Canada: Ontario Production Services Tax Credit

Tax credits are crucial to the film and television industry, and Ontario has been a particularly attractive location for productions since the beginning of its film and television tax credit program. In 201415, Ontario extended about $335 million in tax credits for film and television production services and computer animation and special effects. Ontario also makes grants through such agencies as the Ontario Media Development Corporation and the Northern Ontario Heritage Fund Corporation. The Ontario Superior Court decision in Rookie Blue Two Inc. (2015 ONSC 1618), which was unfavourable to the province, resulted in a retroactive change to the Ontario production services tax credit (OPSTC).

The court in Rookie Blue focused on the meaning of the word "from" in the requirement for the OPSTC that appears in section 92(5.3)(d) of the Ontario Taxation Act, 2007 (OTA). That rule had never been the subject of judicial consideration, and there were no comments on it in the provincial Hansard or in a budget before its enactment. The OPSTC was then a 25 percent refundable tax credit available to a qualifying corporation for an eligible expenditure incurred in respect of a film and television production. A qualifying corporation generally had an Ontario PE and carried out production activities in Ontario.

Rookie Blue Two Inc. was the production company for season 2 of the popular Canadian television show Rookie Blue. The company sought the OPSTC for scriptwriting expenditures: OTA section 92(5.3)(d) allows an OPSTC for the costs incurred for services "for the stages of production, from the final script stage to the end of the postproduction stage." Were the scriptwriting expenses incurred within this period? The parties agreed that the second (white) draft for a script is usually completed within a week of the commencement of filming of the related episode. However, the minister argued that a producer cannot film the episode—that is, cannot commence production—until the script is in place; consequently, expenses relating to the white draft of the script cannot be claimed under OTA section 92(5.3)(d).

The taxpayer argued that the phrase "from the final script stage" includes the creation of the entire final script, and thus the related expenses fall within the period eligible for the OPSTC. The court agreed that the word "from" was inclusive and thus encompassed the period after filming commenced and during which the white script was finalized; the white script is not finalized until after production starts and in fact "is rewritten, revised and amended throughout the shooting process."

The phrase "final script stage" is not an industry term. Moreover, the court said:

Earlier stages of writing that are part of the development or preproduction stages are clearly excluded from the tax credit calculation. In considering the legislative purpose or intention to facilitate Ontario production of television shows, however, it plainly promotes the statutory purpose to allow producers to include in their cost base for the tax credit, the portion of the writing costs that is incurred at, with, or as part of other production costs. If the Legislature had wished to exclude all writing costs from the tax credit, it could have done so by simple words. It either could have added a subsection to say so expressly, or it could have just changed the word "from" to "after"—a word it used in the very next subsection. Why would the Legislature use the phrase "final script stage" except to subdivide script writing into preproduction and production stages? If it did not find that a relevant distinction for the purposes of the tax credit, why refer to script writing at all in clause 92(5.3)(d)?

The 2015 Ontario budget, which was released in the month following the decision in Rookie Blue, is clearly designed to prevent other productions from claiming OPSTCs for writing expenses related to a script's white draft. The budget proposes "that the OPSTC be clarified to ensure that only expenditures incurred after the final script stage to the end of the postproduction stage [are] eligible for the [OPSTC]." The amendment will apply retroactively to expenditures incurred after 2009, when rates were increased from earlier levels. It is hoped that the legislation will also clarify the meaning of "final script stage."

The budget lowers the OPSTC rate to 21.5 percent as of April 23, 2015; the new rate is said to reflect the competitive Canadian dollar. Table 4.1 in the budget shows a projected $10 million saving in 201516 ($25 million in 201617 and 201718). The budget also provides that "a qualifying corporation's Ontario labour expenditures (including labour under a service contract) [will] have to amount to at least 25 per cent of total expenditures." Moreover, a qualifying corporation's expenditures incurred under a contract with a nonarm'slength party are now limited to amounts that would have been OPSTCeligible if the corporation had incurred the expenditures directly.

Originally published in Canadian Tax Highlights, Volume 23, Number 5, May 2015

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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