Introduction
The number of international treaty co-productions produced worldwide has been steadily increasing and this trend is evident in Canada where the film and television production industry has vigorously embraced the co-production structure. In 2002 Canadian producers completed 107 treaty co-productions, up from just 38 completed in 1996. The United Kingdom, France, China and Australia were Canada’s leading co-production partners in 2002, and the aggregate budgets for co-productions concluded with these 4 countries exceeded CDN$475 million (in the case of two way co-productions).
While the reasons for the rise in popularity of international treaty co-productions are numerous (some are set out below), in recent years one of the driving forces has been the ability to access sources of financing in two or more countries – the fabled "double dip". In today’s harsh financing climate, where pre-sales are more difficult than ever to attract and GAP financing requires two or three times coverage, the holy grail for many producers is soft money. The term "soft money" refers to funds which are generated by means other than sales of a product, such as tax credits, government subsidies and equity investments. As more nations have realized the benefits of building a domestic production industry, the number of soft money incentives for productions has increased. In most cases, productions must qualify as a "national production" of a country in order to access the soft money incentives available in the subject country. So it stands to reason that if accessing soft money in one country is good, then accessing soft money from two (or more) countries is great. Enter the international treaty co-production, which is in many cases the only way to double dip into the soft money incentives available in two or more countries.
Canada has long been a leader in the international co-production area with numerous treaties in effect, and as a result Canadian producers have become very adept at using the treaty co-production vehicle. What follows is an overview of international treaty co-productions in the Canadian context and the certification process.
Co-Producing With Canada – The F.A.Q.’S
(a) Who Decides if a Co-Production is an "Official Treaty Co-Production"?
In Canada, the certification of Official Treaty Co-Productions is handled by the Co-Productions Office of Telefilm Canada ("Telefilm"), the Canadian government body charged with the responsibility of receiving and evaluating applications for certification of treaty co-productions. When a production is certified as being made in accordance with a co-production treaty, the subject production gains "Official Treaty Co-Production" status.
(b) What are the Benefits of Official Treaty Co-Production Status?
As an Official Treaty Co-Production, the production is treated as a "national production" of each co-producing country and is subsequently eligible for government incentives and tax benefits in both countries on a proportionate basis.
In Canada, an Official Treaty Co-Production can qualify for treatment as a Canadian Film or Video Production for the purposes of the federal Canadian Film or Video Production Tax Credit Program (the "FTC"). For example, if the Canadian co-producer is responsible for 60% of the co-production budget, then 60% of the budget is generally eligible for Canadian subsidies and the FTC. The production may also be eligible for benefits under similar provincial programs, and, as a Canadian program, may be able to obtain higher license fees from broadcasters. It is important to note that these are general rules, and that the level and type of government support available are subject to the terms of the particular treaty and the specific rules of each government.
(c) How many International Co-Production Treaties does Canada Currently have?
Canada is a party to co-production treaties with more than 50 countries for film and television works, notably excluding the United States. A complete list of these treaties and the relevant guidelines for qualification can be found at Telefilm Canada’s web-site at www.telefilm.gc.ca.
(d) Why Structure a Production as an Official Treaty Co-Production?
There are a number of compelling reasons for producers to choose the treaty co-production route over a non-treaty co-production, the following are some which are most commonly cited:
Access To Additional Sources Of Financing - As noted above, a qualifying co-production will be generally be treated as a "national production" in each of the co-producing countries. As a result, to the extent that subsidies, government incentives and other financial assistance are available to national productions, they can be accessed by the subject co-production. In Canada, a certified co-production is able to access the FTC and provincial tax credit incentives (at higher rates than those available to non-treaty co-productions), other governmental subsidies and higher broadcast licence fees (as a result of requirements placed on Canadian broadcasters).
Reduction Of Risk - Co-production treaties are designed to assist Canadian producers and their counterparts in one or more countries to collaborate on a production. The ability to capitalize on the established relationships of the co-producing partners with service providers, distributors and broadcasters in their home country assists the co-producers by broadening the market for the production. This pooling of the creative, technical and financial resources of the co-producers reduces the various risks of production and enhances the ability of the co-producers to finance and proceed with the co-production.
