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Federal Tax Credit Programs for the Film and Television Production Industry Canadian Audio-Visual Certification Office (CAVCO) BC Film, Television and.

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Presentation on theme: "Federal Tax Credit Programs for the Film and Television Production Industry Canadian Audio-Visual Certification Office (CAVCO) BC Film, Television and."— Presentation transcript:

1 Federal Tax Credit Programs for the Film and Television Production Industry Canadian Audio-Visual Certification Office (CAVCO) BC Film, Television and Animation Industry January 2015

2 2 Table of Contents 1.Overview 2.CAVCO Mandate 3.Program Administration 1.Overview of Operations 2.Risk Management 4.Environmental Scan 5.Risks to Maintaining Status Quo 6.Recent Legislative and Regulatory Amendment 7.CAVCO Operational Policy Priorities 1.Clarify who qualifies as a lead performer 2.Certification of online-only productions 3.Update genre definitio n 8.CAVCO Administrative Priorities

3 3 Overview  Total film and television production industry in Canada = 127,700 jobs and $7.6 Billion in GDP for the Canadian economy in 2012-2013. 1  Support for Canadian productions  1039 Canadian film and television productions produced in 2012/13 were certified by CAVCO  The total Canadian budgets for these productions was $2.3 billion. 2  Support for production in Canada  180 film and television productions produced in 2012/13 received accreditation from CAVCO under the PSTC program  Total Canadian portion of budgets for these productions was $1.4 billion  Support for coproductions  56 treaty coproductions produced in 2012/13 were certified under the CPTC program. The total Canadian budgets for these productions was $215 million  CAVCO must ensure that its program guidelines are aligned with the current realities of the Canadian film and television industry 1 Source: Profile 2013: Economic Report on the Screen-based Media Production Industry in Canada, p.8 2 This figure includes 56 treaty co-productions certified under the CPTC program, with total Canadian production costs of $215 million.

4 National Film Board Canadian content shapes the policy framework 4 Economic Considerations Film or Video Production Services Tax Credit (PSTC) Audiovisual treaty coproduction Canadian Film or Video Production Tax Credit (CPTC) Telefilm Canada Canada Media Fund CBC Cultural Considerations Overview of the Canadian Film and Television Industry Policy Framework

5 5 2.CAVCO Mandate  CAVCO and CRA co-administer two tax credit programs for the film and television industry:  The Canadian Film or Video Production Tax Credit (CPTC)  a fiscal advantage based on labour costs to Canadian-owned production companies producing Canadian content film and television productions  Projected value of CPTC for 2013 is $265 million  The Film or Video Production Services Tax Credit (PSTC)  a fiscal advantage based on labour costs for productions filmed or serviced in Canada by either foreign or Canadian-owned companies  Projected value of PSTC for 2013 is $110 million  CAVCO certifies treaty co-productions under the CPTC program  conform to treaty  relevant requirements of the Income Tax Regulations  As an alternative, CAVCO may issue a letter attesting to the production’s status as a treaty co-production.  CAVCO certifies productions (Part A and Part B); CRA administers tax credits; Production company applies to CAVCO to receive certification and demonstrate completion of production and submits CAVCO certificate to CRA when filing annual corporate income tax return

6 6 3.Program Administration 3.1 Overview of Operations  Each year, CAVCO processes approximately 2500 applications (2300 CPTC and 150 PSTC)  Governed by Income Tax Act (s.125.4, s.125.5), Income Tax Regulations (s.1106, s.9300), Investment Canada Act (s.26-28), Citizenship Act (subsection 2(1)), Immigration and Refugee Protection Act (subsection 2(1))  CAVCO team of 41  Fees paid by program applicants allow CAVCO to fully recover the cost of its services.  Online eSubmission application system  Changes to program policies are announced through public notices (PN)

7 7 3.Program Administration (cont.) 3.2 Risk Management – two types of audits Canadian Content Certification Audit Program  to provide confirmation that Canadian content requirements have been met on selected CPTC files (40 per year)  administered by the CRA and paid for by CAVCO  audits have consistently reaffirmed thoroughness and accuracy of CAVCO review process CRA fiscal audits  CRA conducts audits of the tax returns of selected production companies based on:  its internal risk management policies and,  on the flagging of specific files by CAVCO

