Overview (September 2002)

The Canadian Film and Television Industry
Non-Canadian Originated Productions in Canada
Tax Credits
CRTC 'Canadian Content'
Direct Federal Assistance
Direct Provincial Assistance
Private Assistance
Producing in Canada without Canadian Financing
Comment

The Canadian Film and Television Industry

Over the past several years, the Canadian film and television industry has grown and matured and, at present, represents nearly a C$5 billion business annually, an increase of 12% over the previous year. Only a few years ago, Canada's largest film and television companies were privately held corporations which relied heavily upon government financing and subsidy programmes to finance production. Since 1993, however, many of Canada's most prominent film and television companies have, through a combination of public offerings and consolidations, grown to become commercially successful integrated entertainment corporations. These include:

• Alliance Atlantis Communications Inc (North America's twelfth-largest studio, after the 1998 merger of two of Canada's largest public entertainment companies, Alliance Communications Corp and Atlantis Communications Corp);

• CHUM Limited (owner of CITY-TV and MuchMusic);

• Quebecor Inc;

• Craig Broadcast Systems;

• Astral Media Inc (owner of The Movie Network and The Family Channel;

• Bell Globemedia Inc (owner of CTV);

• Cinar Corp (recently the subject of considerable controversy regarding alleged financial mismanagement);

• TVA International (formerly Coscient Group Inc);

• Peace Arch Entertainment Group;

• Fireworks Entertainment Inc (now controlled by Canadian broadcaster Canwest Global);

• Lions Gate Entertainment Corp; and

• Corus Entertainment Inc (owner of Nelvana Limited, YTV and numerous other specialty channels.

Companies such as Lions Gate, Nelvana and Alliance Atlantis have also successfully raised additional financing in the United States. These companies have been highly successful at forging international alliances with major US studios, television networks and cable services with their European and Australasian counterparts. As a result, their productions are now routinely distributed and viewed throughout the world.

At the same time as the domestic industry has matured, Canada has become a leading location for internationally originated productions. US studios, television networks and cable services have come to Canada in droves, attracted by the low Canadian dollar and first-class Canadian casts and crews, locations and facilities. US companies with a strong presence in Canada include:

• major studios such as Paramount, Walt Disney, Miramax, Universal, MGM and Columbia;

• networks such as ABC, NBC, CBS, Fox and PAX TV;

• cable services such as Showtime, TNT, The Disney Channel, A&E and HBO; and

• film companies such as Hearst, Kushner-Locke and Saban, among others.
  

European film companies such as Granada, Pearson and Yorkshire have also found Canada to be an attractive location and have often been able to take advantage of Canada's numerous international film and television co-production treaties to access Canadian benefits.

In British Columbia, nearly 200 film and television projects were produced during 2001, including prominent studio films such as 'Dreamcatcher' and 'I Spy', and television programmes such as 'Outer Limits', 'Dark Angel', 'The Chris Isaak Show' and 'Glory Days'. Production expenditures in the province in 2001 totalled C$1.1 billion, a drop of 15% since 2000, fuelled largely by foreign location shooting. This represents the third consecutive year in which film and television economic activity in British Columbia has topped C$1 billion. However, the 15% reduction in production activity from 2000 and 2001 is causing some concern in the local production community.

In Ontario, the other leading Canadian production centre, combined film and television production expenditures in 2001 (which includes substantial 'Canadian content' and in-house studio production) equalled C$2 billion. This figure includes 37 feature films, including 'Chicago'. 'On The Line' and 'Resident Evil'. In 2001 a total of 95 Canadian and 48 foreign television projects were shot on location in the province, including popular domestic television series such as 'Blue Murder', 'Relic Hunter' and 'The Associates', and the US version of the popular and critically-acclaimed 'Queer As Folk' television series. In 2001 foreign production contributed C$561 million to the provincial economy.

Production activity in the Province of Quebec in 2001 rose to C$1.4 billion, powred by a 21% growth in domestic production to C$850 million, more than Ontario and British Columbia combined. Montréal was the location for numerous recent major foreign film productions, including 'The Sum of All Fears', 'The Score' and 'Confessions of a Dangerous Mind'.

Other provinces, while not as prominent as Ontario, British Columbia and Quebec, had total production expenditures in recent years as follows: C$65.5 million in Manitoba (2001); approximately C$40 million in New Brunswick (2000/2001); over C$22 million in Newfoundland (2001), and C$8 million in Prince Edward Island (2001). In Alberta, production activity expenditures jumped from C$27 million in 1999 to C$48 million in 2000 to C$50 million in 2001. In Nova Scotia, the film industry continues to thrive with 2001 production expenditures of C$137 million.

As the foregoing figures suggest, Canadian domestic production has generally increased over the past two years and US, European and other non-Canadian producers and distributors continue to produce numerous film and television projects on location in Canada. What accounts for this continuing hihg level of interest in Canadian film and television production? The following factors have all contributed to the production boom.

Geographic proximity
Canada's geographic proximity to the United States and shared North American values and interests have led to the establishment of close professional contacts between Canadian and American studios, independent producers, distributors and buyers. Toronto is a short flight away from New York, and Vancouver is just along the coast from Los Angeles. American television (both network and non-network) is readily accessible and widely disseminated throughout Canada.

