Vancouver: The hard-line retrenchment of the Canada Customs and Revenue Agency to compel u.s. stars working in Canada to pay 30% more in income tax starting Jan. 1 will have a devastating effect on Canadian service production.

So say sources close to the controversy following a July 10 ccra briefing in Vancouver with the lobby group Motion Picture Industry of Canada. The meeting confirmed ccra’s position made plain 18 months ago to enhance enforcement of Canadian tax law.

Some expect b.c.’s $1 billion in production volumes, in particular, to be cut by one-third next year because of the province’s reliance on lucrative, big budget u.s. features – the film sector most vulnerable to the change in tax practice.

The issue for ccra is non-compliance with existing tax policy: Foreign actors have so far paid only a 15% withholding tax but few, if any, have filed the final tax return required by ccra. The practice was overlooked for years while the industry grew, but in 1995 the ccra (then known as Revenue Canada) discovered widespread ‘non-compliance’ and on Jan. 1, 1999, planned to implement what it calls ‘enhanced enforcement.’

Overnight, highly paid u.s. actors on Canadian movie sets were faced with paying about 30% more in Canadian tax throwing the service industry into full crisis mode.

In his response to the industry outrage at the time, National Revenue Minister Herb Dhaliwal (and a Vancouver mp) delayed the implementation of the stricter enforcement, struck initiatives to acquaint the ccra with the film industry and, for a while, appeared to be inclined to maintain the status quo. But a cabinet shuffle August 1999 moved Martin Cauchon into the National Revenue ministry, which began to take a harder line to the point where the industry is back where it was in early 1999.

‘We are expecting full compliance,’ says Jeanne Flemming, Director General of the International Tax Directorate. ‘There will be a transition and those actors with contracts signed in 2000 [that carry over into 2001] will not be affected.’

However, American productions budgeting beyond Jan. 1 – especially those with marquee stars attached – will have to indemnify the actors against tax liabilities, which the local industry says erases the business incentive to bring work north.

(The issue is made more dire and complicated because California, where most big-ticket actors reside, doesn’t have a reciprocal tax treaty that permits foreign tax to be credited against State tax returns. This leads to double taxation.)

‘It’s an issue of fairness and integrity,’ says Flemming. ‘We expect visitors to respect Canada’s rules. We believe [the service industry] will still be profitable as long as the dollar [value] stays were it is and the government continues to provide tax credits.’

Complaining that Cauchon and his bureaucrats are failing to listen to the concerns of the film industry or recognize the implications of enhanced income tax enforcement, b.c. lobbyists met with b.c. mp Hedy Fry July 18 to try and gain some political leverage. They are also asking for another delay beyond the next calendar year, but that requires the approval and political will of Cauchon.

The ccra, however, does offer up hope to actors who don’t object to the complicated procedures required to set themselves up as corporations in Canada. (Actors often work in Canada through their ‘loan-out’ companies.)

Rather than filing as an individual with a high personal tax rate nearing 50%, suggests Flemming, actors can file as corporations, which have a nominal tax rate in 2001 of about 38.5%. Finance Minister Paul Martin, in the February budget, suggested that the corporate tax rate would fall to about 32.5% by 2004, which according to film representatives is the break even threshold that mitigates double taxation.

Waiting for lowered corporate tax rates does nothing to address the immediate hit, however.

‘We need to see if we can delay the application of the ccra rules until corporate tax rates decline,’ says Peter Leitch, gm of Lions Gate Studios and a member of the Film Advisory Committee. ‘Or we have to look for changes in the regulations so that we continue to encourage industry growth.’

To make it easier, the ccra has set up Film Services Units in Toronto, Montreal and Vancouver, a film advisory committee comprising u.s. and Canadian producer representatives such as Leitch, and a technical working group that has streamlined the taxation process specifically for the film industry. Actors can ‘pre-file’ their revenues and expenses, which means they deal with ccra only once. *