Entertainment & Media Law Signal : Canadian Entertainment Lawyers for Licensing, Intellectual Property & New Media Matters

J. Kelly Nestruck reported in the Globe and Mail on Monday that a tax credit aimed at the theatre industry has recently been passed by the Illinois legislature. The Live Theatre Production Tax Credit will provide commercial producers up to $2 million dollars in tax rebates for “pre-Broadway” and “long run” shows.

Both Chicago and Toronto are traditional pre-Broadway stops for large-scale musicals, and the cities derive tourism and economic boons from their vibrant theatre scene. And now with the Illinois tax credits taking effect in July, some of Toronto’s theatre advocates are trying to make the case that a similar tax credit for Toronto is both arts friendly and business savvy.

Tax credits are certainly not new to the Canadian film industry, but Mirvish Productions and Dancap –along with representatives of theatre unions and associations – are hoping for similar incentives directed towards the theatre as well. They have been active in advocating for competitive measures from the city and the province so that productions aren’t lost to American cities.

Could this be, as Nestruck suggests, the new ammunition in a theatre war between the Windy City and Hogtown?

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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.

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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.

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Heenan Blaikie has published a Summary of Canadian Financial Incentives for the Production of Animation, Digital Media and Interactive Content - a concise (and good-looking!) guide to everything from the federal SREDTIP, to Ontario's OIDMTC, to Quebec's PMTTC and all points in between them.  We like to think of the Summary as the sister guide to our Producing in Canada handbook; between them they provide a comprehensive overview of Canadian government incentives for the production of projects in virtually all visual media.

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The efficacy of tax credits for the videogame industry, has been the subject of a variety of coverage recently:

• No Go for UK Tax Breaks for Video Games Industry (includes details on why the UK government has thus far declined to introduce credit incentives for the industry)
• notwithstanding the foregoing, "Hollywood" continues lobbying efforts with the UK government - Hollywood Lobbying UK Government Over Gaming Tax Breaks
• the State of Michigan has also made moves towards eliminating its videogame tax credits - Michigan Gov. Seeks to Scale Back Game Incentives - Do Tax Credit Plans Work?

That last link (written by Drew Boortz and from Reed Smith's Developing Concerns blog) contains some very thoughtful commentary on the topic of videogame tax incentive programs, of which I'll only excerpt this:

One final though on this issue - it is possible that a straight cost-benefit analysis is not the only appropriate way to measure the success of a tax incentive program.  There are other considerations, including the revitalization of underprivileged areas, promoting education and STEM skills in the area's schools, etc., that may not lend themselves to a "hard cash" analysis, but are nevertheless worthy goals. 

In sum, the bottom line is that tax credits and incentives are tricky, complex beasts, and can cut for the better or for the worse.  I for one would like to see more study of this, but based on the limited information available from a comparison of two state systems (Texas and Michigan), it seems to me that games projects are well-suited for tax credit financing, and that treating games as their own form of media, both for the purposes of project approval and payouts, is a strategy worth considering.

For the current state of play on videogame tax incentives in Canada, PwC's The Big Table series of publications is invaluable: the most recent Big Table of Digital Media and Animation Incentives in Canada — August 2010 can be downloaded at the link.

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THR, Esq. reports on news that the US Congress has renewed a federal tax incentive program through 2011: Production Tax Incentives Extended, but Should Hollywood Care?  (The text of Section 181 of the US Internal Revenue Code can be found here.)  Unlike Canadian tax incentives for film and television productions, which are structured as tax credits (meaning that the eligible applicant receives an actual payment from the government), the US federal incentive is structured as a tax deduction -  meaning that it can be used only to lower taxes which would otherwise be payable.  The THR, Esq. article includes an interesting debate between various entertainment lawyers, some of whom laud the federal credit and others who question its practical utility:

At the most basic level, cautions tax counsel Bernard Topper of New York entertainment law firm Frankfurt Kurnit Klein & Selz, people confuse tax deductions with tax credits. Credits reduce taxes dollar for dollar: a $100 tax credit reduces your taxes by $100.

