Montreal: Promoters of a limited partnership tax shelter for service productions are predicting a sharp reduction in foreign film and tv shoots in Canada, especially in British Columbia, following a decision by the federal Finance Department to shut down the shelter.

The negative fallout from Finance’s Nov. 19 ruling will be felt most in b.c., where an estimated 70% to 80% of all production is on behalf of the Hollywood studios and the u.s. television networks.

‘b.c. will be the province that loses the most, again, with the elimination of this tax incentive,’ says Arthur Evrensel, a partner with Heenan Blaikie in Vancouver.

Foreign production in Canada in ’96 is estimated to be in the $400 million to $500 million range, and according to industry analysts, limited partnership financing has played a significant role in attracting this volume of business.

As it stands, Finance has ruled no new prospectuses will be admitted as of Nov. 19. The ruling grandfathers existing investors’ money to Dec. 31.

The ruling wipes out what was effectively a tax deferral with a new provision requiring expenses be matched with income in the same time period. With the loss of the deferral, the investment is no longer attractive.

The cancellation is likely to have an impact on Canadian public funding agencies as well, adding even more fuel to existing tensions between the b.c. and the Ontario and Quebec industries, where the volume of certified Canadian production with access to the 12% federal refundable tax credit and the provincial tax credits is considerably higher.

Evrensel says studies show the program has a positive cash flow to government, in part because lower interest rates and the decline in the prime value of the money have reduced the benefit of the deferral to investors.

‘The other upsetting aspect to this is that in the last few months Revenue Canada issued several favorable advanced tax rulings to companies like Alliance, Grosvenor Park Equities, Monarch Entertainment. I guess there was no sense that this was coming. One arm of government is giving us advanced rulings which we rely on and another says, ‘You know what? We’re going to change the rules.’ ‘

Jeff Rayman, president of Alliance Equipcap, says a certain percentage of foreign shoots would come to Canada because of the low dollar, ‘but without the shelter, a number of shows simply won’t get produced.’

‘The money generated by this program is the final straw to get a show greenlit in a lot of productions. A lot of shows just won’t get made.’

Rayman expects the shutdown to impact early in the new year. ‘I think some (current) shows could end up folding.’

He is doubtful alternative schemes can replace the limited partnership tax shelter.

‘My feeling is that this is the best program that was available because it did not offend the government’s mandate because they were not out of pocket, and at the time it facilitated a lot of production in Canada that would not have otherwise come here,’ says Rayman.

Evrensel says the impact will certainly be felt by mid-year, adding the argument studio shoots ‘would come here anyway’ is shortsighted.

Net surplus to feds

The industry says government may not be fully aware of the number of jobs created by the tax shelter nor its real cost to government.

A preliminary report from the promoters projects a net surplus to the federal government of $17 million in 1997, after any tax recovery of gst income.

On a consistent volume of $500 million, the study says the tax loss to government would be $109.6 million.

On the plus side, the study says non-resident performers would pay $12 million in withholding tax while Canadian taxpayers (employed on the productions) would pay $47.2 million. In addition, the tax recovery from deferrals (over 10 years discounted at 5%) would be $67.3 million for a total of $126.5 million, thus the $17 million net surplus.

The document says different branches of the Canadian government have taken contradictory positions, and ‘since production decisions are made anywhere from six to nine months in advance of production, these proposed changes leave the industry with little time to react and address this apparent shift in policy. It will also be leaving a bitter taste in the mouths of senior u.s. production executives in terms of future dealings with Canada.’

One industry source says the shutdown by Finance was not aimed specifically at the limited production partnerships but at mutual fund limited partnerships and revenue-negative shelters in general.

There may be attempts to lobby government to change the legislation, but others see the ruling as ‘a done deal.’

The production service shelter has been criticized. One source calls it ‘destabilizingŠ(only) adding to the creation of counter-incentives in our (Canadian) industry.’

Evrensel says big-budget foreign shoots are mobile and other location options exist.

‘I don’t think we can afford to lose jobs in b.c. in this area because we do not have the Telefilm productions or the Cable Fund (ctcpf) productions to replace them, whereas Toronto and Montreal can perhaps do without.’