End to Tax Credits That Are Contrary to Policy

Movie_3 The Canadian Government has proposed changes to the film and television production tax credit that has stirred up controversy. Josee Verner, Canadian Minister of Heritage, has introduced Bill C-10 that would prevent film makers from claiming the credit for films which include content that is considered to be contrary to public policy.


Industry supporters charge that the proposal will force film makers out of Canada to go elsewhere because they will not be able to obtain sufficient funding. The Banks are not likely to provide funding to productions that are not eligible for the funding based on the current formula used to determine funding availability. Given that Canadian television programming receives some public funding, as was confirmed by Sarah Polley in a recent Global and Mail article dated April 11, 2008, this seems like a valid concern for the industry. The industry has conceded that where the production violates Criminal law such a limitation is reasonable; however, where no laws are violated this restriction is essentially a form of censorship.   

The issue is expected to be revisited by the Senate Banking Committee.


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Update on Foreign Film Tax Incentives

Picture_of_tax_wordIn 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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Federal and Provincial Film and Television Tax Incentives: Are they worthwhile?

Recently, I wrote a paper for my Masters of Taxation Tax Policy course that reviewed the various tax incentives available to the film and television industry and analyzed the effectiveness of these incentives based on the overall tax policy goals of the government. 

If you would like to review the paper, you can download it by clicking on the attached link.

Download tax_incentives_directed_at_the_film_industry.DOC

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Nova Scotia Ups the Film Tax Incentive Ante

Like many provincial jurisdictions eager to remain competitive in the film and video production industry, Nova Scotia has increased the value of its tax incentives.  Last year the province increased its general film tax credit by five percent which, according Nova Scotia’s fiscal report, saved film industry producers about $2 million.  The province was able to reap the benefits through increased productions within its borders.  However, there was a limited amount of productions that were filmed outside of the main centres. As a result, the province decided to further adjust its film tax credit to encourage more productions in the outskirts of the province. As of July 1, 2006, productions that are primarily filmed outside of the Halifax Regional Municipality (HRM) are eligible for a five percent regional bonus.  This bonus applies to the entire production.  This is an improvement to the previous incentive, which limited the application of the bonus to the production costs incurred outside of the HRM.

It is expected that this move will increase film production traffic in these less populated vicinities.

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The Beauty of Filming in a local Italian Province

          Italy has been the home production center for many blockbuster movies shown on the big screen in Canada and the United States.  Movies such as Gangs of New York, Oceans Eleven, The Passion of the Christ, The Italian Job and the Gladiator; and television programs such as The Soprano’s and Angels in America have taken advantage of the country’s picturesque beauty and extremely talented team of executive producers. 

         One of the more popular areas in Italy for filming has been the Lazio Region.  Lazio has not only grown in popularity because of its pleasant and hospitable hotel service, tasty native dishes, wonderful weather, mesmerizing landscaping or historic architecture, but also because it offers advanced technical expertise in film production and provides a financial advantage to foreign film producers.  Production executives and the government have been working together to increase the Region’s ability to service foreign producers.  The executives have committed to upgrading its production facilities with more advanced technology to allow film professionals to produce better quality final film product, while the government has improved the process for claiming film tax incentives. 

          There have been two significant changes to the government incentive programs.  First, the process for recovering the value added tax credit (VAT) has been modified.  Producers wanting to recover VAT must:   

1.      Film the majority of the production in the Lazio Region;

2.      Submit a credit reimbursement application to the Internal Revenue Office;

3.      Submit an application for the assignment of the credit to the local film fund organization and an accredited bank (with supporting documentation);

          Once the producer has fulfilled these steps, the government will grant the incentive to all qualifying applicants.  Applicants who qualify will receive a VAT tax exemption for most of the costs related to the production.  This process is better from the previous administration of the credit because it improves access to government financial support for filming in the Region. 

          Second, International co-producers filming in the Region are eligible funding of 50% of the production.  The administering body does not impose minimum spending requirements.  Co-financing and development productions filmed in partnership with a Lazio based film production company are also eligible for venture capital funds of up to 50% off funding. 

          If the stunning scenery of this Italian province or the financial and technical benefits it offers has piqued your interest, it may be time to take a trip to Italy and contact the Italian Film Commission for information about how you can qualify for funding and the tax incentives for your next production.