In contrast, a deduction comes off of taxable income. That results in a lower savings. For instance, if you’re being taxed at 30%, then a $100 tax deduction saves just $30 in taxes.

Many state and foreign production incentives are tax credits, whereas Section 181 provides a deduction, which is less valuable. Still, says Topper, the combination of federal and state incentives is “fairly powerful.” He asserts that Section 181 has helped reduce foreign runaway production – the flight of film production to foreign countries.  ...

[Schuyler Moore] couldn’t disagree more. Where Selz sees a provision that’s “very valuable” to investors and has been used “fairly aggressively,” Moore sees “kind of a hill of beans” for the independent world.

Why the difference in opinion? Section 181 provides investors with “passive losses,” since most don’t actively participate in making the movie. Those passive losses can only be offset against passive income, such as income from the movie itself or from certain other investments, such as real estate or oil and gas wells.

For previous Signal discussion about US and Canadian tax incentives for film and TV projects, see here.

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With a hat tip to Entertainment Law Reporter, Sean Kane of Pillsbury Winthrop Shaw Pittman has released two reports on government incentives for the production of interactive entertainment - one covering federal and provincial incentives available in Canada and one covering state incentives available in the United States.  Pillsbury also publishes the Virtual World Law Blog, which covers "virtual worlds and other social media issues".

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The Nova Scotia government has announced changes, effective December 1, 2010, to its Film Tax Credit and Digital Media Tax Credit:

Residency requirements for both credits were changed so that someone only has to so be a resident in the province during the production period. The total production cap for the Film Industry Tax Credit was also removed.

Film Nova Scotia has additional details, and the government's own websites for the credits can be found here (Film Tax Credit and Digital Media Tax Credit).

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According to Tom Moroney writing at Bloomberg Businessweek (hat tip: Entertainment Law Reporter), the climate in the United States for lucrative film and television incentive programs may be shriveling: Strapped States to Hollywood: Stay Home.

[Detroit 1-8-7]'s producers were lured [to Michigan] by state incentives—a mix of tax credits, job-training subsidies, low-interest loans, and other aid. A state report says such subsidies are the most generous in the U.S., and cost Michigan taxpayers more than the economic activity they generate. The 355 full-time jobs created as a result of the program last year cost the state about $193,000 each, the study found. Rick Snyder, the Republican governor-elect, wants to curb the largesse.

Since 2005 states have granted $3.5 billion in incentives to makers of films, TV shows, and commercials, according to a Tax Foundation calculation for Bloomberg Businessweek. Now, as states face a total of $72 billion in budget deficits in their coming fiscal years, according to the National Conference of State Legislatures, some are concluding Hollywood gets a lot more than it gives.

The Tax Foundation has put up its own post (States Slashing Film Tax Subsidies) which provides further details, and includes a link to the Tax Foundation's own lengthy report on the topic.  For contrary perspectives on the value of tax credits, see this earlier Signal post: A US Perspective on Tax Credits.

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Under CAVCO's amended policy regarding proof of Canadian citizenship or permanent residency,  producers and key creative personnel working under the Canadian Film or Video Production Tax Credit (CPTC) will be required to obtain a CAVCO personnel number in order to be eligible for Canadian content points. In order to receive a CAVCO personnel number, each eligible individual must send a copy of their proof of Canadian citizenship or permanent residency directly to CAVCO. Producers should be aware that as of December 31, 2010, it will be mandatory for producers and key creative personnel to have a CAVCO personnel number. Previously, CAVCO required applicants under the CPTC to retain a copy of an individuals citizenship or permanent residency documentation.

Going forward, producers and their counsel are encouraged to include necessary wording in the contracts or deal memos of such key personnel ensuring that each Canadian filling a producer-related or key creative role in their production has obtained a CAVCO personnel number. It is also encouraged that producers and key personnel apply for a CAVCO personnel number as soon as possible, regardless of whether an application for funding has been made.

Further information on the CAVCO personnel number can be found on the Canadian Heritage website. 

