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A Clarifying Development – “Canadian Content” Tax Credit Regulations Amended

The October 4, 2014 Canada Gazette (being vol. 148, no. 40), contained something of note for Canadian film and TV lawyers: amendments to the Income Tax Act regulations which govern the “Canadian content” tax credits for audio-visual productions. The full text of the amendment in the Gazette can be accessed here.

What Was the Problem?

Before the October 4, 2014 amendments, it was not entirely clear who was to be considered an “owner” of copyright in a production, and there was further uncertainty regarding whether licensing someone exploitation rights or granting them a right to share in the revenues of a production could make them qualify as an “owner” of “copyright”. That led to confusion surrounding how to properly structure ownership, licenses and revenue participations so as not to inadvertently fall afoul of the regulations (and thereby render the production ineligible for “Canadian content” tax credits). The confusion was further compounded by some inelegant drafting.

So What Has Changed?

To borrow from the Gazette‘s description of the amendments, the regulation has been changed so that:

  • “copyright owner” is now a defined term in the regulation – one which uses terminology found in the Copyright Act (e.g., the definition uses terms such as “maker” and “copyright” that have particular meanings under the Copyright Act);
  • it is now definitively stated that a person having the right to share in revenues generated by a production is not in and of itself an interest or a right held by a copyright owner;
  • it is now definitely stated that the grant of an exclusive license does not constitute an assignment of copyright for purposes of the tax credit analysis
  • the definition of “excluded production” has been re-worded to make it clear that a production will be deemed to be an “excluded production” (and therefore ineligible for “Canadian content” tax credits) if someone other than a “prescribed person” owns copyright at any point during the first 25 years after the production has been completed; and
  • the list of “prescribed persons” has been expanded to include Canadian individuals, Canadian taxable corporations, and partnerships of prescribed persons.

The amendments will take effect forty days after October 4, 2014 (so, November 13, 2014), and will not be retroactively applied to any production if before November 13, 2014 (a) the Minister of Canadian Heritage has revoked or refused to issue a certificate of completion for it or (b) the Minister of National Revenue has assessed a return of income on the basis that the production is not a Canadian film or video production and that assessment’s basis is not vacated or varied on or after that date.

That’s Nice. So?

While not changing very much on a substantive level, these changes provide some comfort and further guidance on structuring elements that many of us rely on in structuring productions:

  • entering into a license or distribution agreement does not constitute a transfer of copyright
  • granting rights to participate in revenues (such as “back-end” or “net profit” participation) will not, in and of itself, cause the production to go “off-side” – while such “back-end” participations have often been granted to individuals providing services in connection with projects (such as directors or actors), these amendments appear to permit “hands-off” investors to be granted such participations as well, something which historically was regarded as somewhat risky
  • there is now greater flexibility in structuring productions because the list of acceptable (or “prescribed”) persons who can own a copyright interest in the production has been expanded to include not just Canadian corporations, but also Canadian individuals and Canadian partnerships (all of whose partners are prescribed persons)

Fine. Now Say Something Really Nerdy.

These amendments do something interesting with the term “maker”, which is defined in the Copyright Act as “the person by whom the arrangements necessary for the making of the work are undertaken”. The amendments, in the way that they define “copyright owner”, seem to imply that the “maker” of a production is the first “owner” of copyright in the production – however, a close reading of the Copyright Act reveals that the term “maker” is something of an analytical dead-end: being the “maker” of a production has no bearing on the ownership or authorship of that production for copyright purposes. In other words, by trying to tie “maker” and “owner” together, the amendments do something that not even the Copyright Act does. It’s not a problem – ownership for copyright purposes and for tax purposes can be different things – but it is interesting to note that the regulatory instinct is to rely on “maker” status in a way which is not present in the underlying copyright regime.

A Clarifying Development – “Canadian Content” Tax Credit Regulations Amended

E&Y and MPAA Release Tax Credit Benefits Study

Ernst & Young LLP earlier this month released a study assessing the “economic benefits of film production tax incentives”.  The study, entitled “Evaluating the effectiveness of state film tax credit programs” was commissioned by the Motion Picture Association of America (MPAA) and is available for download from the E&Y site.

