Malcolm Silver is head of Malcolm Silver & Co., a Toronto-based company which finances the production and marketing of film, television, video and multimedia.

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this amazing industry seems to completely remake itself every few years with each advance in technology. It’s time for a new look at entertainment investment.

The recent budget changes seemed to spell the end of the film and tv tax shelters for good. However, in true Hollywood style, a hard look at the reality behind the front reveals that the investment opportunities are inevitably alive and well and more interesting than ever.

In 1994, $1.2 billion was spent on film and television production in Canada, of which $500 million has been expended in the province of Ontario. Film and television production is coming of age in Canada and so is the investment opportunity.

Recent changes to tax rules last December and again, in a major way, in last February’s budget, call for a new look at the reality behind the smoke of investing in film, television, video and now cd-rom.

The old subordinated loan structures died at the end of 1994 thanks to the February ’94 budget. In the February ’95 budget, the government got very serious about killing off Capital Cost Allowance deals.

The existing film tax incentives to be eliminated for Canadian content productions acquired after 1995 include the following:

– revenue guarantees will no longer be permitted as an exemption to the ‘at risk’ rules;

– exemption from the leasing properties rule;

– no longer exempt from the half-year cca rule;

– no longer eligible for an additional cca (relies on income from the productions).

The actual amount of tax-shelter product sold in Canada in 1994 probably exceeded $1 billion, which is quite staggering considering that the widely held view in Canada is that there are no write-offs left. Indeed. Clearly, this size of shelter business indicates just how big the production industries have become in recent years.

The overall expansion of the production industry, particularly in Ontario, has been boosted by the public flotation of the six major production houses, despite the fact that their shares (launched in the bull market) have generally been lackluster performers.

Canada still has strong advantages over the u.s. competition: lower costs, international coproduction treaties, a healthy and widening base of broadcasters, and, of course, the cheap dollar. Worldwide, as privatization and new channels pop up, the demand for programming keeps rising.

In 1996, the existing cca tax incentives will be replaced by a refundable tax credit which goes directly to the producers and cannot be passed on to the investors.

The new Canadian film credit is the lower of 25% of eligible wages up to a maximum of 48% of the non-government funded portion of a production, which is better than the average tax-shelter benefit to a producer of about 10% of the production budget.

New offerings

The basic rules for investing in film, television, and video have thus changed, but the federal government made a point in the budget of outlining its continued commitment to these industries.

The Ontario government has renewed its effective tax-free grant incentive to investors of up to 25% of the investment. The limited partnership continues to be the most popular format for private investors. The most common structure is the cca pure deferral – the true successor to the old 1994 cca deals.

Changes to the structure mean there is no subordinated loan in place. Approximately half of the investor loan is advanced by a financial institution and secured by letter of credit. Repayment of the second half of the investor loan is now guaranteed by a 15-year loan, which is backed by revenue guarantees made by a third-party finance/distribution company. This in turn guarantees the repayment of the balance 15 years down the road. In essence, this means that the investors’ adjusted cost base does not turn negative for 15 years and trigger a capital gain.

However, the investor can invest in a financial instrument which will take care of the liability and still have the use of the money saved by the deductions in the meanwhile. This is still a good investment, especially for those who can use the funds to much better effect elsewhere, such as their own business.

Draft legislation came down on April 26 which still has not become final. Investors should ensure that the deal complies with the technical amendments.

This transaction continues the tradition of providing a pure deferral with controlled risk and no upside, in short, a real use of money deal. These transactions have not had an advanced ruling in the past and promoters have not seen fit to need it, since it was a legislated tax shelter.

Production services

These transactions are fundamentally different from cca deals. They are essentially used to finance the production of non-Canadian content shows, i