8 8 4. Environmental Scan a) Key film and television industry trends Some trends have made it more challenging for CAVCO and the industry to determine whether productions are eligible for tax credits:  Increased prominence of branding in productions and having to determine if it crosses line into “advertising” (ineligible genre under Income Tax Regulations)  Blending of more than one genre in a production, e.g. elements of “talk show” (ineligible) with elements of “variety” show (eligible)  Proliferation of “lifestyle” shows which producers submit as “documentaries”  New forms of production financing (e.g. corporate sponsorships, crowdfunding)  Increased use of online/mobile platforms to show Canadian productions  Canadians wanting to view content anytime, anywhere via multiple platforms  Heightened focus on marketing, fan-based strategies

9 9 4. Environmental Scan (continued) b) Challenges for CAVCO  CAVCO updated program guidelines introducing new genre definitions (2010)  This, in conjunction with a rapidly changing audio-visual environment, has made it challenging for the industry to understand, and for CAVCO to administer, the tax credit programs in a fair, consistent and modern way  Uncertainty over CAVCO’s interpretation of genres has caused  increase in pre-assessment requests  increase in producer requests for meetings to discuss new projects  CAVCO required to seek approval to publish public notices (PN) to clarify program policies and requirements

10 10 5. Risks to maintaining status quo Public perception Potential legal challenges  Inefficient use of CAVCO resources  Costs to industry

11 11 6. Recent Legislative and Regulatory Amendments 6.1 Modifications to Income Tax Act  An 11-year process:  announced in 2003, included in different legislative bills that died on the Order Paper  Royal Assent on December 16, 2014 - amendments to sections 125.4 and 241 of ITA  Finance allowed CAVCO and CRA to implement most changes in 2003 exception s241  Modifications include:  Raising limit on base of qualifying labour expenditures to 60% of the total cost of a production from 48%;  Limiting eligible labour expenditures to Canadian citizens or residents;  Allowing eligible labour costs to be incurred up to two years before principal photography begins to include in-house development expenditures;  Explaining that CPTC is not available to any production that has any connection to a tax shelter arrangement;  Specifying that government equity investments are treated as forms of assistance that reduce the eligible cost of production; and  Allowing the limited communication of certain information on CPTC-certified productions (e.g. titles of productions, names of producers and key creative personnel) (section 241)

12 12 6. Recent Legislative and Regulatory Amendments 6.2 Modifications to Income Tax Regulations  Amendments to the Regulations came into force on November 13, 2014 following public consultation and publication in the Canada Gazette on October 4, 2014  Proposed new draft amendments to section 1106 of the Regulations will prevent unintended interpretations by the CRA by making a clear distinction between investment in, and copyright ownership in a production  Clarifying copyright ownership rules for productions  Expanding the range of eligible Canadian investors in a production

13 13 6.2 Modifications to Income Tax Regulations (continued) What changes were made with respect to “copyright ownership”? 1) The production company or a "prescribed person" may be a “copyright owner” of a production 2) “Copyright owner”, for the purpose of the CPTC, is now defined as: · “the maker” who owns “copyright”, as defined in sections 2 and 3 of the Copyright Act; or · a person to whom copyright has been assigned by contract under section 13 of the Copyright Act 3) The right of a person (e.g. a non-Canadian distributor or investor) to receive profits from a production does not, in and of itself, make them a copyright owner of the production 4) The granting of an exclusive licence (e.g. to a broadcaster or distributor) is not an assignment of copyright

14 14 6.2 Modifications to Income Tax Regulations (continued) Prescribed persons: Prior to the amendments, the list of prescribed persons was limited to certain entities such as Canadian broadcasters, broadcaster distribution undertaking funds (e.g. Rogers Documentary Fund) and federal or provincial funding agencies (e.g. Telefilm Canada). The list of “prescribed persons” has been expanded to include: a prescribed taxable Canadian corporation an individual who is a Canadian (citizen or permanent resident) and a partnership composed entirely of other prescribed persons Rights: A prescribed person can: invest in a production participate in profits generated from a production, and/or be a copyright owner in a production A non-prescribed person can: invest in or participate in profits from a production But, cannot in any way, share in the copyright ownership of the production.

