Tag: Labour Tax Credit

Is it time for a new Film Tax Credit?

Film Crew

The Canadian Film Industry has enjoyed a long and fruitful relationship with the Government of Canada. For a relatively small annual investment; entrepreneurs, storytellers, artists, artisans and technicians have wrought world class talent across a truly wide spectrum of disciplines. They have created a massive portfolio of acclaimed stories and productions of every conceivable size and fashion. These projects have permeated our shores from coast to coast to coast, for generations.

 

Yet, despite the struggle to achieve a profitable, self-sustaining industry, filmmakers have found it evermore difficult to bring a production to market without heavy reliance on various forms of government support.

This support ranges – from resources allocated to oversight of currently installed labour tax credits (LTC) – both federal (FLTC) and provincial (PLTC) – to regional bonuses, administration costs devoted to permitting and certifications – to the tax credit payments themselves, any costs related to the running of funding and curating agencies such as Telefilm Canada and National Film Board of Canada, (and provincial counterparts) – to national and provincial public broadcasters: including their licensing fees, production costs and overhead.

It is no wonder that the total burden of the motion picture industry on the state, can be seen by some as, cumbersome.

We are living in a time of economic austerity – despite huge gains in primary sectors such as minerals and energy – governments are facing tightening budgets and hard decisions. In jurisdictions such as Saskatchewan, legislators are beginning to demonstrate their desire for new incentive models to be put in place. The stasis the film industry maintains while promoting its unchanging, pro-LTC script, leaves it flat footed when dealing with major reforms proposed between government and culture.

A new design must be implemented that satisfies the government’s financial commitments, while providing a broad-reaching industry the tools it requires to compete and succeed in a global market.

 

What is it?

Capital Investment Credits (CIC) or Registered Cultural Funds (RCF) are an investor incentive tax credit system that aims to eventually replace the current FLTC structure; by participating in a managed fund, appropriate investors are offered the opportunity to invest into an entire portfolio of industry specific projects,

This fund invests in various media projects at any level of the project’s cycle: development, production, marketing (P&A), and distribution – a strategy aimed at greatly mitigating the risk to the individual investor, who would otherwise likely (or as it seems, not likely) invest in an individual project.

 

How does it work?

Very similar to an RRSP, RESP or RSP, the Federal government provides a 12.5% refundable tax credit into a registered cultural fund by anyone (who has met investor qualifications). Registered culture funds will provide portfolios of varying risk to the investor.

To further mitigate risk, participation can be limited to a maximum contribution – both to the investor and to a single registered fund in any one project. Producers would bring their films to the fund managers. The projects chosen by the managers would fall into one of the portfolios, based on a wide range of variables and industry specific risk assessments. Risk portfolios may include media of all disciplines and be a combination of attributes such as; development, production, low budget (or independent), television, big budget (or tent pole), music, acquisitions, marketing & distribution.

Fund managers may also parcel off an envelope for Canadian producers to partner up with foreign co producers and major Hollywood studios to match participation of future franchises — to enjoy, at least in part, massive, ongoing, global revenue streams.

In 2006, the FLTC paid out $213Million for all film and television productions in Canada or roughly 10% of the registered production budgets in the entire country#. Canadians contribute over $30 billion annually to their RRSP, billions, before taking into account the billions more to RESPs and RSPs. The ability of the private market to raise $213 million for a 10% equity stake in the entire Canadian film and television production industry (given the right incentive) is, overwhelming. With ready access to capital, the industry’s expected growth can easily outperform current projections associated to FLTCs.

A qualified investor is someone who can prove that they are either: a) deemed a high-net worth individual capable of making limited, “ elevated risk” investments b) deemed an experienced investor c) have maxed out RRSP, RSP, and if applicable, RESP contributions.

 

Why do we need it?

The Canadian government’s report on the FLTC in September, 2008 revealed some interesting statistics regarding film and television financing sources, as of 2006:

 

 Total Public Sources of Financing:

Federal tax credit 10% or $213M

+ Provincial tax credit 15% or $330M

+*Public Broadcast Licencing 9% or $199M

+ Public Funding Sources 11% or $236M

=               

 State Subsidy Average Per Project 45% or $978M

**Foreign Sources 12% or $261M

*Canadian Distributor 6% or $136M

*Private Broadcaster Lic. 19% or $418M

***Other Private Sources 14% or $296M

When one is faced with the amount of private investment into film and television – through means other than those known as major production funds such asHarold Greenberg Fund, etc. – (far below 10% of total financing), it is little wonder why meaningful and constant national and international box office successes have eluded for Canada’s homegrown productions, year after year.