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The Canadian Audio-visual Certification Office (CAVCO) has announced a new policy (CAVCO Public Notice 2010-01) relating to the submission and retention of documentation required to prove that an individual is Canadian for purposes of obtaining "Canadian content" tax credits.  Instead of producers being required to collect and retain copies of documents (such as passports or birth certificates), CAVCO will be maintaining a central database of documents submitted directly to CAVCO by individuals.

From the text of the CAVCO public notice:

1. To be eligible to receive a tax credit under the CPTC program, production companies must, among other things, staff "Canadians" as producers and in a minimum number of key creative positions.  "Canadian" is defined in subsection 1106(1) of the Income Tax Regulations (Regulations) to include Canadian citizens and permanent residents.

2. In her report tabled to the House of Commons on November 22, 2005 (Chapter 5 - Support to Cultural Industries), the Auditor General of Canada concluded that CAVCO's former practice of having producers and key creative personnel sign a "Declaration of Citizenship or Permanent Residency" form was not rigorous enough to ensure that Canadian content requirements were being met under the CPTC.

3. In response, CAVCO implemented its "Policy on Documentation Demonstrating that Certain Individuals are Canadian" (Public Notice 2009-01).  The policy, effective June 1, 2009, made the applicant responsible and accountable for ensuring that the producers and key creative positions identified for Canadian content points were Canadian by retaining a copy of documentation, e.g. valid passport or permanent resident card, sufficient to demonstrate that each individual satisfied the Regulations' definition of Canadian.  Documents were subject to audit by CAVCO on a random basis.

4. Because of concerns raised by the industry regarding the security of personal information that was being retained by production companies, CAVCO is amending its citizenship policy.

The Policy

5. The CPTC applicant (the producer) is no longer required to retain a copy of an individual's Canadian citizenship or permanent residency documentation.  Under the amended policy, individual producers and key creative personnel eligible for Canadian content points under the CPTC must send a copy of their proof of Canadian citizenship or permanent residency, e.g. valid passport, birth certificate or permanent resident card, directly to CAVCO using the secure CAVCO Online application system or by mail.  Further details on the process are attached in the annex.

6. Each person confirmed by CAVCO as a Canadian citizen or permanent resident will be assigned a unique CAVCO personnel number.  Canadian citizens do not need to resubmit proof of citizenship for future productions. Permanent residents will need to resubmit proof of permanent residency status only when their permanent resident card expires.

Privacy concerns, which appear to have informed the new CAVCO policy, and particularly federal and provincial statutory obligations, are an area of law which could use more attention from independent producers and their counsel.  I provided some additional background on this in a paper I wrote a few years back entitled We Know Where You Live – BC Privacy Commissioner Provides Guidance to Producers on How to Collect Residency Information from Cast and Crew [originally published in Ontario Bar Association Entertainment, Media and Communications Section Newsletter, Vol. 16, No. 2, November 2006].

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Writing at the NYSBA's The Entertainment, Art and Sports Law Blog, Bennett Liebman reports on the recent expansion of New York State's film and TV production (and post-production) tax credits - and also offers, among other things, a snapshot of tax credit programs across the US, a handy capsule history of film/TV tax credits in the United States, and references to studies on the economic benefits of film/TV tax credits.

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The Globe and Mail published an article today announcing that Canada is among the top video game developers in the world. The Entertainment Software Association of Canada, a non-profit trade association which serves for the needs of developers of video games, have stated that Canada is the 3^rd largest producer of video games behind only Japan and the United States.

The article in the Globe and Mail made it clear that the federal and provincial tax credit programs are to be thanked for the growth of Canada’s video game industry. The incentives offered have been effective at drawing global and independent producers to Canada. It was also noted that Canada’s post secondary education programs have helped to produce a talented and good quality workforce for the video game industry. Games that have been produced in Canada include Ubisoft Montreal’s “Assassin’s Creed” and “Splinter Cell”. The “FIFA Soccer Series” and many others have also been produced in Canada by Electronic Arts Canada.

Recently, there was some exciting news from Warner Bros. Interactive Entertainment who announced that they will be opening a development studio in Montreal in the next few years. Their studio is looked forward to as it will create many jobs for up and coming Canadian talent in the video game industry. The Globe and Mail received a statement from Warner Bros. stating that

Quebec is a perfect fit for the company with its skilled workforce and universities, as well as its tax credits and other incentives.”

