Despite Canada’s low dollar, quality crews and renowned tax-credit incentives for foreign moviemakers, the appetite of U.S. studios to shoot on Canadian soil may be restrained by Finance Minister Paul Martin’s proposal to eliminate Canadian tax shelters once and for all.

On Sept. 18, Martin tabled a ways and means motion in the House of Commons to amend a loophole in the Income Tax Act’s matchable expenditure rule, which would effectively eliminate the possibility for Canadian taxpayers to deduct more than the amount of revenue they invest in a studio film.

Although the Ministry of Finance says its new amendment to the ITA is not directed at any particular sector, Karl Littler, senior advisor, tax policy, Office of the Minister of Finance, says, ‘We’re targeting anyone exploiting the flexibility of the matchable expenditure rule.’

In 1996, legislation was introduced, with the support of the industry, to replace tax shelters with the foreign service production tax credits.

‘But some sharp lawyers and accountants found a legal technicality to exploit it,’ says Littler.

Because of a loophole, Canadian taxpayers have enjoyed the luxury of investing in studio productions and writing off the investment against up-front expenses. They have been able to defer taxes for 10 years when they receive their initial investment, and then some, back. In return, the studios have had the benefit of receiving about 6% on eligible expenditures, which may not sound like much, ‘but on a $50-million film, it’s a big number and enough to offset some incentive for the studios to shoot here,’ confirms one industry insider.

With U.S. lobbyists proposing to implement U.S. tax incentives to combat and potentially negate the appeal of shooting in Canada, eliminating the Canadian tax-shelter incentive could prove to be an untimely move.

But while losing studio business in Canada could translate to billions of dollars of losses, Littler says, ‘It shouldn’t have a significant impact on the industry here, which was doing quite well before this was introduced in the first place. People will always try to take more gravy, but with the Canadian exchange rate, its crews and tax credits, there shouldn’t be much to worry about. The significant impact will be on the tax-shelter brokers.’

Meantime, Sentinel Hill Alliance Atlantis Equicap (30% owned by AAC), CineGate Production Management Services (50% owned by Lions Gate Entertainment) and Grosvenor Park Film Financing the three Canadian organizations that broker these partnerships, are keeping tight-lipped about how they intend to deal with Martin’s surprise announcement.

However, AAC, which holds a 30% interest as a limited partner in SHAAE, estimates that as a result of the proposed tax change, the company’s EBITDA could be reduced by $6 million for the year ending March 31, 2002, incurring up to another $20 million loss by the end of the following fiscal.

Last year, SHAAE accounted for about 16% of AAC’s EBITDA, or $21 million.

Last year Lions Gate reported revenue of $1.6 million from its partnership with CineGate.

As of Sept. 18, Revenue Canada has been administering on the basis that Martin’s proposal is law, confirms Littler. But deals struck before that date will be honored until the end of the year.