Canada: The International Treaty Co-Production Vehicle: Legal Framework

Last Updated: October 3 2002
Article by Arthur Evrensel

The treaty co-production vehicle is an efficient, complex and viable alternative for producing quality film and television productions with Canadian co-producers, and an effective financing alternative to the studio system.

The increase in the last 10 years of the use of the international treaty co-production mechanism is attributable to technological advances resulting in increased domestic and international satellite and television broadcast outlets, and an unprecedented increase in consumer demand for quality film and television programming. However, the increased choices fragmented audiences and reduced advertising revenues to broadcasters. At the same time, the relative cost of production increased, with the result that producers required alternative sources of financing to produce their productions. Concurrently, a worldwide fear of being overwhelmed by American programming encouraged many countries to enter into audio-visual treaties, as a defensive mechanism to offset the American dominance in the area. In this environment, Canada has become a world leader in co-productions to address this state of affairs, and to reduce the risks inherent in film and television production through the pooling of both creative and financial resources.

According to the Canadian Film and Television Production Association ("CFTPA"), the film and television production industry in Canada grew to $4.9 billion of expenditures in 2001. The three largest production centres were Montreal, Toronto and Vancouver. According to Telefilm Canada, France and the United Kingdom are Canada’s leading co-production partners. In recent years the number of co-productions between UK and Canadian producers has increased dramatically, due mainly to the development of the sale and leaseback transaction in the UK, which can be dovetailed into a treaty co-production, albeit with some complexity.

As of January 1, 2002, Canada has signed 55 co-production treaty agreements with 52 countries1.

Co-production agreements signed by Canada with foreign countries are binding international legal accords ("treaties") between governments. These treaties are the product of increasing globalization in the film and television industry. The International Monetary Fund defines "globalization" as: "the increasing integration of economies around the world, particularly through trade and financial flows. The term sometimes also refers to the movement of people (labour) and knowledge (technology) across international borders"2.

As the demand for audio-visual production explodes worldwide, causing film and television production to increase dramatically, Canada and its partners have developed both the infrastructure and technological expertise required to build and sustain an indigenous film industry through the genius of the co-production vehicle. The treaties are designed to assist Canadian producers and their counterparts in other countries to collaborate on a production. The industry has become global, and co-productions are the answer to rising costs and risks of production in a global environment.

An official co-production, is treated as a "national product" in both co-production countries, and are entitled to government financial incentives, tax credits and cultural subsidies. In Canada, the product of a co-production is deemed to be a "Canadian Film or Video Production", which makes the co-production eligible for federal and provincial tax credits, cultural subsidies, and funding from a variety of support mechanisms such as the Canadian Television Fund, Telefilm Canada and the Independent Production Fund. In addition, the finished product which qualifies as "Canadian Content", would also be eligible for higher license fees from Canadian broadcasters, as well as being eligible for higher license fees from European broadcasters for productions which qualify as "national product" of such European nations.

The federal government in Canada announced that it has renewed funding for the Canadian Television Fund for one year, for 2001/2002, which with the contribution of the private sector shall aggregate over $200 million, a portion of which will be earmarked for treaty co-productions. In addition, the CTF-Equity Investment Program and the Feature Film Fund, both administered by Telefilm Canada, also contributed substantial sums to treaty co-productions. In addition, treaty co-productions are also eligible to receive federal and provincial tax credits on the Canadian portion of the labour costs spent on the production.

Relationships & Co-productions

In its essence, a co-production is both a legal relationship and a process. The legal relationship is a form of joint venture, which is fluid in its implementation. Co-productions are essentially a collaboration between two or more producers from two or more countries, the essence of which is set out in a written co-production agreement. The co-production agreement contains the financial, creative, technical, cultural, legal, immigration and budgetary relationship between the co-producers, as well as their respective responsibilities, liabilities, requirements, rights, obligations and financial participation.

A co-production should only be entertained by a producer after an assessment is made of the requirements and the objectives of the production, including the benefits to be derived by each party from participating in the co-production. The personal relationships between co-producers cannot be understated, as it is the cornerstone of every other element of the co-production. Therefore, the relationship between the parties is as important as the benefits to be derived by each party.

