Canada will be subject to a new minimum 40% expenditure requirement for theatrical features coproduced with the U.K. Lobbying efforts have not been successful, and now the industry is waiting for what may be a quasi-death knell, in the form of a guidance document from the U.K. Department for Culture, Media and Sport spelling out the exact requirements for qualifying U.K. expenditures. The document was initially expected in July, but might be published only later this fall.

This year’s poor market conditions have already cut into international feature film production, and some industry commentators are saying the new DCMS ruling, which will be introduced on a ‘temporary basis,’ will completely quash Canada/U.K. feature film coproduction.

Coproductions that don’t meet the 40% U.K. spend requirement will not qualify for certification nor have access to the sale-and-leaseback financing provisions. DCMS manages both the coproduction certification and the related tax or fiscal applications.

The U.K. guidance document is expected to outline requirements for all U.K. coproductions, including inter-European copros.

Under an agreement largely pieced together earlier this summer, Canadian producers will have 60 days following the release of the DCMS guidance document to file completed provisional applications with Telefilm Canada and DCMS, with the additional grandfathering requirement of a start of principal photography by June 2004, although that date could be pushed back to later in ’04.

Telefilm says it will issue ‘a mini-guidance’ on the matter following the posting of the DCMS regulations.

Canadian Heritage told DCMS it would only accept the 40% minimum spend rule as a ‘temporary measure’ to be reviewed after one year.

The current treaty agreement with the U.K. expires at the end of 2005.

In a communique to producers, the CFTPA says it is ‘obviously very concerned that DCMS has decided to pursue this approach. We have argued the new spending requirement will result in dramatically less treaty film activity. A fact that was clearly not a major concern to DCMS officials.’

What costs qualify

The key issue now will be determining what costs will qualify as acceptable U.K. expenditures, says Brigitte Monneau, Telefilm manager, coproductions. She says from DCMS’ perspective, qualified expenditures are likely to be only those costs that ‘open the door to the tax shelter.’

‘At the end of the day, they do not want, for example, so far, to consider a completion bond, or insurance or legal fees as acceptable U.K. expenses for [purposes] of the tax shelter,’ says Monneau.

Telefilm has asked DCMS for precise clarification of admissible U.K. expenses.

Rightly or wrongly, DCMS has raised the issue of ‘imbalance’ in coproduction, along with the issue of ‘non-creative’ filmmaking expenditures – legal fees, bonds and financing fees – and their use in making up the current 20% minimum spend on the U.K. side, says Danny Chalifour, Telefilm’s director, finance and administration.

‘Certainly, that is DCMS’ claim and it has happened in some instances, but I wouldn’t want to generalize,’ adds Chalifour.

The U.K. guidance document is ‘administrative policy’ and will not require any formal change to the treaty, nor apparently to the minimum 20% financing requirement for coproductions.

Chalifour says Telefilm, the CFTPA and Canadian government ‘recognize that there has been an imbalance and Canada has been benefiting from this treaty more than the U.K. There has been way less than 50% [of expenditures in the U.K.] and so, in the spirit of the treaty, we’re trying to help them achieve their objectives. But at the same time we don’t want to kill both our industries and all the relationships built over the years.’

While DCMS is complaining ‘about not getting their fair share of dollars,’ Chalifour says they have also raised the issue that Canada/U.K. features ‘rarely go to market in the U.K., are not distributed, are not seen, and that, for them, is a major problem.’

There is a small ray of hope that the new U.K. expenditure requirements will be softened by the prospect of shared programs in support of development and production. In that regard, Telefilm and executives from the U.K. Film Council met earlier this month to discuss various issues, including the potential for joint financing as well as the issue of distribution and audience goals for coproductions.

‘If the British aren’t going to play, we’ll go somewhere else, and the British aren’t going to gain by this,’ says Arnie Gelbart, president of Montreal’s Galafilm.

‘The bigger issue,’ he says, ‘is that we have lost that battle and we haven’t been able to convince [the DCMS] that they can modify their system in a different way.

‘This is just going to scuttle or totally destroy feature film coproduction with England. They set up a system that isn’t good and they refuse to take responsibility for it and they won’t try to fix it by limiting [the new spend measure] to the English portion of the budget or any of those things, so they are really hurting their [own] producers as well. The people who really abused the system are the British broadcasters,’ says Gelbart.

Sandy Mackay-Smith, president of Invicta Capital Canada, says DCMS is typically ‘generous’ with its grandfathering conditions after the imposition of severe restrictions. ‘Everyone who does the proper preliminary filing will be let in [under the grandfathering rules].’ And he says there could be a further delay before DCMS actually makes its new rules public.

That said, Mackay-Smith adds, ‘If it goes to 40%, that is the end of Canada/U.K. coproductions,’ which this year make up more than half of all Canadian coproduction.

Looking for productions

Mackay-Smith has investor coin through the sale-and-leaseback mechanism, and is looking for additional productions. He says the company did $600 million in business in ’02, including $100 million in Canada.

