Canada: International Treaty Co-Productions With Canada - An Overview For Producers

Article by Ken Dhaliwal and Bob Tarantino

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.

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.

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.

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.

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:

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:

The following are some of the requirements and guidelines established by Telefilm in the context of certifying 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).

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.

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:

• For live action productions:

• For 2-D animated productions:

• For 3-D animated productions:

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.

Subject to the prior approval of Telefilm, the following participation by third country performers is permitted:

• Feature Films/MOWs:

• 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.

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.

1. Advance Ruling:

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.

2. Final Approval:

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.

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 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.

• 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.

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

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.

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