Lower production costs
Production costs in Canada are generally lower than in the United States and other countries, and therefore attract US and other foreign productions. In addition to generally lower guild and union minimums, the favourable exchange rate of the Canadian dollar encourages production in Canada by non-Canadian producers.

Canadian performers and crews
Popular Canadian performers include Jim Carrey, Keanu Reeves, Sarah Polley, Mike Myers, Tom Green, Neve Campbell, Matthew Perry, Christopher Plummer, Kate Nelligan, Donald and Kiefer Sutherland, Catherine O'Hara, Eugene Levy, Rick Moranis, Dan Ackroyd, Dave Thomas and Michael J Fox. Canada has produced several popular on-camera performers, many of whom are recognized celebrities in the United States and abroad. For Canadian productions, performers are commonly represented by the Alliance of Canadian Cinema, Television and Radio Artists (ACTRA) or the Union of British Columbia Performers (UBCP) guilds whose collective agreements are often more favourable to the producer than the Screen Actors Guild (SAG), American Federation of Television and Radio Artists (AFTRA) and other non-Canadian collective agreements. For example, under the ACTRA agreement, a producer has the option to prepay or 'buy out' actors' residuals for a four-year period, which can be very advantageous when compared to SAG or AFTRA residual requirements.

While the ACTRA agreement has several advantages over the SAG agreement (from a producer's standpoint) SAG has announced a new initiative to require its members to work exclusively under SAG contracts even when they are rendering their services outside the United States. Since May 1 2002 SAG has strictly enforced Global Rule 1 to the SAG collective agreement, pursuant to twhich SAG members are required to contract under SAG Agreements, even when SAG members render services in jurisdictions outside of the United States, such as Canada. It remains to be seen how this development will affect production services actually in Canada.

Canada now boasts a high number of highly trained and professional crews, technicians and production personnel. In Toronto, the Canadian Film Centre established by Norman Jewison provides intensive training for Canadian directors, writers and producers. In addition, Canadian trade unions are often more flexible and insist upon less onerous requirements than their non-Canadian counterparts.

Canadian locations
With its wide ranging topography (3,400 miles from coast to coast) and small population (approximately 31 million), Canada is ideally suited for location shooting. Urban centres such as Toronto, Vancouver and Montreal have been disguised as London, Paris, New York and Chicago. Many Canadian cities and several provinces offer free location assistance to film and television producers.

Canadian facilities
Studio facilities and post-production laboratories in Toronto, Montréal and Vancouver rival those in Hollywood. Canada's largest film and television studio, Lions Gate Studios is a C$25 million facility located in Vancouver. The Bridge Studios, also in Vancouver, has one of the largest sound effect stages in North America. Toronto Film Studios is another of the country's largest studio complexes. In February 2002 plans were announced for a new studio in Toronto (to open in 2004) which may become the world's largest custom-built soundstage.

Government financial support
The Canadian Film Development Corporation, otherwise known as Telefilm Canada, provides financial assistance (in the form of equity investments, interest free and low interest loans, development and interim financing) to Canadian film and television productions which have significant Canadian creative, artistic and technical content and which meet certain published criteria. Telefilm Canada's provincial counterparts in Quebec, Ontario, Manitoba, Saskatchewan, Alberta, British Columbia, New Brunswick, Nova Scotia, Newfoundland and Labrador and Prince Edward Island also provide generous financial support (typically in the form of refundable tax credits) to qualifying Canadian productions. In 1996 the Canadian Television Fund (formerly the Canada Television and Cable Production Fund) (CTF) was established by the federal government, a government-cable industry partnership which combined the former Cable Production Fund, Telefilm Canada's Canadian Broadcast Programme Development Fund and a C$100 million contribution from the Department of Canadian Heritage to form an approximate C$200 million per year television funding initiative. The CTF recently released guidelines for 2002-2003 that are conditional on renewed federal government funding at existing levels. Changes in the new guidelines include:

• an expanded remit for children's and youth programming;

• new eligibility status for projects produced by broadcasters; and

• new eligibility status for broadcaster-affiliated distribution companies for Equity Investment Programme-supported productions.

In addition, in October 2000 the Canadian goverment announced a new feature film policy using a comprehensive 'from script to screen' approach to public funding. Among the new initiatives is the Canada Feature Film Fund, a fund which finances Canadian dramatic feature films and international co-productions from project development to domestic market launch with financing 'envelopes' for qualified producers and distributors.

'Canadian content' productions
Canadian television broadcasters and cable services generally pay substantially higher licence fees for television programmes which meet the 'Canadian content' criteria established by the Canadian Radio-television and Telecommunications Commission (CRTC), the Canadian equivalent to the US Federal Communications Commission. Such television programmes are licensed at a premium because, under Canadian law, broadcasters are required to telecast certain minimum amounts of Canadian programming in order to comply with their broadcast licences. Such productions are also generally eligible for direct government funding, tax credits (as described below) and top-up licence fees from the CTF.