Quebec was visionary in seeing the potential value of attracting and encouraging video game developers to settle in their province. However, in a changing economic landscape, attracting the high-value (high paying and highly skilled) jobs associated with the video game industry has become a priority for other provinces as well.

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CBC is reporting that the planned closing of the Saskatchewan Communications Network, the province's public educational broadcaster, could jeopardize nearly $1 million of Canada Media Fund money that had been allocated to the province.  That amount, according to SCN Matters (which describes itself as "an ad-hoc group of viewers, voters and television industry personnel concerned with the government’s decision to terminate the operations of SCN"), could be distributed between around 20 different programs.

The SCN Matters website includes links to a variety of different news stories covering the announced closure of SCN and the reaction, including this story in The La Ronge Northerner:

The government’s decision to eliminate the Saskatchewan Communications Network (SCN) met with dismay among local filmmakers.

“It limits our opportunities for production. I’m not sure who will fill the gap of Saskatchewan- based production,” Randy Johns, of Keewatin Career Development Corporation (KCDC), a La Ronge-based production company, said in an interview with The Northerner.

The SCN website includes an annual report, which provides detailed information on the revenue and expenses of the network.

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Peter Howell writes in the Toronto Star about how "Canadian films don't have to 'look Canadian' any more" - describing the aesthetic improvement resulting from increased production budgets.  On the one hand, Howell notes, Canadian locations, particularly films shot in Canadian urban centres, seem increasingly capable of functioning as "every place and anyplace".  On the other hand, some directors are increasingly willing to expressly set their movies in identifiably Canadian locales (Atom Egoyan's recent work Chloe is set in Toronto).

One item which Howell touches on warrants further attention:

[Kari] Skogland presents a pragmatic truth that all filmmakers must accept, Canadian or not: financing often determines your setting. Tax incentives are often doled out on the proviso that a film be shot in a certain location...

The bolded portion deserves to be unpacked a little.  When financing a Canadian film, there are generally two different types of "tax incentives" a producer can try to obtain: tax credits, which are payments made by the government (federal and/or provincial) on the basis of how much money has been spent on paying "production" or "labour" costs to Canadians in a given jurisdiction (eg if you film a movie in Toronto, you can qualify for federal tax credits and for Ontario tax credits); and "direct incentives", such as equity investments or (recoupable) grants made by a government agency such as Telefilm Canada or the Canada Media Fund.  (Heenan Blaikie's publication Producing in Canada, available here, offers a comprehensive guide to the various types of incentives available.)

 Tax credits, whether the somewhat confusingly named "Canadian content" credits (which are for projects which include a sufficient number of individuals who are Canadian working in creative roles, such as directors, screenwriters and actors, as measured by the Canadian Audio-Visual Certification Office (CAVCO)) or (the less lucrative) "production services" credits (which are for projects shot in Canada, but which do not have the required Canadian nationals fulfilling the required creative roles), are not required to be set in Canada or to be "about" Canada or Canadians.  A sci-fi movie such as Resident Evil: Apocalypse, which was shot in Toronto, can qualify to obtain tax credits just as Passchendaele can.

Direct government incentives, on the other hand, where the government is effectively using taxpayer money to directly invest in a movie, generally do require that a project, in addition to qualifying as "Canadian content" due to the nationality of the people working on it, have some kind of "Canadian content" in respect of the story itself.  Thus, the Canada Feature Film Fund guidelines state that, when considering which projects to invest in, they will prioritize projects which

"present a distinctly Canadian point of view (for example: Canadian characters, setting, themes, talent and stories reflecting Canadian society and cultural diversity)"

The basic requirement is that a project be filmed in Canada and make payments to Canadian residents - but that bare minimum entitles a producer only to receive the bare minimum of available incentives (the "production services" tax credits).  The more "Canadian" a project is, in terms of Canadians working in creative roles, and in terms of being "about" Canada, the more incentives for which it can potentially qualify.

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