Tax shelter leaking in Canada

Prod'n may flow off

TORONTO — Changes to the Canuck income tax act recently proposed by the federal government could result in a yearly loss of as much as C$1 billion ($633.5 million) in private investment by Canadians in U.S. films and TV shows shot in Canada.

Well-heeled Canadians used a tax-shelter loophole to invest approximately that much in studio productions — mostly U.S. — shot in Canada in 2000, according to an industry expert.

That loophole is scheduled to be eliminated as early as Jan. 1.

“This (proposed revision) came pretty much out of the blue,” says Mark Lobsinger, a tax lawyer with McMillan Binch in Toronto, which works for some U.S. studios bringing productions to Canada.

While not specifically aimed at the production industry, “the tax-shelter financing helps U.S. studios do things in Canada,” he notes.

Most U.S. productions shot in Canada budget 5%-8% of a pic through such financing. Films that have used the tax-shelter investment include “The Score,” “The Claim,” the telepic “Jewel,” “The Judge” and “The Pledge” as well as “The Shipping News,” which is currently shooting in Vancouver.

It also has helped fuel growth of about 14% per year in the film and television industries in Canada, with U.S. production in Canada overtaking Canuck indigenous production.

Some say that without the shelter, U.S. studios will be more inclined to take their business elsewhere or stay home.

Lobsinger notes that other Canadian incentives, such as the low dollar and other remaining government tax credits, mean Canuck production may not suffer too much. “I viewed (the tax shelter investment) as a sweetener on top of a lot of great reasons why the studios come up here.”

However, the change would likely wipe out the lucrative world of tax-assisted private-sector filmed entertainment financing in Canada. Hardest hit would be companies such as Grosvenor Park Prods., Sentinel Hill Ventures (30% of which is owned by Alliance Atlantis,) CineGate Production Management Services (50% owned by Lions Gate) and Bulloch Equicap, all of which are middlemen specializing in arranging this financing.

Alliance Atlantis has said its profit could be slashed by $3.8 million in 2002 and as much as $12.7 million the following year via its interest in Sentinel Hill. All no doubt will be trying to lessen the impact by putting new emphasis in a similar vein on other jurisdictions, such as the U.K., Lobsinger noted.

A Revenue Canada employee says the loophole is closing to curb what the government views as an exploitation of the matchable expenditure tax shelter scheme. As applied to the film and TV industry, private investors typically kick in about $150,000 to become part of a partnership servicing the production. Usually a money-loser at first, investors get a tax deferral — reducing their income for the current year and the year following — and then later, when the partnership is concluded, investors get most of their original investment back — regardless of whether the film turns a profit.

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