On April 2 2002 the minister of Canadian Heritage initiated a review of the definition of 'Canadian content' in film and television production. As outlined in "Government Reviews 'Canadian Content' in Film and Television Sector", 'Canadian content' is the colloquial term which refers to the various tests of 'Canadianess' required to access various Canadian government programmes. The basic definition of 'Canadian content' has remained relatively unchanged for almost 30 years, even though the Canadian film and television industry continues to evolve. In light of this evolution, the minister of Canadian Heritage considers it timely to engage in a review of the definition. Submissions and comments are being received on the Department of Canadian Heritage website, and recommendations as to the definition of Canadian content are due to be presented to the minister in March 2003.

Tax credits
In 1995 the federal government introduced a fully refundable tax credit for eligible Canadian content film and video productions produced by qualified taxable Canadian corporations. The federal tax credit, in the maximum amount of 12% of the total production costs of an eligible production, is administered jointly by Canada Customs and Revenue Agency, popularly identified by its former name Revenue Canada, and the Canadian Audio-Visual Certification Office (CAVCO), and is available to Canadian-controlled productions which meet the detailed requirements set out in the Income Tax Act, related regulations and guidelines of CAVCO as summarized below. The federal Canadian content tax credit was modelled on the provincial Canadian content tax credit previously introduced in the province of Quebec (in the maximum amount of 14.58% of eligible production costs). Since the introduction of the federal credit, additional provincial Canadian content tax credits have been introduced in the provinces of Ontario (maximum of 20% of eligible labour expenditures), British Columbia (maximum basic credit of 20% of eligible labour costs) and other provinces.

On October 29 1997 the federal government announced the details of a refundable production services tax credit for eligible film and television productions which are produced in Canada. The production services credit is equal to 11% of qualifying Canadian labour expenses. Assuming that Canadian labour expenditures generally represent approximately 50% of the total production budget, the federal production services tax credit will net applicants approximately 5.5% of total production costs.

The Ontario government has also introduced a refundable production services tax credit with a rate of 11% of qualifying Ontario labour expenditures for eligible productions filmed in Ontario. Additional production services tax credits have been introduced or announced in the following provinces:

• Nova Scotia (between 15% and 17.5% of eligible production costs);

• New Brunswick (maximum of 20% of eligible production costs);

• Manitoba (maximum of 17.5% of eligible production costs);

• Saskatchewan (maximum of 17.5% of production costs);

• Quebec (11% of qualifying Quebec labour expenditures);

• British Columbia (11% of qualifying British Columbia labour expenditures); and

• Newfoundland (maximum of 25% of total production costs).
  

In lieu of a tax credit incentive, the province of Alberta recently introduced a cultural grant programme (comprising a maximum of 20% of the Alberta production budget) and the province of Prince Edward Island has introduced direct government investments (comprising a maximum of 20% of approved PEI eligible budget, subject to genre-specific maximums), to support filmmaking in these provinces.

Many of the aforementioned tax credits offer additional incentives provided that specified criteria are satisfied, including, for example, increased credits for first time producers and regional productions.

Tax shelters
Notwithstanding the introduction of production services credit and the phasing out of the former production services tax shelter structure in autumn 1997, by the end of 1998 enterprising tax lawyers were able to effectively resurrect production services tax shelters in respect of a portion of production costs. Specifically, they were able to design structured film financing investments which involved Canadian limited partnerships being engaged directly or indirectly to render those production services in Canada which did not involve the engagement of Canadian labour. Rather, the Canadian limited partnerships were responsible for administering non-Canadian labour expenditures generally in tandem with a Canadian production company which was responsible for paying the Canadian labour expenditures which formed the basis of production services credit claims discussed in detail below. Production services tax shelters continued to be utilized throughout 2000 and 2001 until Finance Canada again intervened.

On September 18 2001 the federal Canadian finance minister Paul Martin tabled proposed legislation to amend the Income Tax Act to eliminate Canadian film tax shelters (Finance Canada News Release 2001-079). Under the act, the so-called 'matchable expenditure' rules require that the cost of expenditures on business ventures such as film production services be allocated over the economic life of the related right to receive future income. However, the rules do not apply if, in the same year as the expenditure is made, the total revenues realized by the taxpayer in respect to the expenditure exceed 80% of its cost. The technical amendments tabled by Martin propose to amend the matchable expenditure rules to eliminate this exception in respect of all tax shelter transactions, including film. When enacted, the proposed amendments will apply to all expenditures made on or after September 18 2001 subject to certain limited transitional relief. Effective in 2002, existing Canadian film tax shelters are effectively eliminated. The technical amendments will not impact upon existing production services tax credit rules under the act (discussed below).

Mature Canadian independent film companies
As a result of a spate of public stock offerings, several prominent Canadian film companies have become well capitalized and financially independent. The production slates of these companies have dramatically increased domestic production.

As the list of factors suggests, there are several unique elements to Canadian film and television production of which producers and distributors contemplating involvement in a Canadian production should be aware.

Non-Canadian Originated Productions in Canada

Non-Canadian originated productions in Canada generally take one of the following three forms, the first of which is international treaty co-productions.