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GAAP Financing in the U.K. Provides 30% Funding for Films

For many years, the use of generally accepted accounting principles ("GAAP") has been a popular method for funding film productions in the UK. GAAP, when referred to in the film financing context, allows producers to obtain additional funding from investors who rely on this financing technique. Specifically, investors use GAAP to write off costs of a particular production as a tax loss.

The controversy around GAAP financing arises because it is not a funding technique that is sanctioned by the government. In fact, the government in many circumstances already provides structured tax incentives to support the film industry. For this reason, many opponents of GAAP financing are concerned that the tax authorities will challenge investors making these claims on their tax returns. In an article written by Adam Dawtrey in Variety magazine dated May 21, 2006, he states that there is a real concern that the government will be alarmed into action once they become aware of the magnitude of the financing dollars that are generated by GAAP methods of financing. His article reports that GAAP financing for film productions accounted for an estimated $1.24 billion, approximately 30% of the funding in the UK alone.

In light of the fact the UK government changed its Film Tax Relief program effective April 1, 2006, for the main purpose of ensuring that incentives are "effectively targeted and less vulnerable to manipulation and avoidance" it seems more likely that this form of funding mechanism may become susceptible to government attack since it is clearly not a permitted incentive that is outlined in the proposal for reform.

What the proposal does say is that the new tax incentive regime will not be extended to companies whose purpose is to arrange finances for film production companies. Presumably, this can be interpreted to include companies currently providing financing techniques to investors. Nonetheless, despite the possibility that this position can be challenged at any time, this method of financing continues to grow in popularity as film companies struggle to remain competitive with other film companies that make use of this incentive. Query whether the British Tax authorities will take sympathy on these producers by viewing GAAP financing as inevitable in the free market economy or treat is as a significant threat to the government coffers.

For an outline of the proposal visit http://www.hmrc.gov.uk/pbr2005/film-tax-relief.pdf

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CCA and Beneficial Ownership Treatment in a Film Tax Claim

On April 12, 2006 the Canada Revenue Agency (“CRA”) issued a Technical interpretation[i] in response to a taxpayer’s request to confirm that there would be no double counting of broadcast licensing and distribution fees received by a producer for a particular production. 

In the situation presented to the CRA, the Canadian production company was eligible to claim the Canadian film or video production (“CFVP”) tax credit under the Income Tax Act (Canada).[ii]   The company receives licensing and distribution fees throughout the taxation year.  The taxpayer is concerned about the appropriate treatment of the fees.

In response, the CRA noted that provided that the fees would not be characterized as proceeds of distribution for any portion of the company’s ownership interest in the production or treated as the payor’s cost to acquire an ownership interest for the purposes of reducing its undepreciated capital cost, the fees may be included in computing the company’s income. 

Further, the CRA indicated that to the extent that the fees received are to be treated as proceeds of disposition and this results in a reduction to the production company’s undepreciated capital cost, the fees would not also be characterized as current income for the purpose of computing the company’s taxable income for that taxation year. 

In essence, they determined that the fees will not be double counted as long as the taxpayer clearly makes a decision to either treat the fees as taxable income or as proceeds of disposition that reduce undepreciated capital cost. 

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[i] See Canada Revenue Agency Technical Interpretation document # 2006-0167941E5 (E).

[ii] R.S.C. 1985, c. 1 (5th Supp.) section 125.4.  All references in this article to the Act are to the Income Tax Act (Canada) unless otherwise stated.

Global Video Inc. Gets No Credit

One of the ways in which the Canadian government has tried to maintain cultural programming in film and television is by providing tax incentives that are focused on rewarding film producers who develop programs with significant Canadian cultural content.  Many film producers rely on these tax incentives to allow them to make films they otherwise would not be able to make because of limited resources and funding.  However, to qualify for this funding, producers should be careful to ensure that certain requirements are met.  If they don’t, they may find that they are responsible for paying the entire production cost like what happened to the taxpayer in Global Video Inc. v. The Queen.[i]

Section 125.4 of the Income Tax Act (Canada)[ii], provides film producers with a refundable tax credit of 25% of qualified labour expenses[iii] incurred when making a film. To be eligible for this credit the film must be made by a qualified corporation and certified as a Canadian film or video production (“CFVP”) by the Canadian Audio-Visual Certification Office (“CAVCO”).  One of the main objectives behind offering the credit is to provide an incentive for Canadian film producers to make films with a focus on Canadian content.  The credit is also administered to ensure that Canadian producers maintain a beneficial interest and a strong position of control over their productions.[iv]  Being certified as a Canadian production is based on the number of key positions in a production that are filled by Canadians.  In addition, salaries and wages paid to Canadians must account for at least 75% of the total cost of production to be certified.  Presumably, once a film is certified it should have access to the tax credit under 125.4.  However, this is only the first hurdle.  The company producing the film must also be a qualified corporation to be eligible for the credit.  This was the issue in Global Video.

