Internal study shows big corporations scoop up most of federal film credit

Dean Beeby, THE CANADIAN PRESS
OTTAWA - Large corporations scooped up the lion's share of almost $1 billion in federal tax credits designed to stimulate Canadian film and video productions, says an internal study.

"The allocation of the tax credit was extremely concentrated," says the Finance Department report, obtained under the Access to Information Act.

"Corporate groups received a large share of the tax credit, with the top 10 receiving close to 30 per cent of the total."

The study is among the first to calculate how the Canadian Film or Video Production Tax Credit has benefited the industry, closely examining the flow of credits to independents and corporations.

The credit is available only to firms whose sole purpose is to create a particular film or video, so corporations create temporary subsidiaries to produce the work and fold them back into the parent firm when filming is done. The arrangement, which provides steady work for lawyers and accountants, is accepted practice in Canada.

That legal labyrinth has made it difficult to determine to whom the credits ultimately flowed, with some corporate groups creating scores of such subsidiaries.

But a December 2007 paper by John Lester of the federal Finance Department traced back the complex corporate links to produce a big picture.

Over a six-year period ending in 2005, corporate groups received 83 per cent of the $984 million in credits doled out, says the study. Independents, who do not need to use subsidiaries, got the rest.

The beneficiaries were also concentrated in British Columbia, Ontario and Quebec, with 90 per cent of the credits.

Lester found that almost 3,400 individual productions could be traced back to just 500 corporate groups, with one corporation having created 139 subsidiaries over the period. The top five per cent of corporations snagged 37 per cent of the credits.

Another 2,000 productions were by small independents.

The study, however, was not able to determine how the credit may have helped corporate groups churn out profits because the accounting trail is lost when the subsidiary is reabsorbed into the parent.

For the independents, however, the credit tended to tip the scales, with seven of 10 money-losing productions using the credit to make a profit in the end.

Lester also found that virtually no independents paid more income tax than the value of their credits.

The tax credit scheme is the same program that has generated headlines because of Bill C-10, which would cut off these credits to productions the government deems offensive.

Key sections of the newly released report are censored because they contain "advice" to government.

Finance Canada spokesman David Gamble said the study was undertaken to provide background material for a Canadian Heritage evaluation of the credit program, expected to be completed soon.

An industry watcher who examined the report noted that the creation of subsidiaries is a "longtime tradition in the industry, as much to isolate any potential liability as anything else."

Ian Morrison, of the watchdog group Friends of Canadian Broadcasting, also said the numbers "make clear that tax credits are essential to all Canadian production, but have a larger marginal impact on smaller producers who are drawn in as the tax credits become more generous."

But even for large producers, "their entire profit margin almost always relies on the tax credit to make these investments profitable."

Morrison took issue with the claim that independents pay less income tax than the value of their credits, saying the calculation does not account for taxes paid on the wider range of economic activity that results from a film production.

"Public investment in the arts is one of the cheapest and best investments we can make," he said from Toronto.

The Canadian Film or Video Production Tax Credit was created in 1995 and enriched in 2003. By crediting for eligible labour costs, the program can refund up to 15 per cent of the costs of a production.

© The Canadian Press, 2008