Canada is a party to 50 film and/or television co-production treaties in effect in 58 countries including Algeria, Argentina, Australia, Austria, Belgium, Bosnia-Herzegovina, Brazil, Chile, China, the Commonwealth of Independent States, Croatia, the Czech Republic, Denmark, France, Germany, Greece, Hong Kong, Hungary, Iceland, Ireland, Israel, Italy, Japan, Korea, Luxembourg, Malta, Mexico, Morocco, the Netherlands, New Zealand, Poland, Romania, the Russian Federation, the Slovak Republic, Slovenia, South Africa, Spain, Sweden, Switzerland, the United Kingdom and Venezuela.

New co-production agreements have recently been signed with Cuba, Finland, Norway, the Philippines and Singapore, and agreements are being negotiated with Armenia and India. Since 1964 Canadian producers have been involved in over 550 official co-productions. In 2001, for example, Telefilm Canada certified 66 co-production projects with total budgets amounting to C$500 million. France and the United Kingdom remain leading partners for Canadian producers, respectively participating in 38 and 41 co-productions in 2001. New partnerships are increasingly being forged with Asia while Australia's annual treaty co-production with Canada has increased in recent years. Still, European countries represent the vast majority of Canada's co-production activity.

Qualifying co-production films are entitled to the full enjoyment of all government incentives and benefits that are accorded to domestic films in Canada and are considered to be 'national products' in both participating countries. These incentives and benefits include:

• eligibility for government financial support from Telefilm Canada and provincial agencies;

• access to federal and provincial tax credits; and

• qualification for the Canadian content designation established by the CRTC.
  

For example, in 1999, the science fiction adventure television series 'Code Name: Eternity' was produced as a Canada-France co-production by Protocol Eternity Productions Inc of Canada and Dune SA and Metropole (M6) of France in association with Canwest Global, UFA International and Warner Bros. Two Canadian co-productions, François Girard's 'The Red Violin' and Alexander Petrov's 'The Old Man and the Sea' won Oscars in March 2000.

Benefits vary depending on the particular country that is a party to a co-production treaty. Some countries also offer production assistance and a qualifying co-production will be eligible to access this funding in addition to Canadian benefits. Certain treaty countries such as France have quota requirements for domestic television and a co-production will sometimes qualify under the relevant quota.

The co-production treaties between Canada and various European countries are bilateral agreements and their effect must be considered in light of the formation of the European Community (EC) and its broadcasting directive. The EC Broadcasting Directive was first enacted in 1989 and has been incorporated into the domestic law of most EC member states, including France and the United Kingdom. Article 6 provides that member states must ensure that broadcasters reserve a majority proportion of their transmission time to European works. In order for a Canadian/European treaty co-production to qualify as a 'European work', the work must originate in Europe, be "mainly made by authors and workers residing in Europe", and have a European entity as a majority co-producer. If these conditions are met, the co-production qualifies as 100% European content. Works that do not meet this definition are foreign works subject to the quota limits, but works that are mainly made by European residents are exempted from the quota to that degree of contribution. For example, if the European financial participation in a two-hour co-production amounts to one-third of the total, 40 minutes of the co-production will qualify as European content.

While the co-production treaties provide several benefits as described above, they do impose a series of conditions upon the co-producers which sometimes limits their flexibility. For example, each co-production treaty sets minimum standards for financial participation (the minority co-producer must normally contribute at least 20% of the financing), creative participation and the extent to which third countries can be involved in the production. The treaties are also quite specific in outlining the creative and technical contributions which must be made by citizens or nationals of the country of the minority co-producer. For example, co-production agreements may specify minimum numbers of writers, technicians, leading and supporting role performers, and producers who must be citizens of the participating country. Compliance with these sorts of conditions is the trade-off for enjoying the benefits accorded under the co-production treaties.

There is no co-production treaty between Canada and the United States and no such treaty is anticipated in the near future. Furthermore, a US controlled entity will not qualify as Canadian for the purposes of co-production treaties. In certain cases, however, US producers may take indirect advantage of international co-production treaties through the medium of non-Canadian subsidiaries or affiliates incorporated and carrying on business in non-Canadian jurisdictions which are parties to a co-production treaty with Canada (provided such non-Canadian subsidiaries or affiliates meet the relevant qualification criteria under the applicable co-production treaty). In other cases, a US rights holder may license rights to a production to a Canadian company for the purposes of facilitating an official co-production between Canada and another country to be distributed by the US rights holder. As a practical matter, however, the majority of US productions in Canada fall into one of the two categories (discussed below).

The second form of non-Canadian originated productions in Canada is non-Canadian productions with Canadian financing.

Non-Canadians who wish to benefit indirectly from Canadian government and private sector financing must become familiar with the maze of rules regarding Canadian financial assistance and tax benefits. For the most part, these rules are designed to foster the domestic Canadian film industry and encourage the growth and development of Canadian film productions. Therefore, in order to access these benefits, in most cases, an association with an individual Canadian producer with genuine control over the production will be required to gain access to the funding. Non-Canadians can reap the benefits of Canadian financing provided they understand and adhere to the rules of the game. A number of production services tax credits have been introduced both at the federal level and in many of the provinces. These new credits are designed to promote and encourage foreign production in Canada, and thereby develop and grow Canadian production service industries. In view of this fact, the eligibility requirements for such credits are generally far less stringent than those associated with the Canadian content incentives.