In Global Video, the taxpayer Global, a Canadian corporation, was a film production company established in 1996.  Global’s business was focused on the production of documentaries and advertising films.  In September 2001, the corporate taxpayer received a Canadian film production CFVP certificate for the production that is the subject of this case.[v]  After receiving the certificate Global began filming with the expectation that the production would be eligible for the CFVP tax credit.  Accordingly, in filing its tax return for 2001, Global claimed production costs of $125,047 for the film and a corresponding tax credit for $15,006, 25% of the labour costs associated with the production.  Global’s total production cost for the year was $435,669.  The Minister denied Global’s CFVP tax credit claim.  Global appealed to the Tax Court of Canada.

The Minister argued that Global was not a qualified corporation because it did not primarily carry on a CFVP business as required under the Act.  A qualified corporation is defined under the Act as:

… a corporation that is throughout the year a prescribed taxable Canadian corporation the activities of which in the year are primarily the carrying on through a permanent establishment (as defined by regulation) in Canada of a business that is a Canadian film or video production business.[vi]

The Minister determined that the subject production was Global’s only Canadian film or video production for the year.  Further, since Global’s total production cost for the subject production was only $125,047, which accounted for less than 30% of the total production costs of the company, it did not meet the qualified corporation definition since the CRA generally interprets primarily to mean more than 50%.[vii]  Although both parties agreed with the Minister’s interpretation of primarily they disagreed on what criteria it should be applied to.  The Minister considered all sources of revenue generated by a corporation.  Global, on the other hand, believed that the determination should be made based on the total costs of a particular production. Global argued that the Minister’s application of 125.4(1) was too restrictive and that it created inequitable results.  In essence, Global’s position was that the interpretation presented by the Minister would require the incorporation of a separate entity solely for the purposes on producing certified productions, which would essentially permit the taxpayer to accomplish indirectly through a shell corporation what it could not do directly.  Global argued that if it did not meet the requirements it should be permitted to claim the credit on equitable grounds since subject production met the requirements under the definition. 

Judge Lamarre Proulx disagreed with Global.  The court found that the language of the Act clearly stated that the film production corporation is entitled to a credit under 125.4 if it primarily conducts a CFVP business.  Judge Lamarre Proulx went on to say that the general rule for interpreting a statute requires that the courts use the plain and ordinary meaning of the words in a statute where they are clear and unambiguous.  In support of this proposition, the Judge referred to the Supreme Court of Canada’s decision in Canada Trustco Mortgage Co. v. Canada where the court stated:

Where the words of a provision are precise and unequivocal, the ordinary meaning of the words play a dominant role in the interpretive process.

Where Parliament has specified precisely what conditions must be satisfied to achieve a particular result, it is reasonable to assume that Parliament intended that taxpayer’s would rely on such provisions to achieve the result they prescribe.[viii]

Presumably, where separate records are kept for each type of production, those that qualified for the credit could be justified in making a claim if the appropriate labour costs can be attributed to each production.  However, the Act clearly states that the credit is based on the corporation’s activities.  The Act does not provide an assessment based on individual productions.  This was likely the intention of Parliament.  The provision was likely worded in this way to limit opportunities for abuse. Accordingly, based on the literal interpretation of the provision, the Minister’s assessment and the Tax Court of Canada’s decision were correct.  Global did not produce any evidence to indicate that a purposive interpretation of the section was required.  Nor did they provide an alternative criteria for determining that the primary purpose of their company’s business was to produce CFVP throughout the relevant taxation year.      

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[i] 2005 DTC 1818.

[ii] R.S.C. 1985, c. 1 (5th Supp.).  All references in this article to the Act are to the Income Tax Act unless otherwise stated.

[iii] The credit claim is limited to 12% of the total production cost.

[iv] See Canadian Heritage website, Canadian Audio-Visual Certification Office:  http://www.pch.gc.ca/progs/ac-ca/progs/bcpac-cavco/pubs/2001-02/ra-ar/prog_e.cfm#3.1.1 (Accessed: April 17, 2006)

[v] The taxpayer also obtained a similar certificate from the Societe de developpement des enterprises culturelles (“SODEC”).  The criteria for granting a credit on the basis of this certificate will not be discussed in this case comment.   

