Canadian producers are up in arms over a move by the Canada Revenue Agency to potentially shrink their tax-rebate cheques.

Producers who have had their tax-credit applications randomly audited by the country’s tax man in recent months complain that they are now allowed a maximum 10% cap on claims for producer fees, with a further 10% write-off for corporate overhead.

That’s alarmed producers, as many have long recorded a 15% or even a 20% write-down for producer labor costs, against corporate overhead, when filing tax returns in search of tax-credit rebates.

Canadian producers privately insist tax-credit applications have typically started out with a loose 10% producer-fee claim to secure acceptance from analysts at the Canadian Audio-Visual Certification Office, which greenlights tax credits on behalf of the Canadian Heritage department, and the CRA, which reviews federal and provincial tax-credit claims before it issues refund cheques.

At the same time, producers insist their costs often surpass 10% of a project budget, and allowance was often made for that in tax-credit applications.

But, in its latest audit rulings, the CRA appears to be saying it will only allow producers to breach the 10% cap in ‘exceptional circumstances,’ according to sources close to the negotiations with the CRA.

A CRA spokesman says the agency has no direct comment on its current talks with indie producers to resolve the fee dispute.

‘However, I can tell you that the CRA works closely with the affected stakeholders and is always exploring opportunities to improve the delivery of its programs and services,’ the spokesman adds.

But Donna Leon, a producer with Ottawa’s Genuine Pictures (A World of Wonder), sees the CRA as the villain in this saga for springing the change on producers only after they underwent random audits.

‘Until you get audited, you wouldn’t know about it. How would I have known you have a different rule,’ says Leon, who wants the tax man to spell out the new producer-fee policy.

What’s more, producers insist they had long ago breached the 10% producer-fee threshold without resistance from other government agencies with whom they routinely deal.

The effect of the apparent CRA policy change is to leave many producers out-of-pocket as they anticipate smaller tax rebates in the mail over the coming months.

‘There’s a disconnect between what the CRA considers to be the policy with regards to producer fees, and what the industry is used to,’ says one Canadian producer rep speaking on background.

‘We’re trying to remedy it,’ the rep adds, with a reference to upcoming talks with CRA officials.

Officials at agencies including the Canadian Television Fund and the Ontario Media Development Corporation refused to comment on the 10% cap, as they are in consultation with the CRA on the issue.

The biggest producer shortfall identified among recent affected applications is understood to be $400,000.

It is also understood that one CTF analyst alone had 15 out of their last 20 tax-credit applications peg the producer fee at 20%, with no claim for corporate overhead.

The 10% cap will greatly impact smaller producers who made a higher claim, as they depend on straight cash flow and domestic and foreign sales, and need tax credits to stay afloat. That’s especially the case if they do single-picture financing.

At the same time, project budgets for smaller producers are typically low, so they stand to lose less money retroactively when the CRA doles out its tax rebate.

Bigger producers, on the other hand, will feel less of a pinch from the CRA audit rulings because, as established players, they presumably have their operating expenses more under control.

For example, bigger producers may spin off a single-purpose company to make a film or TV show, or cut a deal with their existing landlord for added office space to keep their corporate overhead low.

Conversely, producer fees for veterans are potentially higher, as they do more on a project, leading to a 15% or 20% claim, according to sources.

All of which makes it a tough time to apply for tax credits, given filing and compliance uncertainty.

Behind the scenes, producers complain that the recent tax rulings are arbitrary and overreaching. Other financiers such as banks and distributors have already approved a producer’s business plan, and deemed it reasonable. Why, then, should CRA auditors come in after the fact and interfere in the process, they privately question.

In public, however, lips are sealed or industry execs are playing the issue down as they engage the CRA to resolve the issue.