Culturally Relevant Productions - One of the original goals behind the implementation of co-production treaties was to encourage collaboration and production between nations in order to develop programming that would be specific and relevant to those nations, and thereby less homogenous in nature. In addition to the foregoing cultural benefit, many people believe that co-productions result in programming which is more commercially viable in the co-producers’ home countries. In certain parts of the world including Canada and Europe, the international co-production was even seen as a tool to fight what some refer to (pejoratively) as the "cultural imperialism" of Hollywood.
Established Procedure - Co-production treaties simplify administrative and regulatory procedures and policies relating to the subject production since they establish the basics of the relationship between the co-producers. In addition, since the production is subject to an international treaty between nations, goods and equipment used for production can flow easily between the participating countries. An established procedure also gives the co-producers much needed certainty when they are completing the financing of the co-production.
(e) What Hurdles Does The Official Treaty Co-Production Route Present?
The benefits associated with an Official Treaty Co-Production do not come without a price – and in some instances producers may decide that the price is too high. The following are some of the most common hurdles associated with Official Treaty Co-Productions:
Additional Cost - This is a simple, yet painful equation : more countries plus more rules plus more accountants plus more lawyers equals an increase in your budget - simple. It is typically the case that the increased cost of professional fees, travel, communication etc. will be more than offset by the benefits resulting from certification as an Official Treaty Co-Production. However, producers would be well advised not to underestimate the potential hit to the budget caused by these factors. It is particularly important not to fall into the trap that more co-producers must necessarily result in more benefits – sometimes the additional complexities and costs outweigh the additional benefits. The relative net benefit of undertaking a co-production must be assessed carefully with the advice of experienced professionals.
Time Zone Challenges - It is a common misconception that technology can overcome great distances. The reality is that technology can be useful, but it is not the panacea that many had hoped for. Given the nature of any co-production, there will most likely be multiple time zones and countries to deal with. We recently completed work on a project with a sales agent in Los Angeles and co-producers, financiers and distributors in each of Canada the United Kingdom and France. Organizing these disparate parties and directing their time and energy towards a single goal (i.e. closing) was, at times, frustrated by time zones, email problems, and occasionally the business practices in their home nations. Somewhat surprisingly, the method of communication that was most effective was the conference call- old fashioned as it may be. In the end, the experience confirmed that whenever parties are separated by distance and time, the coordination and organizational capabilities of the co-producers (and their counsel) become paramount in the push towards a (timely) closing.
Trust - Producing is, at the best of times, a stressful and overwhelming process, so having like-minded co-producers who trust each other will help to ensure that the process has the best chance for success. The co-production process is, in essence, a collaborative effort - from choosing the key creative team and selecting cast to the decisions relating to distribution. Accordingly, choosing the appropriate co-producer should only be made after due consideration by both sides. The relationship between the co-producers is a legal one in that its terms, conditions and limitations are contained in the co-production agreement. Nevertheless, there must be some substance to the relationship between the co-producers for the project to be a success, since that relationship may be tested by the pressures inherent in a co-production. In choosing a co-producer, it is also important to consider certain factors which may impact on the relationship, such as differing cultures and business practices of the co-producing nations.
Governmental Discretion - This point may seem contradictory in light of what is noted above in section (d) under Established Procedure, however given recent events in the United Kingdom, it is worth noting that governments will occasionally change their minds. The Department of Culture Media and Sport ("DCMS") in the United Kingdom recently to adopt new minimum contribution and spend requirements in respect of its treaty with Canada. While the new minimums were not a surprise to anyone, the narrowed interpretation by the DCMS of what would be considered UK spend has caught some productions off guard. This change highlights the fact that governmental authorities can and will exercise discretion in some cases. The best approach to prepare for any changes in policy or interpretation is to maintain a free and open information flow with the authorities who will be certifying your co-production.
Telefilm’s Requirements – The Abc’s
The following are some of the requirements and guidelines established by Telefilm in the context of certifying Official Treaty Co-Productions.
(a) What Projects are Eligible to be Certified as Official Treaty Co-Productions?
Subject to certain excluded types of productions set out below, any production of any length, technical medium or genre that meets the requirements and conditions described in the applicable co-production treaties or established by the competent authorities will be certified. The key is whether the producer can comply with the terms of the applicable co-production treaty.
