Six weeks after indigenous drama was a topic of choice at the national networks hearing, the Department of Finance is in the process of passing legislation which could result in programming controlled by foreign producers occupying Cancon-allocated airtime.

The new Film and Video Production Services Tax Credit for foreign film producers was in the House the week ending Dec. 12. At Playback press time, the wording of the legislation had yet to be made public but industry sources say there is nothing in the prospectus that says productions eligible for the foreign tax credit are de facto not eligible for delineation as a Canadian production from the crtc.

In early December, a concentrated lobby effort was underway to get a qualifier written into the legislation, but the mood was less than optimistic. Finance is referring the issue to the crtc, which in turn says it will deal with its role in the Cancon process at the Canadian content hearings in the third quarter, 1998.

But sources say the outtake of the new tax credit passing without the qualifier boils down to a new lucrative incentive for Canadian broadcasters to trigger projects deemed ‘foreign’ under the tax credit, ‘Canadian’ under the crtc’s Canadian or ‘Special Recognition’ criteria. In the process, it could undermine the ability of pure Canadian productions to tap sought-after broadcast slots

‘If a studio comes to a Canadian broadcaster and says we want to do it in Canada, the broadcaster has the option of saying okay, we’ll only buy it if it qualifies for Canadian and then we’ll give you a higher license fee,’ says one source with business ties to the American studios and therefore remaining nameless.

‘The broadcasters can move towards the American-produced programming and call it Canadian. It’s very damaging to the Canadian production community because it puts pressure on what is already scarce – shelf space.’

The federal credit – matched by the Ontario government last month – is 11% of eligible labor costs to a maximum of 5.5% of the budget. At both the federal and provincial level, the 11% is triggered retroactive to Nov. 1.

New credit more attractive

The impact of the new credit is taking time to gel, in part because the rebate level is set at the same level as the federal government’s former Production Services Limited Partnership tax shelter and doesn’t alone seem to change the status quo.

But producers say the federal credit plus the new Ontario credit and the lack of qualifier on the Cancon issue make hankering after an sr number a substantially more attractive scenario than what was possible under the limited partnership shelters.

‘The question for the producers was and still is can you get more money from the broadcasters. Do you skewer what you do for economic reasons in order to get the Cancon stamp, and I think the majority decided under the shelter system that it wasn’t worth it,’ says Ron Atkey, chairman of the Arts, Entertainment and Media Law Group for Osler, Hoskin & Harcourt.

The economics have changed with the Ontario credit, but Atkey isn’t convinced the payback is enough to tempt an increased number of projects to the sr credit.

‘There may be an economic case to get the sr number. But there’s income tax applied to these Canadian entities that wasn’t under the shelters which may counterbalance any increase from the broadcaster.

‘There are also transfer pricing rules which are in process and you now have to wait get your money back over 120 days with the credit, which didn’t happen under the shelter. Yes, the studios can interim finance this, but it’s still the cost of money over 120 days. I’d say net, net, net, they’re probably about in the same place.’

Specific to Ontario, Susan Karney, an entertainment lawyer with Goodman Phillips & Vineberg, says the new Ontario credit is a positive but also questions whether its incarnation creates a quantitative difference in incentives for foreign producers.

‘When the tax shelters were abolished, the industry thought that Ontario would lose a lot of producton. But with the new provincial production services credit, we’re pretty much back to where we were.’

But some industry executives (all of whom have u.s. clients and/or partners and are therefore speaking off the record), are concerned that the tax credit paves the way for cavco-complete projects to be rejected in favor of those that fit the less stringent crtc guidelines.

For the record, cavco stipulates copyright ownership and distribution criteria as well as control by the Canadian production company over production financing, key personnel and content.

According to the Canadian Broadcast and Cable Regulatory Handbook, the crtc’s ‘Canadian’ delineation follows a six-point system which focuses on key creative personnel and says the ‘central decision maker of the visual production’ must be Canadian.

It’s ‘Special Recognition for Co-Ventures’ criterion says 100% Canadian program credit will be given with documentation substantiating that the Canadian production company ‘has no less than an equal measure of decision-making responsibility with other co-venture partners on all creative elements of the production,’ and ‘is responsible for the administration of not less than the Canadian element of the production budget.’

‘If the c number is a five-foot loophole, the sr is 10 feet,’ says one. ‘Production service deals were bad; this tax credit is worse. It’s formal legislation that says `C’mon in!’ ‘

The point of the tax credit, adds another, is an industrial incentive.

‘It’s not to give 10 studios a subsidy to do Canadian programming. The credit going this way is a brand new world because it means that every dollar spent here is supported.’