Douglas Barrett is a partner of the Toronto law firm of McMillan Binch and head of the firm’s KNOWlaw Group.

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In my last two columns, I indicated that with the introduction of the federal tax credit, we would also be seeing a few new Canadian content certification rules. Today’s column is about the changes to the current certification system administered by the Canadian Audio Visual Certification Office (cavco).

The changes are found in two places – in the new Regulations published on Dec. 12, 1995 but not yet passed, and in draft ‘Producer Control Guidelines’ dated Feb. 14, 1996, which are currently the subject of industry consultation.

Changes found in the new Regulations

Definition of Canadian: The Regulations make it clear that the tax credit is only available to a corporation that is Canadian controlled as determined under the Investment Canada Act.

The draft application forms issued by cavco require that each application be accompanied by a legal opinion stating that the applicant is ‘Canadian.’

For those production companies which are 100% Canadian owned, obtaining the opinion should neither be complicated nor costly. However, for those companies with non-Canadian shareholders having interests of more than about one-third of the shares, the issue gets considerably murkier and a ruling may be required from Investment Canada. This requirement for a legal opinion or ruling places a new burden on the industry.

Copyright ownership: The Canadian producer must be the ‘exclusive worldwide copyright owner in the production for all commercial exploitation purposes’ for the five-year period following completion. The five-year requirement is stricter than the old rule, which permitted the immediate sale of the copyright to investors.

Control of licensing: The Canadian producer must control the initial licensing of the commercial exploitation of the production.

Share of revenues: The producer must retain a share of revenues ‘that is acceptable to the Ministry of Canadian Heritage from the exploitation of the production in non-Canadian markets.’ This is a major new requirement and there is, as yet, no definitive interpretation of what is, in fact, an acceptable share of revenues.

Distribution: The production must be shown by a Canadian distributor, or broadcast by a Canadian broadcast licensee, within two years of the completion of the production. This requirement is similar to the long-standing Telefilm Canada rule relating to distribution. In addition to the above requirements, no distribution in Canada within the first two years is permitted by a non-Canadian distributor.

Excluded categories: The Regulations exclude a number of program categories from eligibility for the credit. These are news, current affairs programs, talk shows, game shows, sports, funds solicitations, reality television, pornography, advertising, industrial productions and productions composed substantially of stock footage.

Presumably, once the rules have been passed, if any of the above types of productions require certification for broadcast purposes, an application will have to be made to the crtc and not cavco.

Also excluded from eligibility is any ‘production for which public financial support would, in the opinion of the Minister of Canadian Heritage, be contrary to public policy.’ This is a broad provision which is designed to give cavco the discretionary capacity to design rules to eliminate, in particular, service productions.

Definition of producer: The Regulations also contain a new and tougher definition of the producer of a film. In addition to the old requirement that the producer be the person who ‘controls and is the central decision maker in respect of the production,’ there is a new requirement that the producer be the person who is ‘directly responsible for the acquisition of the production’s story or screenplay and the development, creative and financial control and exploitation of the production.’

It is interesting to note that this requirement falls short of requiring that the producer be responsible for the development of the story or screenplay.

Points and expenses: In general, the six out of 10 point system and the requirement to spend 75% of costs in production and post-production have been maintained. However, there is one category which has been toughened up.

In determining whether a Canadian meets the requirement for being a ‘lead performer,’ it used to be the case that a consideration was given to some but not all of a performer’s remuneration, billing and time on screen. Now the Regulations require that the determination as to whether a role is ‘leading’ must be made having regard to all three requirements.

New producer control guidelines

The draft ‘Producer Control Guidelines,’ which began circulating around the industry last fall and have most recently been revised on Feb. 14, 1996, reflect two things:

– considerably more detailed thinking on the part of cavco as to the nature and extent of control required by a Canadian producer in order to be eligible for the credit; and

– a determination not to certify what are generally thought of as ‘service’ productions.

The new guidelines have three components:

– a description of what a producer ‘normally’ does;

– requirements of control in order to obtain certification; and

– ‘indicators’ of non-Canadian control which might prevent certification.

Normal activities: The guidelines specify that a producer is normally involved in the acquisition of the underlying story, the commissioning of the screenplay, the selection of key creative artists, final approval of the budget, arranging for financing, supervising production and exercising final creative control.

Approval rights are acceptable for foreign distributors, but these organizations may not control expenditures, receive underages, sign or cosign cheques, supervise production functions or overrule a producer in the event of a dispute.

Requirements for control: Some of the requirements are merely restatements of the Regulations, but a few others are added. In particular, it is now a requirement that the Canadian producer receive at least as much remuneration as the aggregate paid to all credited foreign producer-related personnel.

Further, it is no longer enough for a Canadian producer merely to receive a production fee: there must also be a financial interest in foreign exploitation and a share of profits.

As well, Canadian producers cannot be overruled in the event of a dispute.

Indicators of non-control: This is bound to be the most controversial part of the guidelines. The use of indicators was first developed in Ontario under the Ontario Film Investment Program and more recently has been adopted by the Cable Production Fund.

Essentially, while the breach of any one of the indicators would not necessarily render the project uncertifiable, the breach of several most certainly would, and the breach of only one, if serious enough, could disqualify the production.

Here is summary list of the principal indicators:

– 75% or more of the budget provided by one non-Canadian source.

– A foreign entity holding all non-Canadian rights.

– No right on the part of the Canadian producer of a series to produce further seasons if renewed.

– No meaningful Canadian involvement in story or script development.

– The presence of a completion bond given by the foreign distributor with takeover rights.

– The excessive prominence of foreign courtesy credits.

– The right of the foreign distributor to require changes in the production.

While ultimately a commonly understood code will develop among industry professionals as to how these indicators will be interpreted, there will likely never be complete certainty of certification where they are present in any specific production.

In addition, interpretations may vary from time to time and from official to official. Caution should therefore be exercised in structuring deals in which any of the above factors are present.

Will the big u.s. networks and studios, in response to the introduction of the guidelines, adapt their business practices to the new environment, or will they reduce their current level of Canadian activity? This is the big unknown.

Courtesy credits: The producer control guidelines also contain a new section on obtaining courtesy credits for foreign producer-related functions. Basically, the list of such functions and included credits has been considerably extended and the rules relating to the granting of such approvals have become much more complex – so complex, in fact, that cavco has issued a chart with a matrix of possible options for the granting of such credits.

What remains true from before is that those receiving such credits must sign an affidavit under oath that they have no ultimate creative or financial decision-making power. In addition, cavco requires full disclosure of all documentation pertaining to the applicable individual’s involvement in the production.

Conclusion

The cumulative effect of all of the above changes appears to make certification, and hence the benefit of the tax credit, available to a considerably narrower group of productions than before. Whether this is a good or bad development depends on the sector of the industry in which you are involved.

What is clear, however, is that the government has in mind a finite amount of money for the new tax credit program. Were the old certification rules to have remained unchanged and service productions to have access to the credit it is likely the government would soon be sharply reducing the rate of the credit available to all productions.

In the coming months, Binchmarks will return to the subject of the credit with reports on new developments and the evolving interpretation of Revenue Canada when developments merit it.

(This article contains general comments only. It is not intended to be exhaustive and should not be considered as advice on any particular situation.)