For Telefilm’s purposes, the following types of productions are not eligible:
- Pornography; and
- projects containing elements of excessive violence, sexual violence or sexual exploitation, or of a defamatory, obscene or otherwise illegal nature as described in the Criminal Code of Canada.
An eligible production must comply with: (i) the minimums for financial participation; (ii) minimum expenditure requirements in the co-producing countries; and (iii) creative contribution requirements for the Canadian and foreign co-producer(s), as set forth in the applicable international co-production treaty. (See also: What Level of Participation Must Canadians Have?, below)
Productions based on concepts, bibles, screenplays and other audiovisual projects obtained from a third-party country are not eligible. Co-producers may however acquire the rights to produce audiovisual works based on pre-existing works from third-party countries which were originally conceived for purposes other than audiovisual production (e.g., the co-producers of a Canada/France co-production may obtain the feature film rights to a novel published in the United States or Japan).
(b) Who Is An "Eligible Applicant" For Telefilm’s Purposes?
The Canadian co-producer must:
- be a Canadian-owned company under the effective control of Canadians, as defined in the Investment Canada Act and the Income Tax Act (Canada); and
- own the exploitation and distribution rights in Canada and must retain a fair share of the net revenues from all other territories, including the co-producing country or countries;
- if the Canadian co-producer is affiliated or associated with a foreign company, the Canadian co-producer must be incorporated and operated independently from that group. In assessing the effective independence of the Canadian co-producer, Telefilm will require copies of organizational charts lists of principal shareholders any shareholders’ agreement and financial statements.
(c)What Level Of Participation Must Canadians Have?
Subject to what is contained in the relevant co-production treaty, the following is an outlines some of Telefilm’s key requirements regarding the level of participation of Canadians in international treaty co-productions:
Minimum Financial Contribution: Some co-production treaties stipulate minimum contribution requirements. Each co-producer must provide no less than a specified percentage of the total budget, which may vary between 15% and 30%, depending on the relevant co-production treaty.
Development and Scriptwriting: As noted above, the co-production may be based on a work, regardless of country of origin provided that the work was not originally conceived for an audiovisual production.
Intellectual Property Rights: The intellectual property rights in and to the co-production must be equal to the proportion of the financial contribution made by each co-producer. Accordingly, it is typically the case that the copyright in and to the co-production is split amongst the co-producers in the same proportion as their respective financing contributions, subject to each of the co-producers exclusively owning copyright for their home countries.
Allocation of Creative Positions: The distribution of key creative positions between co-producers must correspond with their respective financial contributions The co-producers must also 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. The producer, the crew and the personnel exercising control over the creative, financial and technical aspects of the Canadian share of the project must be Canadian citizens or permanent residents.
It should be noted that for animation productions, a "significant portion" of the creative animation work must be undertaken by Canadians. This is in keeping with the approach that the involvement of the co-producers in the production should be balanced, and to pre-empt situations where all of the creative work is completed in one country, while the technical activities are completed in the other co-producing country.
In addition, the director(s) and scriptwriter(s) of the production must be citizens or permanent residents of a co-producing country (in the case of co-productions with an European Union ("EU") member country, citizenship or permanent residence in any EU country will suffice).
Telefilm has identified the persons listed below as "key creative personnel" for purposes of their analysis; subject to Telefilm’s discretion and the applicable treaty, the following persons must be from a co-producing country:
- For live action productions:
Director
Scriptwriter(s)
1st lead performer (based on on-screen time)
2nd lead performer (based on on-screen time)
Director of photography
Production designer
Picture Editor
Music Composer
- For 2-D animated productions :
Director
Head scriptwriter and scriptwriters
Storyboard supervisor
Design supervisor (art director)
1st lead voice (based on on-screen time)
2nd lead voice (based on on-screen time)
Picture Editor
Music Composer
- For 3-D animated productions :
Director
Head scriptwriter and scriptwriters
Storyboard supervisor
Design supervisor (art director)
Character model supervisor
Motion capture supervisor
Animation director
1st lead voice (based on on-screen time)
2nd lead voice (based on on-screen time)
Picture Editor
Music Composer
Financial and Creative Participation of the Co-Producers: The approach taken by Telefilm is that creative and technical participation, royalties and expenses of each co-producer should be proportionate to that co-producer’s financial contribution to the co-production.