Canadian financial assistance to film and television productions normally falls into one of the following five broad categories:

• tax credits;

• CRTC Canadian content;

• direct federal assistance;

• direct provincial assistance; and

• private assistance.
  

Tax Credits

Federal Canadian content credit
On February 27 1995 the federal budget brought into existence the Canadian film or video production tax credit, a federal refundable tax credit administered on behalf of the minister of Canadian Heritage by the Canadian Audio-Visual Certification Office (CAVCO) and CCRA. The credit, passed into law on June 20 1996, is set out in Section 125.4 of the Income Tax Act and Section 1106 of the regulations, and is available to a qualified corporation. The qualified corporation must be 'Canadian-controlled', as determined under the Investment Canada Act (ie, a majority of the voting interests must be held by Canadians and they must have control in fact over the corporation). The credit available is equal to 25% of the qualified labour expenditures including eligible salaries, wages and other remuneration paid or payable for services rendered in connection with the production of a Canadian film or video production. Such qualified expenditures are net of any assistance which the producer receives from any Canadian federal or provincial film agency, provincial tax credit programme or other grants, subsidies and similar benefits.

The total labour expenditure qualifying for the credit may not exceed 48% of the cost of the production to the qualifying corporation. Therefore, the credit can provide producers with up to 12% (25% of 48%) of the total cost of an eligible production produced in Canada. To be eligible for the credit, the subject production must be certified by CAVCO as a 'Canadian film or video production', and to qualify as such, the production must meet a number of creative and non-creative criteria (summarized below).

A Canadian film or video production is a film or video production, other than an excluded production, of a qualified corporation that is either (i) a treaty co-production, or (ii) a film or video production that meets certain prescribed requirements.

The requirements for a non-treaty production are substantially similar to those applicable to 'certified productions' under the former Canadian content tax shelter system. The following criteria must be met in order for such a production to qualify for the credit:

• the producer must be Canadian and a citizen or permanent resident of Canada at all times during the production;

• the production must meet certain prescribed requirements relating to creative points and Canadian expenditures (described below); and

• the production must not be an excluded production.

To be eligible for the credit, the production must be produced or co-produced by a Canadian. The regulations to the Income Tax Act provide that in order to qualify as a producer the applicable individual must:

• control and be the central decision-maker in respect of the production;

• be directly responsible for acquiring the production, story or screenplay and the development, creative and financial control and exploitation of the production; and

• be identified in the production as being its producer.
  

With the exception of a treaty co-production, all positions related to the producer function must be held by Canadians. In limited circumstances, CAVCO will consider the granting of a producer-related credit (such as executive or associate producer) to non-Canadians as a courtesy. In no event will CAVCO grant non-Canadian exemptions in respect of such production personnel as a producer, line-producer or production manager.

The term 'Canadian' is defined as:

• a Canadian citizen pursuant to the Citizenship Act;

• a permanent resident pursuant to the Immigration Act; or

• a corporation that is Canadian-controlled, as determined for the purposes of the Investment Canada Act.
  

The producer must be a Canadian "at all relevant times", meaning that such person(s) must meet the relevant definition at the time their services in relation to the production commenced through to the completion of post-production.

To be eligible for the credit, the production (if live action; there are separate rules for animation productions) must earn a minimum of six units of production or 'points', based on the following key personnel qualifying as Canadians:

• director (two points);

• screenwriter (two points);

• highest paid actor (one point);

• second highest paid actor (one point);

• art director (one point);

• director of photography (one point);

• music composer (one point); and

• picture editor (one point).
  

In addition, either the director and/or screenwriter and at least one of the highest or second highest paid actors must be Canadian.

In the case of a documentary production which does not involve performers or other elements such as music composer or art director, a production may meet the creative services criteria even if it has not been allotted the aforementioned minimum six points. However, all the creative positions must be occupied by Canadians.

As indicated above, there is a separate 10-point scale for animation productions. To qualify for the credit, animation productions must also obtain a minimum of six points based on the following key personnel qualifying as Canadians and the following services being rendered in Canada:

• director (one point);

• screenwriter and storyboard supervisor (one point);

• highest or second highest paid lead voice (one point);

• design supervisor (one point);

• camera operator (one point);

• music composer one point);

• picture editor (one point);

• layout and background undertaken in Canada (one point);

• key animation undertaken in Canada (one point); and

• assistant animation performed in Canada (one point).

At least one of the director or the screenwriter and the storyboard supervisor must be Canadian, the lead-voice must be Canadian and the key animation must be done in Canada.

In addition to meeting the points test in connection with key creative positions, the expenditures incurred in connection with the production (whether live action or animation) must also satisfy two expenditure tests. First, at least 75% of remuneration for all costs paid or payable for services provided in respect of producing the production (other than post-production work) must be paid to, or in respect of services provided by Canadians. Second, at least 75% of all costs incurred for processing, post-production and final preparation of the production must be incurred in respect of services provided in Canada.

