, cross-department venture, with plans to hold an industry consultation in late June or early July. Mayson says the industry will be consulted throughout the process. ‘We hope it will continue to be an open process with room for comment from the industry.’

The next step in the process is the creation of draft regulation. ‘Everyone will be interested in that so we will certainly try to keep the lines of communication open,’ says Mayson.

Still in question is the administrator of the credit. Telefilm Canada and cavco are in the running.