Ted Kelterborn is a lawyer at the Toronto law firm of McMillan Binch and a member of the firm’s KNOWlaw Group.

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Whether in feature films like Toy Story, Saturday morning cartoons like BeastWars, or special effects like those in Sinbad, there’s no denying that computer animation is a hot commodity in the entertainment industry today.

In an effort to bolster the continued growth of an already burgeoning computer animation industry in Ontario, on May 6 the Ontario government announced the creation of the Ontario Computer Animation and Special Effects Tax Credit.

The OCASE Tax Credit

Modeled after the Canadian Film or Video Production Tax Credit and its progeny, the Ontario Film and Television Tax Credit, ocase is a refundable tax credit which the Ontario government will provide to corporations for ‘Ontario labour expenditures incurred in respect of computer animation and special effects activities carried out in Ontario for use in film or television productions.’

ocase will be administered by the Ontario Film Development Corporation, which also administers the ofttc. Although the ocase credit is to be effective for qualified labor expenditures incurred after June 30, 1997, no credits will be paid until the appropriate regulations have been passed into force.

Regulations are currently being developed and will likely be included in the government’s budget implementation bill expected in late fall.

What do we know so far?

Although the devil will no doubt be in the details which will be contained in the regulations and guidelines, at this point we do know that:

* ocase is a refundable tax credit earned at a rate of 15% of ‘qualifying labour expenditures,’ subject to an annual cap of $500,000 per associated group of corporations.

* ‘Qualifying labour expenditures’ are the lesser of ‘Ontario labour expenditures’, (which are expenditures incurred after June 30, 1997 in respect of payments made to persons in Ontario who are performing ‘eligible computer animation and special effects activities’) and 48% of the prescribed cost of ‘eligible computer animation and special effects activities.’

* ‘Eligible computer animation and special effects activities’ are prescribed activities carried out in Ontario in respect of digital animation and digital visual effects for use in film or television productions, which productions must be for commercial exploitation, must be at least a half-hour in the case of television productions and must not be in genres which are ‘excluded productions’ for purposes of the ofttc.

Excluded production genres include those set out in subsection 1106(1)(b) in regulations to the federal Income Tax Act (for example, news, sports, talk shows, game shows, commercials, infomercials, pornography and ‘programs for which public support would be contrary to public policy’) as well as magazine shows, variety shows, educational and instructional shows and non-primetime shows other than those directed at children.

Service producers should note that a production which does not fall within these excluded genres may still qualify for the ocase credit, even if it does not otherwise qualify as a certified Canadian film or video production for the purposes of the federal cfvptc or the ofttc.

* The ocase tax credit is available to qualifying corporations, being those corporations which are Canadian corporations that:

a) are performing ‘eligible computer animation and special effects activities’ either for a film or television production that it is producing or under contract with a producer of a film or television production;

b) have a permanent establishment in Ontario; and

c) are not exempt from taxation under the Corporations Tax Act;

* A corporation that qualifies for the ocase credit as well as the ofttc will be eligible for both credits for qualifying expenditures without grinding down either credit.

* In order to qualify for the ocase credit, a certificate of eligibility must be obtained from the ofdc, which certificate will be filed under the Corporations Tax Act with the tax return of the corporation claiming the credit.

When will we know more?

As mentioned previously, regulations for the ocase tax credit are not anticipated before late fall and many details of the credit will not be known until that time.

Although many of the newly passed regulations governing the ofttc, together with the ofttc guidelines (which are anticipated shortly from the ofdc), will probably also be applicable to ocase, the question of what should comprise ‘eligible computer animation and special effects activities’ will no doubt be the subject of much discussion and debate prior to the release of the regulations.

How can I get more details?

Although there is very limited printed material available respecting ocase, you may be able to obtain further information by contacting the ofdc at 175 Bloor Street East, Suite 300, Toronto, Ont. M4W 3R8. The ofdc phone number is (416) 314-6858.

One thing is clear in all of this. The film and television industry in Ontario has once again made its case for support to the Government of Ontario and the government has responded.

Hopefully, once the bugs have been ironed out of the system, ocase will make it possible for producers of computer animation and special effects finally to take some credit (tax credit that is) for their work.

(This article contains general comments only. It is not intended to be exhaustive and should not be considered as advice on any particular situation.)