Sandy Mackay-Smith is president of London-based Invicta Capital’s Canadian branch, which provides U.K./Canada leaseback funding to Canadian dramatic film producers. Recent features on which it has participated include Head in the Clouds starring Charlize Theron, A Different Loyalty with Sharon Stone and Sienna Films’ Touch of Pink.

The U.K. announced last year that it was going to raise the U.K. spend for U.K./Canada treaty coproductions from 20% to 40%. A protocol was set up between the two agencies involved, the Department for Culture, Media and Sport in the U.K. and Telefilm Canada, that permitted all films with preliminary applications filed by Jan. 5, 2004 and shootings to commence by August 2004 to take advantage of the less-than-40% minimum. This is known in the trade as the ‘grandfathering’ provisions of the new regulations. A similar procedure was used when the DCMS decided to stop leaseback funding of television production two years ago.

I am happy to say that many Canadian producers participated in the grandfathering and filed the required Telefilm and DCMS preliminary applications before the deadline. If even half of these films reach production, this will represent a significant bubble of film activity in Canada in the first half of 2004, as all must start principal photography by August. Invicta Canada is showing some $100 million of grandfathered film coproduction clients, with most having financing in place.

Telefilm was very helpful during the process, as it compiled a list of those filing before the grandfathering date and communicated that to the DCMS to be sure everyone was included. I believe this will help avoid the disputed filings experienced during the cutoff of leasebacks for television.

Once grandfathered, however, Canadian producers should be aware that the DCMS is carefully following the guidelines put out in August 2003 providing for discretionary decisions when the coproduction dips toward being a service coproduction. One needs to speak to his or her U.K. coproduction accountant to pick up on the nuances of these guideline changes.

One example is the third-country shooting guideline. If your production wants to do nine days of shooting in China, for instance, a DCMS consent is needed, and the conditions to that consent may require a beefing up of the U.K. spend to accommodate for the loss of the U.K. labor spend in China.

According to Sirish Malde, one of the best known and respected U.K. accountants in the leaseback world, this translates, in his experience, to a spend of 30% or more in the U.K. under the grandfathering provisions.

New CAVCO rules

A Canadian regulation change is also likely to spur activity as well, although these are still early days.

In the late fall, CAVCO made two announcements. The first was an increase in federal tax credits that would apply to qualifying treaty coproductions, and second was a rule change permitting equity participation by third parties without ‘grinding,’ or reducing, the Canadian federal tax credits or Telefilm investment. This was a welcome and innovative change by CAVCO and Telefilm. (The full text of the change is on the CAVCO section of the Canadian Heritage website – www.pch.gc.ca.)

Equity, as defined in the regulations, appears to mean foreign equity as well as Canadian equity. Therefore, it would appear that U.S. funds could be fitted into the equation without grinding the Canadian government benefits. As a result of this change, several Canadian producers have been quick off the mark to entice their colleagues and foreign film producers to join in on projects that are otherwise Canada/U.K. treaty coproductions. In this way, the Canadian producer takes advantage of Canadian tax credits, the leaseback (currently in the 13% of budget range for 2004, depending on size of production) and the third-party equity investment. Authorities at CAVCO and Telefilm are still working on the guidelines, and the industry is still digesting its effect on raising money for productions.

U.K. equity deals are still a hot topic of conversation. These so-called equity deals can be combined with a leaseback in certain circumstances.

The U.K. equity does not come without a price, however. All U.K. equity products require heavy recoupment schedules and fees, and are not for the lighthearted.

Also, there have been checkered results for Canadian producers who attempt to access U.K. equity. I am constantly hearing tales of the U.K. equity player not turning up at the table. This is not helped by the fact that there are new U.K. equity players popping up every week, and unfortunately popping off at about the same rate.

Why are UK ‘equity’ vehicles risky? First, the UK tax legislation on which these schemes are built is at best shaky. Secondly, the equity investor is a different animal from leaseback investors, who are primarily looking for safety through deferment of tax, not equity risk-taking. Consequently, equity investors are harder to find.

The best strategy, if you have to go with UK equity, is to team up with established equity players such as Spice Factory/Movision or Visionview. These companies have been in the business for many years and understand the investment market. Funding from a dual approach of leaseback and equity can cover about 30% of the film’s budget, depending on the strength of presales.

It is important to know that the equity provider pays a great deal of attention to the script and how it will sell worldwide. Only scripts they feel they can recoup on are accepted. Scripts of interest tend to vary, depending on what international film distributors are looking for at the time.

What to do about the U.K. equity providers? My advice to all clients is that it is better to find enough presales worldwide to fill the gap, rather than spend time pursuing this often-elusive avenue. However, if it appears U.K. equity may be the only answer, there are reliable equity providers, but Canadian producers must be fully aware of the circumstances they are getting into.

As far as other world film funding is concerned, Belgium represents an interesting development. Invicta Capital last year funded a film production that had a 5% Belgium tax-credit component. Belgium has recently introduced a tax-credit system based on one dollar for one-and-a-half dollars of spend in Belgium, up to a maximum of about 20%.

Also, Invicta U.K. last year did two films involving Iceland/U.K. and is doing another this year involving Canada/U.K./Iceland.

Unfortunately, there does not seem to be any relief as yet for Germany/Canada treaty coproductions. German funding requires 100% copyright as part of their recoupment package, which rightfully does not sit well with Telefilm. Consequently, it appears impossible at this point to access German recoupable funding schemes under a treaty coproduction.

German funding can be used for Canadian service deals; however, I have not seen this vehicle used extensively.

I am told Telefilm is actively working on the Canada/Germany treaty to solve the copyright issue, and my understanding is that we may see relief by June 2004.

Producers might also keep an eye out for local U.S. state incentives for production, such as the new ones sprouting up in New Orleans, Arizona and Hawaii.

What will happen to U.K. leasebacks, with the looming renewal date in 2005, is anybody’s guess. The one thing we do know is that the U.K. pre-budget announcement in December 2003 talks about a replacement for the U.K. leaseback. The Luxembourg tax-credit system was mentioned as a possible model. In Luxembourg, production companies are issued assignable tax-credit certificates, which in turn may be sold to banks or a corporation looking to defer future income tax. March 17 is the expected date for the U.K. budget.

-www.pch.gc.ca (Canadian Heritage)