The current model has government investing over 3 times the resources into an industry than the private sector does. It also provides an ideal place on where to start adjusting the current FTLC strategy.

CICs are designed to, for starters, replace the Federal Tax Credit with private investment triggered by a publicly backed incentive. When $212M of private capital is raised to replace the labour tax credit, it will reduce the required investment of the federal government by 87.5%. compared to the FLTC ratio – allowing for tremendous growth in private participation at a premium value to the Canadian people.

The Government partially weighs the success of the FLTC in the following four ways:

Does the FLTC help producers:

  1. Engage in Additional Project Development Activities”?
  2. Increase its Level of Equity in Production Projects”?
  3. Hire/Retain Additional Corporate Personnel”?
  4. Build a Library of Distribution Rights for Film and Video Properties”?

 

With the obvious exception of #2, the majority of respondents scored the FLTC as mostly ineffective to the other three benchmarks. The availability of private capital through the incentive of CICs would cater to those four key gauges much more effectively, for obvious reasons -

 

  1. Private Capital at Development Stages provides value adding attachments – greatly increasing Development success rates
  2. Cash = Equity
  3. Companies that develop and own intellectual property tend to have greater long term employee rates than service production companies.
  4. Access to Capital allows for the acquisition and exploitation of existing and developing libraries.

 

One of the key purposes of any government is to get regular citizens, as well as those from abroad, to invest in their country. CICs create the incentive for a key ingredient to any successful business – private capital.

Making a movie is only part of the equation. How to get that movie in front of a global audience is a whole other side of the coin that producers are beginning to face up to. CICs provide for fund managers who wish to include marketing and distribution envelopes to their clients; the next logical step for production financing.

The period between development to distribution can represent years of investment over a few, very crucial stages. For the individual investor, an exit strategy that includes no revenues for up to and beyond 24-36 months, can further impede serious interest. The acquisition of existing properties, including libraries of produced content for resale, provide early revenue streams for funds that are bringing new properties to market.

 

Why now?

The need for content has risen exponentially, year by year. With customers consuming greater and greater hours/day of media, coupled with the abundant supply of cheap production and display technology, the price they are paying for that media is lowering – per hour watched – yet overall, consumers spend a great deal more annually on entertainment and culture.

The results reflect a simple notion – when investing in culture and entertainment, volume is the key to success. As any other business mantra will profess, diversity remains the tried and true way to establish a reliable revenue stream. Diversity cannot be achieved without volume. To the individual investor, the risk in placing a stake in any one production is inherently high. Yet potential revenues for any one film or show are nigh limitless.

RCFs aim to stretch the investors dollar; so the odds of owning part of a smash hit, have never been better. Funds could work with producers and distributors who are already eager to promote output or slate deals that involve many productions over a period of years.

A major investment by the Canadian private sector into a truly global market would also spark an investment into infrastructure such as studios, post-production and animation houses. These brick and mortar businesses employ long term, highly skilled employment in a dynamic and popular field.

 

Does it work?

Capital solely designated for quality entertainment to the masses pays dividends. It is that very fact that triggered initial government involvement into FLTCs and funding agencies, so many years ago. It is what keeps government involvement active for now and many foreseeable years in the future.

A model private structure, created through state sponsored incentives, for the investment and financing of multiple, high value intellectual properties can be best illustrated by using Ryan Kavanaugh’s, Relativity Media. A company that describes itself on its own website as;

 

[Relativity Media] is a next-generation studio engaged in multiple aspects of entertainment, including full-scale film and television production and distribution, the co-financing of major studio film slates, music publishing, sports management and digital media. Additionally, the company makes strategic partnerships with, and investments in, media and entertainment-related companies and assets.

To date, Relativity has produced, distributed, and/or structured financing for more than 200 motion pictures. Released films have accumulated more than $17 billion in worldwide box office receipts including such titles as: The Raven, Mirror Mirror, Act of Valor, Haywire, Immortals, Tower Heist, Bridesmaids, Limitless, Hop, Cowboys & Aliens, Battle: Los Angeles, Little Fockers, The Fighter, The Social Network, Salt, Despicable Me, Grown Ups, Dear John, It’s Complicated, Couples Retreat and Zombieland. Thirty-nine of the company’s films have opened to No. 1 at the box office. Relativity films have earned 60 Oscar® nominations, including nods for The Fighter, The Social Network, The Wolfman, A Serious Man, Frost/Nixon, Atonement, American Gangster and 3:10 to Yuma. Sixty-two of Relativity’s films have each generated more than $100 million in worldwide box office receipts.