Other advantages of co-productions which are produced within the framework of co-production treaties, is that they simplify administrative and regulatory procedures by which goods, services, performers, technicians and equipment used for a production can travel easier between the two co-producing countries. A co-production agreement between a Canadian producer and a producer in a country with which Canada has a co-production treaty, is negotiated between private parties, and the co-production agreement sets out the basic terms of the production including minimum financial, creative and technical participation from each country, conditions for participation by third parties and procedures for entry and exit of all personnel and equipment from participating countries.

Legal Framework

There are three (3) essential source materials which constitute the legal framework of co-productions. They are:

  1. The governing treaty between the two countries: One should examine the terms of the applicable treaty as no two are alike, however, they are very similar in their essential components.
  2. Telefilm Canada Rules Regarding Co-Productions: Heritage Canada has delegated to Telefilm Canada, the responsibility for administering the approval process for co-production agreements negotiated between Canadian producers and producers with countries with whom Canada has a treaty. As a result, the Telefilm Canada rules regarding co-productions should be reviewed to understand the principles governing the agreements.
  3. Rights: The chain-of-title with regards to the sources of the rights, namely the acquisition agreement and the co-production agreement which will determine the respective participation of the parties, including the granting of the rights to each, is the key document and must be crafted carefully to ensure each party’s basic requirements, concerns and needs are addressed.

Essential Principles

There are four (4) key principles which are set out in the Rules of Telefilm Canada governing co-productions, and which must be enshrined in the agreements entered into by the co-producers. They are:

  1. Creative, Artistic and Technical Contributions.
  2. The co-producers from each country must each make a real and substantial creative, artistic and technical contribution to the production and which must be in proportion to the financial participation of each co-producer. The co-producers must comply with the minimum requirements set out in each treaty and all participants in the co-production must be nationals from the co-producing countries, subject to certain exceptions.

  3. Minimum Financial Participation.
  4. Each producer must contribute towards the creative, artistic, technical and financial aspects of the co-production. No producer may provide less than a specified percentage of the total budget, which minimum participation may vary between 15% and 30%, depending on the co-production agreement.

  5. Sharing Markets and Potential Revenues.
  6. Depending on the percentage of their respective investment in the co-production, producers must negotiate equitable sharing of markets as well as potential revenues therefrom.

  7. Copyright Ownership.

The copyright ownership of the co-production produced under the treaty, must be equal to the proportion of the financial contribution made by each co-producer, subject to the minimums.

In structuring a co-production agreement, the parties must be aware that the financial, artistic, technical and creative benefits and ownership of the co-production must reflect an overall balance, equitable to both parties, if it is to obtain the approval of the authorities in both countries. There must be a proportionate ratio of risk/reward between the parties.

Co-production treaties also require that all services on the production are to be provided by nationals of the two (2) countries, which is a requirement of each treaty. In general, the production must be filmed in one or both of the countries, however approval of filming in a third country is granted in limited circumstances. In addition, the authorities may also approve the participation of a performer who is not a national of either co-producing country but is required by the distributors, as a condition of license. In addition, a co-production agreement with a member state of the European Union ("EU") provides for further flexibility by permitting the participation in the co-production of nationals of any member state of the EU, as well as any performer from those countries. Therefore, the pool of technical and creative talent is larger.

Generally, co-producers share responsibility for the exploitation of the completed production. Exploitation within a producer’s home country is the responsibility of that producer and the proceeds from such exploitation generally belong to that producer. Receipts from exploitation in other countries are customarily split between co-producers in proportion to their contribution to the production budget. Typically, the copyright is shared in proportion to contribution to the financing, while domestic use of the copyright is owned by the respective co-producers exclusively.

In order for an international co-production to achieve official treaty co-production status, a co-production must be approved in Canada by the Co-production Office of Telefilm Canada which has been delegated the responsibility to administer the approval process for co-production agreements individually negotiated between Canadian co-producers and foreign co-producers. The approval process begins when the co-production agreement and the supporting material required to be submitted to Telefilm Canada for an Advance Ruling, is filed with Telefilm Canada within the delays prescribed by the guidelines. A similar procedure is adhered to by the foreign co-producer with the applicable agency in their home country. The Canadian producer will then apply to the Canadian Audio-Visual Certification Office ("CAVCO") for a Part "A" Certificate and CAVCO will provide a calculation of the amount of labour expenditures that qualify for federal tax credits. If the production is financed and made in accordance with the co-production agreement, Telefilm Canada will generally grant "final approval" within the delays set out in the rules and regulations. Any changes to a project may result in the loss of official treaty co-production status and the consequential loss of eligibility for tax credits. Once the final approval is obtained, it is filed with CAVCO and the Part "B" Certificate of Completion is obtained.

