Sara Morton is a lawyer in the Entertainment Law Group of the law firm of Lang Michener.

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The Ontario budget introduced on May 7 contained a proposed amendment to the Corporations Tax Act providing for the creation of a refundable Ontario film and television tax credit intended to harmonize with the proposed federal film or video production tax credit. This was much-needed good news to Ontario producers whose ability to finance their productions has been severely restricted over the past year by spending cuts to provincial and national funding sources.

Of interest to both producers and lenders was the statement in the budget that the proposed Ontario tax credit is assignable, as producers will therefore be able to use the credit as collateral for loans.

In stating that the credit is assignable, the budget confirmed the existing law in Ontario (whereas federal government debts are not generally assignable as security, debts of the Ontario government are not generally subject to any such restriction).

The assignability of the Ontario tax credit means that a lender can enforce its rights to receive the credit against the producer and a trustee in bankruptcy of the producer.

Like the proposed federal tax credit, the proposed Ontario tax credit is expected to be a good receivable for producers to use as collateral, because it may be payable some time after completion and delivery of the production. It is also potentially a good receivable to lend against from a lender’s perspective, because it is payable by a creditworthy party; however, its use as collateral is subject to certain limitations (similar to those relating to the proposed federal tax credit) as described below.

Lenders likely to be cautious

Lenders are likely to be cautious in accepting the proposed Ontario tax credit as collateral immediately, because the proposed amendment is not yet law. Until it becomes law, the Ministry of Finance will not have authority to pay out the credit, which is essential if a lender is to lend against it.

The Ministry of Finance anticipates that the legislation will be introduced in the Ontario legislature in the first week of June and is hopeful that it will be passed prior to the summer recess of the legislature, which could begin as early as June 27.

While the anticipated date of introduction of the legislation is only weeks away, it may well be attainable, as the budget indicated that the Ontario legislation will incorporate by reference many provisions of the proposed federal tax credit legislation and regulations. It is anticipated that Ontario tax credit regulations will follow within a few weeks of passage of the legislation.

The fact that the federal legislation and regulations have not yet been passed is not expected to delay the enactment of the Ontario legislation and regulations; however, both the federal and Ontario legislation and regulations must be enacted in order for the Ontario Film Development Corporation to administer the tax credit program, as described below.

Lenders may also be reluctant to lend against the Ontario tax credit prior to the issuance by the ofdc of documentation which will provide them with comfort as to the eligibility of the particular producer and production for the credit, as well as the anticipated amount of the credit.

The ofdc, which will administer the proposed tax credit program under the auspices of the Ontario Minister of Citizenship, Culture and Recreation, will issue a certificate of eligibility which a producer will file with its provincial income tax return when it claims the credit.

This certificate is expected to certify that the production is an eligible Ontario production, that the producer is a qualifying production company, and to estimate the amount of the qualified labor expenditures to be used in calculating the amount of the credit.

To facilitate financing of the Ontario tax credit, the ofdc also proposes to issue some form of interim certificate.

The budget indicated that applications for the proposed Ontario tax credit can be filed with the ofdc after June 30, and the ofdc expects to begin issuing certificates of eligibility (or interim certificates) immediately, on the assumption that the legislation and regulations will then have been passed.

However, if the legislation and regulations have not then been passed, it is unclear whether the ofdc will be in a position to issue such certificates, even ones which are conditional upon this occurring.

The concept of ‘assistance’ (incorporated into the Ontario tax credit legislation by reference to the definition of ‘qualified labor expenditure’ used in the federal legislation) introduces uncertainty into the calculation of the Ontario tax credit, as it does with respect to the calculation of the federal tax credit. This is because qualified labor expenditures, the base on which both credits are calculated, are indirectly reduced by assistance.

The definition of assistance in the proposed federal tax credit legislation includes a ‘grant, subsidy, forgivable loan, deduction from tax and an allowance.’

An information bulletin dated Dec. 18, 1995 relating to the federal tax credit indicated that government agency equity or equity from a private fund would also be assistance, but that repayable loans, broadcast licences and contributions from the Cable Production Fund would not be considered to be assistance.

Despite this guidance, due to the myriad variety of forms which production funding may take, there remains considerable uncertainty in the industry as to which sources of funding will be considered to be assistance.

As the revisions to the draft federal tax credit legislation released at the end of March did not clarify this issue, it is anticipated that the Canadian Audio Visual Certification Office will release guidelines addressing this issue, among others, in the coming months.

Limitations on assignability

Assuming that the Ontario tax credit legislation and regulations become law in accordance with the anticipated schedule, producers should still expect that lenders will have concerns in lending against the Ontario tax credit, for the following reasons.

First, the interim certificate and certificate of eligibility will likely be non-binding and subject to audit by the Ministry of Finance.

In contemplation of the possible reduction of the credit in the event of an audit, lenders may discount the anticipated value of the Ontario tax credit calculated on the basis of such certificates when assessing its value as collateral, although such discounting might decrease as experience with the Ontario tax credit develops.

Second, the assignability of the Ontario tax credit is not expected to be binding on the government and the tax credit will therefore be payable to the producer. This is a disadvantage to a lender, as specific receivables assigned as security for a production financing loan are usually directed to be paid to the lender in repayment of the loan.

Under the Ontario Film Investment Program, replaced by the proposed Ontario tax credit program, a producer could direct the ofdc to pay all or part of an ofip rebate directly to the lender in satisfaction of a loan. Absent this ability to direct payment of the tax credit, a lender will likely require the producer to receive and hold the tax credit in trust for the lender until it is paid to them, or take other steps so that the credit will be received by the lender without passing through the hands of the producer.

Third, the budget stated that the proposed Ontario tax credit will be applied against any outstanding Ontario tax liabilities of the producer (such as any corporate tax, sales tax and employer health tax).

Producers should anticipate that lenders may therefore require them to incorporate a sole-purpose production company without existing Ontario tax liabilities as the borrower.

The budget also stated that a refund will be subject to a producer’s liability for corporate minimum tax. Corporate minimum tax is payable by a corporation (together with any associated corporations) whose gross revenues for the taxation year exceed $10 million or whose total assets exceed $5 million, to the extent that it exceeds regular Ontario corporate tax. However, in view of these thresholds, this consideration will likely not be relevant for the majority of producers applying for the credit.

Despite the limitations described above, the proposed Ontario tax credit should improve the ability of Ontario producers to finance their productions and return to Ontario’s production financing environment the stability which (due to the temporary nature of that program) was absent under ofip.