[vi] See definition of  “qualified corporation under section 125.4(1).

[vii] See Guide to Form T1131 entitled “Claiming a Canadian Film and Video Production Tax Credit”

[viii] 2005 DTC 5547.

The Best Canada Can Give: Saskatchewan Upgrades Its Film Tax Credit

In January 2006, Saskatchewan implemented the most recent revisions to its Film Employment Tax Credit.  The tax credit now permits producers to claim up to 45% of qualified labour costs for a production shot within the provinces borders.  The previous credit was limited to 35%.  The producer may also claim another five percent of eligible labour costs for films shot beyond 40 kilometers outside of Saskatchewan or Regina.  In addition, producers can receive a five percent bonus on productions valued at $3 million or more, if at least six key-crew positions go to Saskatchewan residents.  With the new increase in Saskatchewan’s tax credits, it is considered to be on of the richest film tax incentives in Canada. 

Although Saskatchewan has not seen an immediate shift in production levels since increasing the tax credit, the government and industry observers anticipate that there will be a significant growth in this prairie province over the next year.  In fact, SaskFilm, the organization responsible for administering the tax credit and providing financial assistance to qualified production companies for purposes of developing a production, reports that inquiries about filming in the province has more than doubled since the change to the credit was announced in November.

Some industry commentators, although pleased with the increase, are concerned that the labour pool will be insufficient to support a surge in production if the change comes about too quickly.  In order to address this concern, the government is discussing the option of introducing a training program specifically focussed on growing the available talent pool.  No definitive announcement has been made about how this program will work. 

Provided the Saskatchewan film industry can meet the demands of expanded productions within its borders, it is likely that the increased credit will allow the province to compete for bigger blockbuster productions which will rival that of Ontario’s.  This could potentially be the beginning of a domino effect of increasing film tax incentives across Canada.  However, at this stage it is too soon to tell how this change will affect the rest of the provinces.  Ontario and other provinces will just have to keep their ears tuned in to any market shifts and a finger on the government lobbying speed dial line.

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Challenges to Financing Canadian Films

One of the biggest hurdles to film production in Canada, and likely any other jurisdiction, is the ability to acquire sufficient funding to complete a production.  Sometimes producers have an established reputation and can easily obtain private financing.  Usually, however, these opportunities are restricted to big blockbuster films.  For smaller films, with limited access to cash, there are a number of government agencies that provide different types of funding to burgeoning Canadian producers. 

In Canada, public financing now accounts for 51% of total financing of local feature films.  According to “Profile 2006: An Economic Report on the Canadian Film and Television Production Industry”, 30% of financing for a film comes from public funding agencies such as Canada Feature Film Fund, Canadian Television Fund (Equity Investment Program), Telefilm Canada and various government departments and agencies.  The remainder of the funding is provided indirectly through federal tax credits at 7% and provincial tax credits at 14%.  During the same period, private financing represented only 12% of Canadian feature film financing. 

Considering the heavy reliance on public funding, it is not surprising that industry supporters spend a lot of effort lobbying the government to maintain, if not increase, the amount of available funding for productions.  However, both the federal and provincial government argue that it is challenging to find support for all these programs.  Film tax credits offered by both governments are often the most highly criticized because the government argues that the amount spent over the course of a year is unpredictable.  In fact, in the 2004/2005, the federal government spent $19 million on tax credit claims.  Provincial governments spent $35 million.  Both figures exceeded the amount budgeted by the government.  On the other hand, direct funding programs like Telefilm or Canada Feature Film Fund are provided with a specific budget to be allocated based on strict eligibility criteria and no flexibility is provided for distributions over the designated budget.  For this reason, the government finds this alternative more attractive.  However, the argument against converting all funding into this formula is that the criteria are overly restrictive and subject to the discretion of those in power in these departments and agencies.  It is argued that many excellent feature films would not be made because one individual or the department may have biases against a certain genre, plot, or producer. 

There is no simple solution to this problem.  For this reason, both programs continue to exist in order to allow all productions equal opportunity of obtaining the necessary funding.  Despite the fact that many provinces, including British Columbia and Ontario, have attempted to phase out the use of tax credits, it is unlikely they will be successful without great resistance unless the film financing system is completely overhauled.  Without the tax credit system, what remains is a completely discretionary funding program that may see the cultural landscape of Canada dictated by a few.  This does not seem like the best result for Canada.

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