If Canada is not a party to a co-production treaty with a specific country, the Canadian producer may nevertheless obtain ad hoc approval from Telefilm Canada for official treaty co-production status. In order for the Canadian authorities to grant such approval, it must be shown that official treaty co-production status would be beneficial. There is no co-production treaty between Canada and the United States and ad hoc approval is not granted for a Canada/US co-production.

To ensure that there is an overall balance in the financial, creative and technical participation in co-production agreements, Canada and its partner countries call for joint commissions to convene (usually every two to four years) to review the operation of the specific co-production treaty and to address any imbalances or other problems which may have arisen in the past.

Content of the Co-Production Agreement

As stated earlier, the co-production agreement sets out the essence of the relationship between the co-producers and their respective responsibilities, liabilities, requirements, rights, obligations and financial participation. As a result, the negotiation and finalization of the co-production agreement is the core of the relationship between the co-producers and should be carefully negotiated and crafted in the context of each co-production, since no two co-productions are alike.

The following are some of the essential terms which should be incorporated in a co-production agreement. There are two competing thoughts in negotiating and drafting co-production agreements. The first approach is to have an agreement which contains the essential provisions but which is not detailed, to permit the parties to be flexible to address and resolve issues as they arise during the development, production and exploitation of the production. The second approach is to detail, in the co-production agreement, every conceivable matter and comprehensively deal with all issues. The methodology adopted will depend on the familiarity of the co-producers and the level of trust and ability of the parties.

The key elements which should be incorporated into a co-production agreement are the following:

    1. The amount of the budget, which should also fix an exchange rate between the currencies of the two co-producing countries and each producer should ensure that they purchase "forwards" to hedge against the risk of fluctuations in the exchange rate.
    2. The dates and places of principal photography of the production.
    3. The issue of which co-producer shall have final approval in the event of dispute, as well as the identity of the individual who will drive the creative process. Where there are broadcasters or distributors, they may also have approval rights and these should be enshrined in the agreement.
    4. The respective financial contributions of the co-producers.
    5. The responsibility for the completion of the production, which in the ordinary course will require a third party completion guarantor.
    6. A cash flow schedule to ensure that each party is aware of the dates on which funding will be required from each.
    7. The identity and role of key creative individuals, such as producers and their respective screen credits.
    8. Essential creative elements such as actors, directors and the screenplay on which the production is to be based.
    9. A provision providing for the types of insurance for the production.
    10. The respective fees and expenses of the co-producers which should also be enshrined in the budget.
    11. The division of distribution rights in the territories, as well as the respective distribution fees and expenses permitted to be charged by third parties.

    12. Chain of title issues dealing with which party is to provide the production with the underlying rights.
    13. The share of copyright ownership of the respective co-producers.
    14. The establishment of dates by which certain events are to be satisfied, such as the obtaining of the approval of the respective co-production authorities in the respective co-production countries or the ability to demonstrate closing of the financing for the production. In the event the pre-conditions are not satisfied by the dates established, then the co-production agreement should permit either party to terminate the agreement.
    15. Accounting provision to ensure that accounts are prepared by the parties and there is an obligation to deliver them to each other on a semi-annual basis.
    16. Responsibility for rights ownership to sequels, remakes, prequels and television series based on the production, and a description of the basis of the involvement of the co-producers in such productions.
    17. Termination provision to ensure that if there is a breach, the party who is in violation of the terms of the co-production agreement can be replaced within a reasonable period of time.
    18. Customary mutual indemnifications, representations and warranties.

    Conclusion

    While complicated, co-productions present opportunities for producers to pool capital, share risk and benefit from the creative talents of foreign producers and performers.

    The challenges to maintaining effective co-productions, are an attempt to balance the diverse interests of the co-production partners, while recognizing that the ultimate benefit to both parties is achieved by co-operation between the co-producers.

    1 For an up to date list of the co-production treaties between Canada and other countries visit www.telefilm.gc.ca.

    2 IMF Staff, "Globalization: Threat or Opportunity?" Issues Brief, April 12, 2000.

    The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.

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