Distribution: There must be an equitable sharing of markets and potential revenues among the co-producers, depending on the percentage of each co-producer’s respective investment in the co-production. Exploitation of the co-production in a co-producer’s home country is the responsibility of that producer, and the proceeds from such exploitation will generally remain with that producer. As a result, the Canadian co-producer must own the exploitation and distribution rights in Canada and must retain a fair share of the net revenues from all other territories. For the territories outside of the home countries of the co-producers, the co-producers will typically share responsibility for the exploitation of the co-production. The receipts from exploitation in these other countries are then shared among the co-producers in proportion to their contribution to the production budget.
(d)To What Extent Will Telefilm allow Third-Party Performers to Participate?
Subject to the prior approval of Telefilm, the following participation by third country performers is permitted:
- Feature Films/MOWs:
1 performer + 1 cameo (3 shooting days maximum)
- Television Series :
- up to 6 episodes: 1 lead performer + 1 cameo OR 1 guest star;
- 7-13 episodes: 1 lead performer + 2 cameos OR 1 lead performer + 1 cameo + 1 guest star OR 1 lead performer + 2 guest stars;
- 4-26 episodes: 1 lead performer + 4 cameos OR 1 lead performer + 2 cameos + 2 guest stars OR 1 lead performer + 4 guest stars.
For these purposes:
- "cameo" means the brief appearance of an internationally known personality from a third-party country, involving no more than three shooting days; and
- "guest star" means the participation of a third-party country performer in one or more episodes of a series, according to the ratio set out above.
(e) What are Telefilm’s Restrictions on Granting on-Screen Credits?
A maximum of 2 courtesy credits for third country participants are permitted, provided their functions in no way interfere with the co-producers’ financial and creative authority and they are related either to distribution or financing, or to the provision of production services under the strict control and supervision of one of the co-producers. In the case of animation projects, subcontractors for technical work are allowed credits customary in such circumstances. Co-producers must provide sworn declarations that the recipients of the courtesy credits did not participate in the financial and creative aspects of the production. Schedule A contains a table setting out Telefilm’s credit guidelines. The credits must be used in exploitation in all territories as well as in all marketing material, and must be those authorized by Telefilm.
CO-PRODUCTION CERTIFICATION IN CANADA
The process involves two stages – advance ruling and final approval. It should be noted that both steps must be completed before a project is certified, and a project cannot receive final approval unless it has first received a positive advance ruling from Telefilm.
- Advance Ruling:
- Final Approval:
The advance ruling stage involves the submission of an application and a number of documents to Telefilm (Schedule B provides a list of the documents required to obtain the advance ruling). The application must be duly completed and signed by an authorized representative of the Canadian Co-Producer and submitted to Telefilm’s Co-Production office. Applications for advance ruling are required to be submitted at least 30 days prior to the commencement of principal photography for dramas, feature films and documentaries. If the production is an animated production, the application must be submitted to Telefilm at the time of key animation or in the case of a series, at the latest, production of the video master of the first episode. A parallel procedure is adhered to by the foreign co-producer with the applicable agency in their home nation. In addition to the application process with Telefilm, the Canadian producer must 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 the FTC.
Applications for final approval for both live action and animated productions must be submitted as soon as the production is completed or no later than nineteen (19) months following the end of the Canadian co-producer’s taxation year in which principal photography began, or, in the case of animation projects, in which key animation of the first episode was undertaken. Schedule C sets out a list of the documents required by Telefilm to obtain final approval.
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About the Authors:
Ken Dhaliwal
Ken Dhaliwal is a partner in the Toronto Office of Heenan Blaikie. Mr. Dhaliwal's focus is on media and entertainment law, with an emphasis on motion pictures and television in Canada and internationally.
Mr. Dhaliwal's areas of expertise are corporate financing, tax-assisted and tax-motivated financing, production financing, international co-productions and co-ventures, completion bonds and domestic and international distribution arrangements. Mr. Dhaliwal has extensive experience in advising his clients with respect to Canadian and international tax incentives and structured finance programmes for film and television, and structuring his client's productions to maximize the benefits of these programmes. Mr. Dhaliwal represents clients ranging from Canadian and international independent producers to Hollywood studios, Canadian and international financiers, completion guarantors and artists. Mr. Dhaliwal has been peer-rated as a leading lawyer in the Entertainment Law field in LEXPERT's 2004 survey.
