Tax Quarry

On Halloween October 31, 2006, the Minister of Finance surprised Bay Street by announcing a proposal that would significantly affect the taxation of income trusts.  The intention behind the proposed changes was to discourage corporations from operating as income trusts and consequently eroding the Canadian tax base.  One of the major criticisms of the proposal is that it deviates from the government’s commitment to allow income trusts to be taxed on more favourable terms than corporations.  The government’s position is that non-residents and tax-exempt entities are unfairly benefiting from the pre-election promise to adjust the taxation of dividends when this is inconsistent with the object and spirit of the Act as a whole.  This position appears to be inconsistent with pre-election promises to maintain the tax status of these entities.  The government obviously believed that protecting the fiscal coffers was a lot more important than the perception that they would follow through with its election promise. 

Essentially, the proposal creates a new tax regime for publicly listed flow through entities by imposing a distribution tax.  The distribution tax prevents the deductibility of certain payments made by publicly traded income trusts and subjects all distributions from the income trust to the prevailing corporate rates at the time of the payment.  The proposal provides a four year grace period that will ensure that existing income trusts will not be immediately affected by the change in rules.  However, any income trust created after the announcement date will be subject to the new rules effective for the 2007 taxation year.

As part of this announcement, and presumably as a buffer for heightened criticisms from the public, the government also included in the proposal a decrease in the general corporate income tax rate of 0.5% effective in 2011. This proposal is an extension to amendments previously made by the former government, which would have decreased the corporate income tax rate beginning 2007 until 2010.

Taxation of investors under the proposal will be affected.  For example, distributions to: 

(1)               Canadian resident individuals will be deemed to be eligible for enhanced dividend tax credit;

(2)               Canadian-resident corporations are deductible from the recipient’s income;

(3)               RPPs, RRSPs, RRIFs are not taxed and the tax exempt entities are not entitled to any refundable dividend tax credit; and

(4)               Non-residents are subject to withholding tax.

For more information and updates on legislative proposals on how the distribution tax will apply to flow through entities, visit the Department of Finance’s website.

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In the United States more and more jurisdictions are offering tax credits as an incentive for film producers to remain closer to home.  Although many of these incentives offer generous tax credits of up to 50% of production costs, the programs also limit the level of funding the credit would apply to amounts significantly lower than available in foreign jurisdictions such as Canada.  For many producers the cap is seen as counter-intuitive so they continue to rely on tax credits programs of other locales that provide more flexibility and benefits for higher priced productions.

Australia continues to offer a 100% tax deduction for investors in films substantially made within its borders.  On the state level producers can also access additional deductions ranging from 1.5% to 2% based on the size of the project.  Aussie productions where at least 70% of the budget is spent in Australia are eligible for a 12.5% rebate based on a budget between A$15million and A$38million.  Any production that exceeds this budget range is automatically eligible for the rebate.

In Canada, the federal government offers a production services credit of 16% based on wages paid to Canadian residents.  This rate applies to foreign owned production companies.  Some Canadian provinces also offer incentives for local productions. For example, Ontario offers an 18% tax credit based on the use of eligible labour.  Unlike some of the other provinces, Ontario does not provide a maximum claim limit.  However to be eligible for the credit, the budget cannot be less than $1 million.  Where the production company is a Canadian controlled corporation the province provides a 30% tax credit based on the use of eligible labour.  If certain conditions are met, an emerging producer can claim a credit of up to 40%.

In Germany, production companies that partner with a German producer are eligible for interest free loans that are conditionally repayable.  The amount of the loan ranges from $320,000 to $1.27 million.  To be eligible for the loan the producer must personally contribute at least 15% of the budget. 

If filming in Ireland, a foreign producer can take advantage of a 12% tax break based on the value of the budget up to $18 million.  For film budgets north of $18 million the amount that can be claimed increases to 18% to a maximum of $42 million.  Eligibility for this incentive requires the employment of at least one Irish co-producer.

The United Kingdom introduced a new tax credit program in April 2006 that superseded the sale-leaseback incentive.  Productions filmed in the UK are eligible for a 20% tax credit for budgets up to £20 million.  Films with budgets higher than £20 million only claim a tax credit of 16%.  Productions must meet additional British Cultural standards.

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