PRODUCERS across Canada, long frustrated by the increasing gap between demand for and supply of production financing, are stepping up the pace in search of more private-sector capital. Initiatives underway include the study of an approach used in the mining industry and a petition to support the return of the 100% Capital Cost Allowance program of the controversial ‘tax shelter’ era.

Just a couple of years back, the notion of bringing back the CCA would have been dismissed out of hand. In the early years of the CCA, initiated by the Canadian Film Development Corporation (now Telefilm Canada ) in 1974 and entirely phased out in 1996, the rules allowed investors in a production to recoup, over time, 100% of costs, regardless of whether the film made money. After the incentive was lowered in 1987, investors could begin by recouping 30% of costs and slowly recoup more, but if they made a profit, it was counted toward the recoupment cap of the full cost of the film. The knock against this system was that private investors started backing dubious productions to collect huge fees for themselves while producing mostly forgettable features derided as ‘dentist films’ or ‘lawyer films.’

But the idea of bringing back tax shelters is finding new momentum. It received a high-profile platform in January at the CFTPA conference in Ottawa, where producer Robert Lantos extolled the system’s virtues. He rhymed off several titles made under the CCA that achieved critical and commercial success, including his own production In Praise of Older Women and The Silent Partner, directed by Daryl Duke. He said the Canadian film industry went into decline as soon as government agencies were charged with dishing out production funds, with too much power now in the hands of ‘cynical’ distributors.

In the search for alternate funding sources, Tom Rowe, chair of the B.C. Producers Branch of the CFTPA, says his organization commissioned PricewaterhouseCoopers to conduct a study that would analyze and summarize federal legislation pertaining to flow-through shares in the Canadian mining industry, to determine how it could be adapted to the motion picture production industry. The draft study is currently being vetted by the CFTPA Tax Committee in B.C. and by other experts. Rowe says it won’t be released for general discussion until late August or early September, and declined getting into detail on the study’s findings until then.

The impetus for the study, he says, ‘came from a belief that there simply isn’t enough money in the system to accomplish the goal of capturing 5% of Canadian box office [for domestic movies, which Telefilm is striving for]. In looking for sources of private money, it became clear that our industry was at a distinct disadvantage in competing for high-risk investments.’

Stopping short of suggesting how the film business can adopt models from other industries, Rowe explains, ‘In oil, gas and mining exploration and development, ‘flow-through’ refers to the ability of an eligible corporation to pass its deduction for eligible expenditures to its shareholders. In this way, shareholders receive tax deductions that may otherwise be unused by the corporation, and the corporation receives equity financing.’

Shawn Williamson, partner and producer at Brightlight Pictures in Vancouver, says that he welcomes the idea of producing films using this model. He recognizes that a lot more work and study will have to be done before the government and industry can assess the impact of this type of investment incentive on the tax system and figure out whether it would work in film and TV.

Williamson adds that because so many production companies are undercapitalized in Canada and aren’t able to reinvest their tax credits into their corporate infrastructure or development slates, ‘it’s been a very difficult time in the industry over the last couple of years.’ He points out that Germany allows pure tax shelters for film industry investors, and producers there ‘have been very successful at raising money over the years. We’re never going to be able to raise that much in Canada, but we’d be better capitalized than we have been.’

Furthering the cause of ‘pure’ tax shelters, Toronto filmmaker Doug Williams (Overdrawn at the Memory Bank) and producer and former ACTRA Toronto executive Robin Chetwynd have circulated a petition pushing for a return of a tax shelter reminiscent of the Capital Cost Allowance.

Williams acknowledges the notoriety of the CCA era, but argues, ‘I don’t think [terrible films are] a natural consequence of a 100% tax shelter… Bad movies can be made under any system. I think [the shelter] would just loosen up money and keep Canadian cinema independent of American cultural influences,’ he says, referring to a controversial deal through which Telefilm has encouraged Hollywood’s Creative Artists Agency to package talent for Canadian films.

As Williams and Chetwynd wrote in a recent newspaper article about the tax shelter era, ‘the industrial infrastructure grew and was stimulated in an unprecedented manner. Re-establishment of the capital cost allowance poses a danger that carpetbaggers might rip off the system, again. But the differences between our film community in [the early years of the tax shelter] and 2004 are such that history need not repeat itself. Our commitment to the art of film, and to a national identity expressed through our cinema, was a nascent force in 1980. Today, the Canadian industry is wholly capable of establishing creative watchdogs to monitor project development, and regulatory watchdogs to keep an eye on those who might attempt to unfairly exploit a renewed 100% tax shelter.’

Williams is trying to talk to unions, producers, associations and others to gauge support for his position, but has had little feedback. He says that regardless of the details of a new, like-minded tax incentive, its aim should be to allow financing by the private sector – especially members of the middle class – to stimulate film production to a rate closer to what it was at the height of the CCA era.

According to data published by CAVCO, most tax shelter years saw a large number of projects approved under the CCA with budgets totaling hundreds of millions of dollars. Even after 1987, when the tax benefit began to decline, the total budgets of projects applying for the CCA were sizable. The most demand came in 1994, when 239 projects applied, with total budgets of nearly $974 million. In 1995, 216 projects were registered, with budgets of $864.3 million in all.

However, sources in the federal Department of Finance say the government is strongly opposed to tax shelters, with one source saying he works to close them down whenever possible. The official, who asked not to be identified, says the wrap-up of the CCA and other tax shelters used by the production industry is a good thing. He says shelters amount to foregone revenue for the government. Although proponents of shelters argue they create jobs, he says such incentives could create employment in any industry. He compares this to the labor-based tax credit, introduced in 1995 to replace the CCA, which helps producers reduce their costs, but also provides revenue, since people working on the productions pay income tax. *