The study attempts to devise a methodology for evaluting film- and TV-related tax incentive programs, and, as noted by Deadline Hollywood, E&Y argues that “The economic benefits to residents extend beyond the production activities themselves and include increased activity by suppliers to the film industry and increased consumer spending from higher incomes”.  While the study is a little light on actual numbers, it rather sensibly notes that “Whether the costs of the programs are justified by these
economic benefits must be answered by comparing the benefit-cost ratios of film credit programs with those achieved by other economic development programs.”

E&Y and MPAA Release Tax Credit Benefits Study

Saskatchewan Ends Film & TV Tax Credit

The Saskatchewan government has announced that it is eliminating the Saskatchewan Film Employment Tax Credit Program.  From the CBC news report:

Finance Minister Ken Krawetz announced Wednesday that the province can’t afford the film employment tax credit and so the program will be wound down.

The subsidy provides a tax credit of up to 55 per cent of the labour costs in film and video productions.

Sitcoms like Corner Gas and TV movies like Prairie Giant: The Tommy Douglas Story, were among the Saskatchewan productions made with the help of the program.

Tax credit incentive programs remain in flux in a variety of jurisdictions: as Saskatchewan winds down its program, many US states are re-assessing the advisability of their existing programs (Despite Budget Crunch, the Great Film Production Incentives Race Continues) and the UK has just announced the creation of a new targeted television tax credit.

Saskatchewan Ends Film & TV Tax Credit

Tax Credits: Perhaps One Size Does Not Fit All

2011 has seen a variety of news stories about film and television tax credit incentive programs around the world.  In the summer, the Economist reported that many US states were ending their tax credit programs (“Unilateral disarmament”):

Arizona, Arkansas, Idaho, Kansas, Maine, New Jersey and Washington have recently ended, suspended or shrunk their programmes. Many others, struggling with budget deficits, are considering doing the same, investing the money in something permanent or even leaving it to taxpayers. “2010 will likely stand as the peak year,” thinks Mr Henchman.

But where some US states are declining to tread, other jurisdictions are continuing to venture:

UK Extends Movie Tax Break Until 2015

Prime Minister David Cameron has announced that film tax relief will be extended for four more years until the end of December 2015. It had been due to expire March next year.

It is worth emphasizing that the UK has extended its film and TV tax incentive program at the same time that the government is in the midst of enormous budget cuts in other areas of government spending.

Closer to home, the province of New Brunswick, after announcing the end of its incentive program earlier this year, has now indicated that film and TV projects will continue to receive funding, though via different delivery mechanisms:

N.B. filmmakers welcome new funding

Filmmakers in New Brunswick are welcoming a new funding application process launched by the provincial government on Tuesday, after the film tax credit was axed in March.

New Brunswick will provide as much as 25 to 30 per cent of eligible expenditures incurred in the province, depending upon the type of project, said Wellness, Culture and Sport Minister Trevor Holder.

While it’s dangerous to draw conclusions from such disparate experiences, it’s worth noting that tax credit incentive programs appear to be in the process of being retained in jurisdictions where they have a long history (reflecting a long-term investment in anticipated industry growth and spin-off benefits) and being abandoned in jurisdictions where they were viewed as short-cuts to desirable economic activity.  In other words, tax credit programs appear to be viewed as worthwhile when they are understood as a mechanism for developing or sustaining an indigenous production industry over an extended time horizon; they are less attractive if they are intended to create, virtually overnight, an industry hub in an environment which is otherwise unpromising.

Tax Credits: Perhaps One Size Does Not Fit All

Canadian Locations Losing Out to US Tax Credits?

Nellie Andreeva, writing at Deadline | Hollywood, offers a detailed account of how Canadian cities are losing out on pilot productions this year, in part because of increasingly lucrative tax credit incentives available in US states: PILOT SEASON LOCATIONS: New York Production Booming, Canada Loses Ground.  As Andreeva notes,

Part of the reason for more TV studio executives to consider keeping drama pilot production in the U.S. is that the current currency exchange rate makes production in Canada less appealing than in years past. But also key are tax incentives offered in the states. On a standard hourlong pilot budget of $3 million, 10%-25% in tax rebates represents a nice saving. For instance, two of the three CW pilots shooting in the U.S., Hart of Dixie and Cooper & Stone, are being produced in states with tax incentives, North Carolina and Illinois. The locations also happen to fit the settings of the shows, which producers always wish for but only get when economics allow.




Canadian Locations Losing Out to US Tax Credits?