Bob Tarantino
Bob Tarantino joined Heenan Blaikie the Toronto Office of Heenan Blaikie in 2001 after practising with Sullivan & Cromwell in New York City.
Mr. Tarantino focuses his practice on entertainment and corporate/commercial law, with an emphasis on film and television production, financing, recording, publishing, licensing, distribution, and intellectual property acquisition and protection. He works with clients ranging from artists and independent producers to Canadian and foreign studios, financiers, completion guarantors, writers and directors, at every stage of production, from development to delivery.
Schedule A
Telefilm Credit Guidelines
- Telefilm Approval - Telefilm must approve the credits to be used in the exploitation of the production in all territories (including the marketing material).
- Courtesy Credits - A maximum of 2 courtesy credits are permitted for third-party country participants provided their functions in no way interfere with the co-producers’ financial and creative authority and they are related either to distribution or financing, or to the provision of production services under the strict control and supervision of the producer.
- Co-producer’s credits - The Canadian and foreign co-producers must appear in the credits and be clearly and predominately identified in the head and tail credits.
- Maximum Number of Credits - No more than two credits will be authorized for any one company and/or its representatives.
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Schedule B
Documents to be Submitted for Advance Ruling
The following list is taken from Telefilm Canada’s Official Coproductions Mandate, Policies and Requirements publication, last updated March 19, 2004. The guidelines should be consulted to determine if any further documents are required. Please visit Telefilm Canada’s website at http://www.telefilm.gc.ca for up-to-date information
- duly executed co-production contract
- Canadian co-producer’s incorporation documents
- Canadian co-producer’s organizational chart
- list of the main shareholder of the Canadian co-producer
- any shareholders’ agreement
- financial statements of the Canadian co-producer
- contracts establishing full title to the property
- if the scriptwriter is Canadian, the producer and scriptwriter must produce an affidavit certifying the originality and authenticity of the script
- contracts with the scriptwriter(s) and director(s)
- documents relating to the sharing of production and distribution rights between the co-producers, in Canada and the rest of the world, should such terms not be stipulated in the co-production contract
- subcontracting agreements in the case of animation projects
- letters of interest, deal letters or agreements with distributors or broadcasters
- a legible photocopy of passports or other documents approved by Telefilm Canada, providing proof of citizenship for Canadian key creative personnel
- the resumes of director(s), scriptwriter(s) and producer(s)
- a preliminary list of creative and technical personnel
- an itemized projected budget (in Cdn$), including both the Canadian and foreign shares
- a cost breakdown by country (in Cdn$), including third-party expenses, if applicable
- an itemized financial structure (in Cdn$) for the Canadian co-producer, together with letters, contracts and other relevant financial documents, including the producer’s contribution, the list of and contracts relating to deferred costs, and the project’s recoupment schedule. An itemized financial structure for the foreign co-producer is also required should there be common sources of financing
- a detailed production schedule giving the dates and locations of each phase of the co-production
- a temporary credit list, approved by Telefilm Canada, with the nationality of all participants
Schedule C
Documents to be Submitted for Final Approval
The following list is taken from Telefilm Canada’s Official Coproductions Mandate, Policies and Requirements publication, last updated March 19, 2004. The guidelines should be consulted to determine if any further documents are required. Please visit Telefilm Canada’s website at www.telefilm.gc.ca for up-to-date information
- contracts between the producer and key personnel, especially the music composer(s)
- complete list of head and tail credits, giving the nationality of each participant. This list must be approved and signed by the producer. In the case of a series, the Canadian co-producer must provide a signed and approved list of credits for the first and last episodes, as well as a list of any credits that differ in other episodes
- any alternate versions of the credit list must be provided to Telefilm Canada for approval
- videocassette(s) of the production
- an audited production cost report, prepared by a certified accountant independent of the production company for productions with a budget of Cdn$500,000 or more
- a review engagement report for productions with a budget of between Cdn$100,000 and $499,000
- an approved affidavit attesting to the production cost for productions with a budget of less than $100,000
- a final cost report (in Cdn$), approved by the foreign co-producer
- each co-producer’s final financial structure, accompanied by all of the Canadian co-producer’s related contracts, and a final itemized breakdown of costs by country (in Cdn$)
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.