He says the 20% to 30% minimum U.K. model is still being accepted, and many of his clients have already filed with DCMS and Telefilm with a view to qualifying for the grandfathering exemption.

TV coproductions were dealt a mortal blow last year when they were disqualified from sale-and-leaseback benefits, although many projects were grandfathered.

The new 40% U.K. spend requirement for features will do the same, pricing out the Canadian industry from the U.K. feature film production market.

If there is a small flurry of filings aimed at qualifying for grandfathering under the current 20% spend rule, Telefilm’s Monneau says, ‘We don’t want projects filed with just an application form. We need to have substance in the project.’

Telefilm generally requires as a minimum a completed budget and financial structure, a screenplay, and all the essential elements including a duly signed coproduction agreement between the producers, she says.

Neil Court, partner and executive producer of Decode Entertainment in Toronto, says new seasons of The Blobheads and Girl Stuff/Boy Stuff, grandfathered as coproductions with a sale-and-leaseback attachment in ’02, will either be coproduced with a European country other than the U.K. or financed from Canada. ‘It is that cut and dry. Other than the sale-and-leaseback, there is no other benefit available for TV [in the U.K.],’ he says.

Court says Canada/U.K. TV copros are likely to be limited to projects with major U.K. funding from a broadcaster such as ITV or BBC, which is up for a charter renewal in ’04, and will be exclusively majority U.K.

In addition to the financing benefit, he says the U.K. was a good coproduction partner because of the many excellent craft and creative resources available.

Court says the U.K. will remain a relatively robust presale and acquisition market, like Germany, and less a production market, as producers start to look at alternative sources, including direct financing support (production grants) from ‘purely industrial’ sources such as the German state-based (Lander) programs.

‘Producers are pretty resilient and when one source of funding dries up they tend to scout out others, and certainly Germany is going to be an interesting one, I think,’ says Court.

Claude Leger, president of Montreal’s Transfilm, is especially active in tripartite coproductions with French and U.K. partners. Leger says he understands the U.K. position

‘These days the U.K. has been playing a lot with Canada, and I understand why, because we have a tendency, regardless of whether the U.K. invests 25% or 30%, to always do [majority coproductions] and we never shoot [in the U.K.]. You have to understand, the equilibrium is missing,’ says Leger.

Strict with benefits

He says Canada has been strict with its benefits – mainly the tax credit – which can only be maximized (up to 80%) if the production is filmed in Canada.

He says it is only normal that jurisdictions that provide financing through programs such as the sale-and-leaseback and equity programs should also benefit from production spending.

According to Leger, the minimum U.K. spend position is still under discussion in Europe, and he does not think the U.K. can arbitrarily or unilaterally impose the 40% minimum spend level on its European partners.

According to Telefilm, the new minimum U.K. spend envisioned for tripartite coproductions is currently 30% (or 35%), although exact details for projects coproduced under the European Convention will only be announced in the DCMS guidance.

‘The Canadian production community has expressed grave concern, and that concern is being echoed by the Europeans and the Brits themselves. It will certainly make things more difficult for [British producers],’ says Sheila de La Varende, Telefilm’s director – European Office, and international development and promotion.

Developments with Germany and France

Beyond the ticking time bomb that are Canada/U.K. coproductions, the industry is hoping for a formal amendment to include television production in the feature film treaty with Germany. The industry is also waiting for changes to the German tax laws related to the important issue of copyright requirements.

An acceptable draft amendment to the Canada/Germany treaty is in place, and the next step would appear to be on the departmental or diplomatic level.

Plans are also underway for a new Canada/France Mixed Commission in Paris later this fall.

A number of TV deals are ready to go, but Telefilm Canada can’t proceed without an agreement.

The treaty with Germany ‘provides for the ability of both countries to make an exception’ (to the requirement the screenwriter must be German or Canadian), says Telefilm director of finance and administration Danny Chalifour.

‘From a Telefilm perspective, very prudently and cautiously we are open to at least considering that there may be circumstances where this may be beneficial. So we are not going to be of a state of mind to discount that flexibility,’ he says.

‘Certainly from the Telefilm side and the industry side, we’re all hoping [the amended German treaty] is going to happen in the next couple of months,’ says Chalifour.

Telefilm investments

Sheila de La Varende, Telefilm’s director – European Office, and international development and promotion, makes the point that despite the threat to coproductions with the U.K., Canada is ‘still an attractive coproduction partner and is not without money.’

As of Aug. 25, Telefilm had invested more than $20 million in 16 international coproductions, including 11 projects that have received investments between $950,000 and $3.5 million.

Total ’03 coproduction activity in feature films (for the calendar year from Jan. 1 to Aug. 11) is $243.6 million – $206.6 million for 14 English-language productions and $37 million for two French-language productions.

In TV, total coproduction activity (as of Aug. 11) is $238.5 million – $189.8 million on the English side and $48.7 million on the French side. Total budgets for 16 coproduction doc projects as of Aug. 11 was $14.4 million. Total of budgets for 17 animation projects was $111.5 million.