RelativityREAL, Relativity’s television arm, has more than 70 projects in active production, including 17 original series that are currently airing or will air in the upcoming television season including Police Womenfor TLC Coming Home Lifetime andThe Great Food Truck Race for Food Network. Relativity also owns and operates RogueLife, Relativity’s digital content studio that is developing original content for the web and creating sustainable online platforms and communities. Relativity Music Group, a music division of Relativity, provides music supervision, music publishing catalogues and soundtrack services for films produced and/or distributed by Relativity Media and other major Hollywood studios. Relativity Sports is a fast-growing sports management company dedicated to providing high-profile athletes with a full-range of professional development services.

 

According to a feature on Kavanaugh, published in Esquire:

Kavanaugh sits behind a curved zebrawood desk and on top of an estimated $2 billion in liquid assets, much of which comes courtesy of Elliott Associates, a venerable New York — based hedge fund that has $13 billion more where that came from.Read more: http://www.esquire.com/features/best-and-brightest-2009/ryan-kavanaugh-1209#ixzz23v4vtInV

 

Government Sponsored, Relativity Media Model

 

  • With $2 billion in cash, Relativity Media has generated $17billion in worldwide box-office receipts alone.
  • Federal incentives proposed to raise $2 billion = 12.5% or $250 million
  • Proposed CIC Cost:Benefit to tax base, 1:136

 

 

Current System

  • Estimates of FLTC tax credits for 2012: ~$300 million
  • Estimated value of FLTC in relation to total production budgets in Canada = 10% or $3 billion
  • Estimated 2012 FLTC Cost:Benefit to tax base, 1:10

 

Aren’t Labour Tax Credits the Answer?

Labour tax credits have many drawbacks. First, for producers- the tax credit is expensive money, both to finance and to audit – this reduces the percentage of the budget that is placed on the screen. As it is not up front money like an equity partner, LTCs can not be used to secure attachments that may boost the value of the project, such as well known cast members or a director.

The largest single reason labour tax incentives are not the ideal federal model, is that LTCs cater predominantly to service production resulting in outsourced manufacturing jobs from larger foreign centres that do little to develop and control high-value intellectual properties in Canada. The reason for investment of billions into Hollywood movies is quite simply because revenues from the ownership of intellectual property far outweigh any conceivable LTC cost benefit analysis imaginable.

Across the globe, in industries of all types, global competition for labour based tax credits nearly always result in lower wages to trade workers and lower revenues to public coffers. Capital incentives generate local spending on a ratio and continuity that is unmatched by labour incentives.

 

What about Telefilm and the National Film Board?

To describe – the tremendous contribution, celebrated establishments such as, Telefilm Canada and theNational Film Board of Canada (NFB) have nurtured for decades – requires respective volumes that this article could not hope to cover. All the while, year after year, subscriptions to these focused resources have never been higher while their allocated budgets for both, continue to fall.

CICs would seek to lessen the pressure on the mountainous over-subscriptions to both national agencies. By enticing private investment into Canadian entertainment, Telefilm and the NFB can concentrate on filling their mandates:

As Telefilm focuses on the development of the industry. Its primary role can recenter itself on fostering talent to ready filmmakers to enter the private equity market.

NFB’s mandate for Canadian interpretations will continue to allow the organization to explore new frontiers of motion pictures without stringent profit considerations.

 

Plan of Action

  1. Draft RCF Proposal
  2. Construct RCF Information Website
  3. Gain Media Industry Support for RCF Proposal
  4. RCF Conference with Media and Potential Fund Managers
  5. Promotion Fund Raising
  6. Public Awareness
  7. Engage Communications Agency
  8. Government Negotiations
  9. RCF Inclusion in Federal Budget
  10. RCF Implementation

Implementation

The implementation of RCF’s is likely to include a trial period where producers choose between RCF or FLTC strategies. Official RCF policy would reasonably exclude ‘double-dipping’ with FLTCs. “Twinning” the credits provides continuity for production companies with ongoing projects, while structuring the release private funds into projects at a controlled, progressive rate.

 

#http://www.nordicity.com/reports/Economic_Analysis_of_CPTC_final.pdf

**Often represents Foreign Pre-sale Revenues.

* Represents Revenues to productions, often as “pre-sales” or minimum guarantees – most of which require further financing until as much as 18 months after delivery of product.

***Includes all industry based private funds such as Harold Greenberg as well as private investment or revenues.

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