Canada May Drop Studio Tax Breaks

The Canadian government is poised to eliminate a lucrative financial incentive that has helped build the country’s burgeoning film industry while benefiting U.S. entertainment companies.

Canada’s finance minister announced plans last month to abolish a tax shelter that Hollywood studios and independent producers have utilized to shave millions of dollars from the cost of making movies. Producers say tax-shelter financing can save as much as 6% of production costs.

The film and television industry’s use of the Canadian tax incentives grew in the last two years, drawing production out of Los Angeles and into Toronto, Vancouver and Montreal, among other locations. Now, some in the Canadian film industry are nervous that fewer productions will head north.

“The timing could not have been much worse,” said John Dellaverson, chairman of CineGate Production Management Services, one of three main brokerages that handle Canadian film investments. “There are no doubts that some productions won’t be going to Canada.”

Producers say shooting in Canada will become less attractive if Parliament ends the tax shelter, as expected, by the end of the year.

“We’re going to have to look at the economics of shooting in Canada,” said Chris McGurk, Metro-Goldwyn-Mayer’s chief operating officer. “There are other alternatives besides Canada. Prague, New Zealand, Australia, South Africa and Mexico are still significantly cheaper than shooting in the U.S.”

Already, some in Hollywood are reluctant to travel in the wake of the Sept. 11 terrorist attacks. Some Canadians worry that the loss of the tax shelter might give U.S. filmmakers and actors another reason to stay home.

“Of course, there will be a negative effect, but we’re hopeful that it will not be as negative as some people fear,” said David Zitzerman, a Toronto attorney with Goodmans, which represents U.S. studios and movie producers.

The complex shelter in effect allows a studio to trim part of the costs of producing a film or television project in Canada. Tax-shelter financing has been used for big-budget pictures such as Miramax’s “The Shipping News” starring Kevin Spacey and Paramount’s “The Sum of All Fears” with Ben Affleck and Morgan Freeman. MGM’s “A Guy Thing,” which will begin shooting in Vancouver in November, also will take advantage of the shelter.

For some television and other thin-margin productions, the Canadian shelter often provided the difference between making a small profit and even making a movie.

“It was a huge incentive. And every time you take an incentive away, people will look for someplace else to shoot,” said Orly Adelson, a television-movie executive producer. “The question is: Where will the movies go?”

Canadian film officials say it’s too soon to predict how much of the estimated $1.3 billion in annual foreign film production the country could lose. They anticipate that U.S. producers will continue their northern trek because of Canada’s cheap dollar, government labor rebates, experienced work crews and the country’s proximity to the U.S.

“Right now, everyone is reconsidering everything, but there are many reasons why people shoot in Canada,” said Elizabeth McDonald, president of the Canadian Film and Television Production Assn.

“Our people get paid almost 40% less than our counterparts in the U.S.,” McDonald said. “The demand to fill shelf space is huge in the global entertainment market, and the amount of money to pay for that incredible amount of content is limited. This is still an attractive place to do work.”

Many in Hollywood agree. They say Canada’s lower labor and supply costs remain a strong draw. The Canadian government’s 11% rebate program on the cost of labor will continue, along with additional rebates offered by some of the provinces.

Other advantages are that people speak English, the two cultures are similar and Toronto and Vancouver share time zones with New York and Los Angeles, respectively.

But Canada’s labor rebates and other advantages might not be enough for Adelson and other TV-movie producers. The tax incentives were beneficial, Adelson said, because they came along when production costs were rising and companies were paying less for movies.

“The tax shelter was the way that we were able to bridge the gap,” Adelson said.

Studios and producers began taking advantage of Canada’s tax shelter in 1998, two years after an earlier system was dismantled to make way for the labor rebate program. But tax code writers allowed a loophole that Hollywood quickly pounced on.

“Depending on the cost of the picture, the tax shelter can be a larger amount than the rebate,” said Dellaverson, whose firm last year handled investments for $700 million in films shot in Canada. “The tax shelter is an income stream, in effect, for the studios.”

The popularity of Canadian tax incentives, and filmmaking in Canada, coincided with a slide in film production jobs in California and the U.S., according to the Los Angeles County Economic Development Corp. Last year, employment in the Los Angeles film industry declined by 2% after seven years of steady increases.

Norman Bacal, managing partner of one of Canada’s largest entertainment law firms, Heenan Blaikie, said production in Canada has increased every year since filmmakers qualified for tax benefits.

But the tax shelter became a sore point for many in the Canadian government who had difficulty explaining the value of rules that mostly benefited U.S.-owned studios.

“A lot of the bigger companies have gotten comfortable with the 3% to 6% savings,” said Tom Crowe, president of the regional British Columbia Film Commission.

“This sends a clear message to foreign producers, and American producers and America that we are not giving money away for free.”