The regulations exclude certain costs from these calculations. Excluded costs include:

• costs determined by reference to profit participations in the production;

• remuneration payable to, or in respect of, the producer or to key creative personnel in points positions; and

• amounts payable in respect of insurance, financing, brokerage, legal and accounting fees.
  

A production will not qualify for the credit if it is an excluded production. A production will be excluded from eligibility if it falls within the list of excluded genres set out in the regulations to the Income Tax Act or if it fails to meet certain specified ownership and distribution criteria (described below).

Ineligible genres of productions include:

• news or public affairs programming;

• talk shows;

• game shows or contests;

• sporting events award shows;

• fundraising events;

• reality television;

• pornography;

• advertising;

• industrial, corporate or institutional productions;

• productions (other than documentaries) which primarily consist of stock footage; and

• productions for which public financial support would, in the opinion of the minister of Canadian Heritage, be contrary to public policy.
  

A production will also be excluded from eligibility for the credit unless the following prescribed requirements are met:

• the production is completed within two years of the end of the qualified corporation's taxation year in which principal photography began and a certificate of completion has been issued by the minister of Canadian Heritage within 30 months of the end of the corporation's taxation year in which principal photography began;

• there is a written agreement, at fair market value, with a Canadian distributor or broadcaster holding a CRTC licence to have the production shown in Canada within two years of the production being completed and commercially exploitable;

• only Canadians distribute the production in Canada within two years (proposed to be increased to 25 years) of the production being completed and commercially exploitable;

• the exclusive worldwide copyright in the production, for all commercial exploitation purposes, is held by the Canadian producer for a minimum of 25 years commencing when the production is completed and is commercially exploitable;

• the Canadian producer controls the initial licensing of commercial exploitation of the production; and

• the Canadian producer retains a share of revenues that is acceptable to the minister of Canadian Heritage from the exploitation of the production in non-Canadian markets. In this regard, CAVCO has indicated that the Canadian producer must retain an effective share of net profits equivalent to at least 25% of the value worldwide excluding Canada.
  

To qualify for the credit, with certain limited exceptions, no deduction for tax purposes may be available in respect of the production to anyone other than the qualified corporation. In particular, the credit will not be available where an investor, other than a prescribed person, who is not actively engaged on a regular basis in the production of Canadian film or video productions, may deduct an amount in respect of the production in computing its income for any taxation year. This rule (which effectively prohibits participation by private investors) ensures that no tax shelter will be permitted in respect of a Canadian film or video production.

Prescribed persons who are allowed to have an interest in and deduct an amount in respect of an eligible production include:

• a corporation that holds a television broadcasting licence issued by the CRTC;

• a non-profit organization that has a fund which is established to finance Canadian film or video productions; and

• a Canadian federal or provincial government film agency.
  

Proposed amendments to the regulations would expand the definition of a 'prescribed person' to include Canadian television specialty channels and pay television licensees of the CRTC.

The Income Tax Act expressly allows the credit to be assigned and this provision overrides Section 67 of the Financial Administration Act which would otherwise preclude the assignment of a federal Crown debt. Therefore, the federal credit may be assigned to a bank or other financial institution as part of an interim financing arrangement. Notwithstanding this, the assignment is technically not binding on the CCRA and the rights of the assignee financier are subject to all statutory and common law rights of set off that the CCRA may exercise against the credit's recipient. Therefore, lending institutions must conduct due diligence reviews in order to confirm that the CCRA will have no rights of set off against their respective borrowers. In addition, as an administrative matter, the actual refund cheque will only be made payable by the CCRA to the applicant corporation and not to the assignee. Therefore, financial institutions will typically insist upon a power of attorney from the borrower and an irrevocable direction which requires the cheque to be paid to an address approved by the financial institution.

Regarding producer control guidelines, CAVCO retains a large degree of discretion in certifying productions as Canadian film or video productions. This discretion is exercised, in part, through a series of producer-control guidelines which are designed, in CAVCO's words, "to ensure that access to the new Canadian film or video production tax credit is limited to productions that are truly owned and controlled by Canadian companies". The guidelines provide prospective applicants with additional details, definitions and requirements for the granting of CAVCO certification. In addition, the guidelines provide a series of 'indicators' which are considered by CAVCO in assessing 'true' Canadian ownership and control of a production.

The guidelines provide that control over the financial and creative elements of the production must be vested in the Canadian producer. However, they recognize that such control by the Canadian producer "may be subject to reasonable and customary approvals required by other non-Canadian arm's-length financial participants such as distributors, broadcasters and financiers". Notwithstanding this, CAVCO believes that any approvals granted to a non-Canadian, in addition to being reasonable and customary, must not encroach upon the ability of the Canadian producer to control the production. For example, granting a non-Canadian the right to control expenditures, co-sign cheques, receive under-budgeted amounts, supervise the functions of production accountant or production manager, or overrule the producer in the case of a dispute are all matters which, in CAVCO's view, would encroach upon the control of the Canadian producer and suggest non-Canadian control of the production.

