A small gathering of British Columbia producers, u.s. producers and accountants is meeting with representatives from Revenue Canada, Industry Canada and the Ministry of Heritage Feb. 29 to discuss enforcement of a tax policy that would cause major disruption in the Canadian production industry.

‘It could conceivably be the next crisis in the industry,’ says Norm Bacal, partner at Heenan Blaikie, regarding a change in Revenue Canada rule enforcement that could effectively discourage American performers from working in Canada.

After auditing a Canadian company set up in Vancouver by an American actor who was working in Canada, Revenue Canada has made a proposal that would effectively change how u.s. performers working in Canada would be taxed.

Since 1985, Revenue Canada has allowed American performers to work in Canada as contractors, meaning that production companies withold 15% of an actor’s fees for tax purposes and when the performer goes home he/she files for a credit. Revenue Canada has not required foreign performers to file in the past although it has always been policy.

David Zitzerman of Goodman, Phillips and Vineberg says ‘If you read the Income Tax literally, when Kevin Bacon comes to Toronto to shoot a film he should file a return and pay taxes at 53% on his income from shooting in Canada. But Revenue Canada has, for the last few years, chosen administratively not to enforce those rules.’

What has changed, continues Zitzerman, is ‘because of concern over some of the practices in Vancouver, Revenue Canada senior official Ed Gauthier said they were now considering enforcing the law of the land and requiring non-Canadians to file returns.’

Bacal says Revenue Canada is considering changing its administrative policies in such a way that u.s. performers would be treated as employees. On the surface, it appears foreign actors would be inconvenienced by the need for a Canadian accountant to file a tax return but Bacal calls this issue ‘a red herring.’ Bacal says according to hearsay the most significant change is a shift in the department to a graduated tax basis for non-Canadian performers. ‘As soon as they say we expect graduated withholding it necessarily means they consider them employees.’

Bob Armstrong of Cannell, who will attend the meeting Feb. 29 says, ‘I am aware that Revenue Canada is taking a pretty close look at our industry but that’s all it is. I wouldn’t be surprised if they are thinking of changing their policies but there have been no announcements about changes. Not that I’m aware of.’

Bacal says the issue is at very early stages and many Canadian producers are not aware of the situation. ‘It’s all piecemeal but we’ve certainly gotten enough indications that we are very concerned about it.’

The signals are coming from the u.s. and from British Columbia where the booming service industry could face serious injury in any disincentives for u.s. productions.

Bacal summarizes the aggravation for visiting performers: ‘Let’s assume you bring up an actor who is being paid a million dollars. Under the policy as we understood it the production company would be obliged to withhold $150,000 and that would be the extent of its obligation. Under the new proposals, when you get into graduated withholding you are withholding as if that person is an employee and you may be withholding 50% in total and in some cases more than 50%.’

Doug Barrett, partner at McMillan Binch, says, ‘This is a tough issue for both the industry and Revenue Canada because Revenue Canada is not changing the law, it’s merely changing its administrative approach to what is already law. So it probably has every right to do what it’s doing. The hill the industry has to climb is to persuade Revenue Canada to return to a more relaxed type of enforcement and this is always tough.’

Jim Westwell, president of the Vancouver-based payroll company tvd is putting together some statistics to present at the Feb. 29 meeting including news that, in b.c. over the last two years, there was $240 million paid out in payroll in the industry and $50 million in taxes.

When asked what the motive of Revenue Canada might be, Bacal says, it’s a matter of ‘looking more at what the appropriate theory is without regard perhaps to what the practical implications are. I don’t think it’s a tax grab or anything like that.’

cftpa president Elizabeth McDonald says the timing of the cftpa/apftq Parliament Hill blitz (Feb.15) was helpful in this matter. ‘This came out of an audit and the audit could lead to a ruling but we’ve had the opportunity thanks to the blitz to raise the issue to the department of Revenue and explain potential problems.’