15 15 6.2 Modifications to Income Tax Regulations (continued) What will CAVCO examine when a non-prescribed person is involved in a production? CAVCO will review all relevant agreements to ensure that: there are no issues with the Canadian producer’s control of the production; the production company retains an acceptable share of revenues from the production. What evidence should you include with your application to demonstrate that a Canadian corporation, individual or partnership is a prescribed person? 1) Prescribed taxable Canadian corporation: provide a “Private Company Declaration” form 2) An individual who is a Canadian citizen or permanent resident must either: a) provide a completed and signed “Individual Declaration – Prescribed Person” form or b) have a clause in his/her agreement with the production company confirming that he/she is Canadian. 3) A partnership must demonstrate that each of its members is a prescribed person listed in paragraphs (a) to (h) of the “prescribed person” definition.

16 7. CAVCO operational policy priorities CAVCO identified a number of short-term operational policy priorities to modernize the tax credit programs and mitigate risks: a)Clarify who qualifies as a “lead performer” b)Certification of online-only productions c)Update genre definitions 16

17 17 Issue  At least one of two lead performers be Canadian  Industry misunderstanding as to what qualified as a “leading role” Status  CAVCO issued a PN with a call for comments in 2013  Final Lead Performer Policy published as CAVCO PN 2014-01 on August 29, 2014 Identifying who is a lead performer is a two-step process:  1 st identify all lead performers based on 3 criteria: time on screen (animation: length of time voice is heard), billing, remuneration  2 nd identify order, i.e., first, second, third lead performer based on remuneration 7. a) Clarify who qualifies as a lead performer

18 18 Key Points to Remember:  The 3 criteria are not necessarily weighed equally, and may not run in parallel  Time on screen is considered the most important of the three criteria  Time spent by performer in background of scene not be counted towards the total time on screen  The “importance” of a person’s role within a production is not considered  How is performer billed in the opening and closing screen credits  Remuneration includes direct or indirect financial compensation, additional benefits, residuals, travel and living expenses  May also consider how the lead performers are featured in publicity  Guest appearances: performance is evaluated if lead performance for the purpose of episodes  Cameos: brief appearance of a known person always considered a minor role  Once lead performers are identified, remunerations are used to rank them  Billing and time on screen are no longer considered at this point in the analysis  One point given for Canadian lead performer receiving either the highest or the second highest remuneration  If a Canadian and a non-Canadian lead performer are remunerated equally, the non-Canadian lead performer will be ranked above the Canadian 7. a) Clarify who qualifies as a lead performer (continued)

19 19 7. b) Certification of Online-only Productions Issue  CPTC eligibility criteria require agreement with CRTC-licensed broadcaster or a Canadian distributor to have production “shown in Canada” within two years (Income Tax Regulations s. 1106)  Current interpretation limited to traditional formats such as TV, DVD, Theatrical – does not recognize increased use of online/mobile platforms  “Shown in Canada” could be interpreted to include productions that are only going to be shown online (e.g. a webseries licenced by the CBC that would only be shown on Status  CAVCO seeking approval to proceed with a proposal to allow the certification of online-only productions Considerations  Interpretation already used by provincial tax credit agencies (e.g. B.C.)  Interpretation aligns with current CBC/Radio-Canada, CMF, BDU strategies emphasizing digital/mobile services  Cost / estimated value of tax credits

20 20 7. c) Update genre definitions Issue  The Regulations list certain production genres that are not eligible for tax credits:  Definitions for these genres are not provided in the Regulations  CAVCO 2010 guidelines define these as well as eligible genres  There is uncertainty over the application of many current genre definitions – e.g. a production in respect of a game, questionnaire or contest (ineligible)  There is also an increasing number of productions blending eligible and ineligible genres – e.g. a production blending significant sports event coverage (ineligible) with behind-the-scenes documentary segments about the athletes (eligible)  A new approach for determining what types of productions should be considered “advertising” (ineligible) is needed, due to the increased prominence of brands and corporate sponsorship in productions Status  CAVCO is seeking approval to issue a call-for-comments PN which would limit and update definitions  Provide industry with opportunity to comment on proposed changes, in accordance with standards of administrative fairness news, current events, public affairs programming talk shows sports events galas, awards shows pornography advertising solicit funds games, questionnaires or contests (exc. minors) reality TV industrial, corporate or institutional consists of stock footage (exc. Docs)

21 21 8. CAVCO Administrative Priorities  Execute new MOU PCH/Telefilm Canada regarding coproductions  Streamlining processes  Service standards  New business line: Pre-assessments  Consistency – advice, adjudication  New tools/interaction with clients: survey, online payments, webinars, news,

22 How to Reach Us Director: Johanne Mennie Telephone: 1-888-433-2200 (toll free) or 819-934-9830 General email address: Website: 22

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