The guidelines set out eight requirements which must be met for the production to be considered to be 'Canadian controlled'. They are largely based upon the regulations to the Income Tax Act. They include the following requirements:

• worldwide copyright in the production must be owned and controlled by Canadians for a minimum period of 25 years from the first date of commercial exploitation;

• Canadian distribution rights must be owned and controlled for a minimum period of two years (rising to 25 years if the Department of Finance accepts a Canadian industry proposal) from the date the production becomes commercially exploitable;

• the Canadian producer must control the initial licensing of commercial exploitation of the production;

• the Canadian producer must retain a reasonable financial interest in the foreign exploitation of the production (normally not less than 25% of the worldwide value excluding Canada);

• the Canadian producer must not be a producer for hire for a non-Canadian;

• the Canadian producer must not receive less remuneration as a producer than the total paid for all non-Canadian producer related positions, whether credited or uncredited;

• the Canadian producer must not be a party to an agreement that grants a non-Canadian the right to cancel the agreement without suffering a penalty; and

• the Canadian producer must not be a party to an agreement where the producer can be overruled by a non-Canadian in the case of a dispute.
  

In addition to these requirements, CAVCO will also consider various indicators of non-Canadian control. These include, among others:

• evidence that 75% or more of the total budget is financed by a single non-Canadian entity or its related companies (excluding recognized lending institutions);

• evidence that a Canadian entity does not own or control distribution and exhibition rights to at least either the United States or an economically significant portion of the world outside North America;

• evidence that the Canadian producer does not participate in the meaningful development of the production's story, concept and/or script; and

• evidence that foreign participants, through the receipt of weekly expense statements, exercise undue control or require changes to the production.
  

In order to assess whether one or more of such indicators has been contravened, CAVCO requires the submission of all relevant contractual documentation between the producer and non-Canadian entities who participate in the financing or distribution of the production as part of the producer's credit application package.

The guidelines contain a detailed set of criteria which govern the granting of screen credits to non-Canadian corporations and individuals involved in a Canadian film or video production. In general, co-production credits (with the exception of treaty co-productions) will not be granted to non-Canadian persons or entities and the Canadian producer and production company must clearly and prominently be identified in the main and end titles. Corporate presentation credits are allowed for non-Canadian licensed broadcasters and, subject to CAVCO approval, other non-Canadian corporate entities such as distributors, syndicators, packagers and financiers may be granted up to a maximum of two 'presentation' credits in the main titles.

With certain exceptions, 'in association with' or similar production credits may be granted to non-Canadian bona fide distributors or licensed broadcasters where the credits conform to the following format:

"(a Canadian company production) in
association with (foreign entity)".

There is no restriction as to the number of 'in association with' or similar production credits for non-Canadian entities in the end titles provided that they conform to the format suggested by CAVCO. In addition, logos of non-Canadian broadcasters, distributors, syndicators, packagers and financiers are allowed in the end titles provided that Canadian company logos also appear and are no less prominent.

The guidelines also contain a detailed set of rules regarding the granting of production related credits to non-Canadian individuals. In general, a maximum of two non-Canadian individuals may receive certain major producer related credits which are prescribed by CAVCO such as 'executive producer', 'supervising producer' or 'executive in charge of production' provided that their functions in no way interfere with the financial and creative authority of the individual Canadian producer and relate to either arranging foreign distribution or financing or the provision of services to the production under the strict supervision and control of the Canadian producer. Persons requiring such exemptions must sign duly notarized affidavits, in CAVCO approved form, which outline their specific duties and responsibilities, and in which they declare that they hold no ultimate creative or financial decision making power over the production. CAVCO also requires full disclosure of all contracts pertaining to exempted individual's involvement in the production.

In addition to the maximum of two major non-Canadian credits set forth above, it is also possible, in prescribed circumstances, to obtain permission from CAVCO to grant a maximum of one additional credit of a lesser nature from a list prescribed by CAVCO to a non-Canadian. Included in the CAVCO list are such credits as 'production executive', 'production associate', 'executive/production consultant' and 'creative consultant'.

CAVCO will also give consideration to the granting of an 'executive producer' credit to either a non-Canadian leading performer or writer-for-hire provided that the credit is offered solely as a vanity credit. Only one such credit will be granted per production and it will count as the lesser credit allowed as described above. While a notarized affidavit, in CAVCO form, must be submitted in support of the writer-for-hire credit, the leading non-Canadian performer is not required to submit an affidavit.

Non-Canadian individual presentation credits may also be granted for representatives of non-Canadian bona fide distribution companies or licensed broadcasters whose functions on the production involve no creative or financial control. Once again, such credits require an exemption from CAVCO and are counted against the maximum two major credit allocation described above.

It is a CAVCO rule that the amount of time which may be spent on set by credited exempted non-Canadians (with the exception of the leading performer or writer-for-hire) is limited to 25% of principal photography. The CAVCO approved form of affidavit requires the applicant to certify as to the percentage of time he or she has been on set. Finally, a maximum of two credits will be allowed for any one non-Canadian company and/or its representatives on the basis described above.

As a general rule, given the complexity of the CAVCO rules regarding non-Canadian screen credits and the various permutations and combinations, it is always advisable to review the guidelines in detail and, whenever possible, check with CAVCO in advance to confirm that the proposed credits for non-Canadians are acceptable to CAVCO.

The certification of a production as a Canadian film or video production involves a two-step process. Initially, a producer of an eligible production must obtain from CAVCO a 'Canadian film or video production certificate (Part A)' certification. The issuance of a Part A certificate is based on CAVCO's evaluation of the application, analysis of cost estimates, and financing plans, together with its review of the other content issues discussed above. The Part A certificate may be provided before or during production in order to assist a producer in the acquisition of financing. Upon receipt of a Part A certificate and upon the completion and filing of the applicable CCRA (T1131) tax form in conjunction with its tax return, a producer may claim a tax credit at the end of its fiscal year (ie, the first year of production) in respect of the labour costs incurred in such year.

The second part of the administrative process involves the producer's application for a 'certificate of completion (Part B)'. Upon completion of the production (and within 30 months after the end of the Canadian corporation's taxation year in which the production's principal photography began), the producer must submit an application for a certificate of completion (Part B), along with all supporting documentation. The certificate of completion certifies that a production was completed within two years after the end of the taxation year in which principal photography began. In the event that a production is not completed within such period, the production will be deemed ineligible and no credit will be allowed by the CCRA in such taxation year. In addition, the CCRA may re-assess the producer for any credit previously granted in connection with the production.

Together with the producer's application for a certificate of completion (Part B), an audited statement of production costs prepared by an independent certified accountant must be submitted for productions with a budget of C$500,000 or more. For productions with budgets ranging between C$100,000 and C$499,999, a review engagement report will suffice. Where a production budget is less than C$100,000, CAVCO will require only that a producer signs an affidavit (in a CAVCO approved form) attesting to the cost of production.

Productions which have received CAVCO certification are automatically recognized as Canadian programmes for purposes of the CRTC, but the reverse does not apply. In general, the CRTC has discretion to recognize as Canadian certain programmes which would not be certified by CAVCO (described below).

On August 6 1999 the Income Tax Rulings and Interpretations Directorate, a department of the CCRA, released for public comment a revised draft interpretative position on the meaning of the term 'investor' as it relates to the credit. According to the CCRA, the investor rules are intended to assist in determining the impact that some of the most common film financing arrangements would have on a production's eligibility for the credit. The investor rules review various common financing arrangements available to Canadian producers, and assess how, in certain circumstances, such arrangements might result in a reduction of the credit available to the Canadian producer or possibly even render the production ineligible for the credit entirely.

The investor rules, in their current form, could substantially restrict or even eliminate the ability of Canadian producers to access the credit in circumstances where domestic or foreign distributors and broadcasters receive a substantial 'back-end' profit participation in the applicable productions.

The investor rules currently remain in draft form and it is possible that they will be superseded by a new interpretation policy in the near future. The Department of Finance and the Department of Canadian Heritage released a discussion paper on March 6 2001 soliciting comments on a proposal to simplify the credit, including, in particular, the investor rules. Following consultations, if the proposals are implemented, draft amendments to the Income Tax Act and regulations will be recommended to the minister of finance. These proposals are summarized below.

Simplification proposals for the credit seek to change the rule disqualifying a production from the credit if any person other than the production corporation makes a deduction in respect of the cost of the production. Under the proposals, a production would only be ineligible under this rule if:

• the interest of an investor in the production is a tax shelter;

• a person's interest in an investor is a tax shelter; or

• any such interest would be a matchable expenditure but for the 80%-revenue exception in the matchable expenditure rules.
  

The calculation of the credit would be based only on qualifying labour expenditures, with the only ownership criteria being those in the income tax regulations. The proposals, therefore, would mean that qualified labour expenditures in respect of an equity interest of a person other than the qualified production corporation would not be carved out. The credit rules, however, would expressly carve out expenditures incurred on behalf of an equity share owned by another qualified production company. No major changes are proposed to the ownership requirements in the income tax regulations.

It is proposed that qualified labour expenditures would not be restricted by a percentage of production cost (currently at 48%). However, qualified labour expenditures would be amended to exclude amounts paid as producer fees to the extent that they exceed 15% of the total qualifying labour expenditures, other than producer fees. The government proposed to consult further with industry representatives concerning smaller productions and certain genres, such as documentaries, where a reasonable producer fee may be in excess of 15% of total qualifying labour expenditures.

The proposals also recommend reducing qualified labour expenditures in respect of government assistance, through a 50% reduction of government assistance in respect of the production. This 50% 'grind' would also apply to equity interests owned by government agencies.

The proposals recommended that only expenditures paid to persons resident in Canada be eligible for the credit. The proposals also recommend changing the starting time for eligibility of expenditures to the latest of the following three times:

• the time at which the producer or a related party first incurs development labour costs directly attributable to the script;

• the first time at which the producer or related party acquires a right in respect of the story that is the basis of the final script; or

• two years prior to the date on which principal photography begins.
  

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