Tax Credit Myths
How did the SFETC work? Read and learn, my pretties
by Carrie-May Siggins and Stephen Whitworth
How does the Saskatchewan Film Employment Tax Credit (SFETC) actually work? It's so complicated. We've been confused. You've been confused. Let's end the confusion, and in the process bust five myths about how the Saskatchewan government supported the film industry.
I spoke with producers Shayne Putzlocher and Holly Baird. Both are Saskatchewan born and bred, and both learned the trade here in the province, working their way up through locally shot productions. Three years ago they realized there was a need for a smaller production company specializing in feature films, so they started Trilight Productions. Since opening for business, Trilight has completed three major motion pictures - including the hugely anticipated Hard Core Logo 2.
I also spoke with Kevin Dewalt, CEO of Minds Eye Productions, one of Regina's largest production companies, to clarify the situation. Between the three, I got a clearer picture of how the tax credit in this province worked.
Myth One: SFETC Is An Up-Front Grant.
"It's money paid out irrespective of how much is paid to the province," said Premier Brad Wall at a March 26 press conference. He said it over and over. As rhetoric, it makes sense - it's probably easier to find public support for cutting grants than it is to get support for killing a tax credit.
After all, for 30 years right-wing governments and business groups have programmed us to think tax credits are a key to spurring economic development. It's hard for conservative politicians like Wall to diss 'em.
But is our soon-to-be-cancelled Saskatchewan Film Employment Tax Credit a grant? (And if so, why isn't it called the Saskatchewan Film Employment Grant?)
Nope, says Dewalt. Not at all.
"I disagree with them. It's a tax credit based on an economic spend in the province."
After a crash course in film industry economics, here's how I understand it.
The tax credit comes in three parts. The basic tax credit covers 45 per cent of a production's labour costs, up to 50 per cent of a production's total budget.
Then there's a five per cent rural credit on certain expenditures if 50 per cent of a production is filmed in rural Saskatchewan.
Finally, an additional five per cent key bonus may be added if the production's budget is over $3 million and at least six of 10 prescribed positions - including first assistant director, costume designer, property manager and production designer - go to Saskatchewan residents.
To apply for a tax credit, a company must submit a painfully detailed spreadsheet estimating every cost that will be incurred during production in this province. "You have to get what are called qualified expenditures," says Putzlocher. "That's what the tax credit is based on."
This application is called Certificate A. Once it's been submitted, SaskFilm conducts a full audit on the application, making sure that the numbers - labour costs, expenditures and the percentage that can come back as a tax credit - add up.
If they do, producers get a letter they can then use to convince a bank to give them a loan for the production.
After a production company submits a year-end budget report to SaskFilm, an independent accountant spends weeks auditing it. If the application survives the audit, then and only then does the company see a cheque from the ministry. This usually happens 12-18 months after the initial application, and after production has ended.
This means that by the time the production company gets its rebate, the Saskatchewan residents who worked on the production (the ones who made it eligible for the tax credit in the first place) have already paid taxes to the province on their income.
In other words, the government has already seen a large chunk of their investment returned in direct tax dollars, even before they've written the cheque.
(And that doesn't include the sales tax paid on the millions of dollars of expenditures the production incurs.)
"If the production is in place," says Dewalt, "taxes being paid on that production actually covers the expense to the province. So there really is no cost to this government, to this province, on this tax credit."
The moral of the story: IT'S NOT A GRANT.
Myth Two: Saskatchewan Citizens' Tax Dollars Go To Toronto Companies That Set Up "Shell Companies" In This Province Then Take The Money And Run.
Yes, shell companies are set up. So what? Dewalt explains: "We're forced to set up a separate company on each project. Forced by the banks, because they want security on that chain of title, which is copyright on the project. So it's no different than Minds Eye setting up a company every time. When a company comes in from out of province, they also have to."
But tax dollars aren't simply funneled into Toronto by this shell company. According to Baird, to be eligible for the tax credit, a company from another jurisdiction MUST team up with a local production company to produce a film. No Saskatchewan-based partnership, no tax credit.
This is a win-win situation, as both (or sometimes more than two) companies can bring in different kinds of financing to get the ball rolling on a project.
"And this isn't just business from the U.S." says Putzlocher. "There are very successful partnerships with Europe and Asia as well."
Myth Three: SFETC pays for 50 per cent of a film production's budget, which is an outrageous sum for a government to support.
"There is misinformation out there about us getting 50 per cent of our budget back," says Putzlocher. "It's just not true."
Let's go back to the rules around SFETC eligibility. Only 45 per cent of labour costs are eligible for the tax credit - and eligible labour costs cannot be more than half a film's budget.
Crunching the numbers and including the rural and key bonuses, this means that at the very most, the tax credit covers 27.5 per cent of a production's budget, says Putzlocher - and that much, he says, is rare.
"It's usually more like 18 per cent of total budget costs," he says.
Still confused? Let's look at this using an example made of itty-bitty little round numbers.
Let's say your film costs $100 and the labour costs were $60. Only the first $50 of labour costs (half the budget) are eligible for the tax credit. Remember, the credit isn't for 100 per cent of your film's labour costs - it's for 45 per cent. And since eligible labour is $50, the tax credit, at most, is $22.50.
Toss in a five per cent key bonus and you're at $27.50. With the rural bonus, it could go a little higher.
So no. The tax credit has never totaled half a film's budget.
Myth Four: Okay, so it's 18 per cent. Producers can easily just go find that elsewhere.
Financing a film is like a game of dominoes - one block is dependent on another. Often other sources of funding, whether from banks, other government agencies or private investors, are dependent on that government-issued piece of paper. It's a valuable guarantee on a loan. Without it, other sources of funding could dry up as well.
Plus, $1.8 million on a $10 million movie is not a small amount of change for a producer to raise. You cancel her tax credit, make her work far harder for financing and think she'll still shoot her big movie here? Aren't you the optimist.
Myth Five: A non-refundable tax credit is the best alternative to the SFETC.
Most Canadian provinces and at least 40 U.S. states use similar tax credits as incentives to attract film productions. Some models are based on labour, others on goods and services, but for the most part it's always a government return on expenditure.
The Saskatchewan Party government cancelled the tax credit anyway. Oh well.
Now that the decision has been made by the Wall government to eliminate the tax credit, local film industry leaders have begun searching for alternative funding models. The pressure is on - they need to find a brand new way to keep their industry viable.
The Saskatchewan Media Production Industry Association is raising money to bring in Saskatchewan business people to help brainstorm new funding models that will work for both producers and the government. SMPIA is waiting to see what ideas the community comes up with before commenting on possible alternatives.
But one idea that has been repeated often by the premier is a non-refundable tax credit (NRTC). A NRTC means that a person or business gets a credit back on taxes paid.
"Unfortunately," says Dewalt, "this probably won't work."
"Because NRTC is based on a company's yearly," explains Dewalt, "it's based on what they pay to the government in taxes. Well, what happens if you don't have taxes to pay - if you're basically a break-even company?"
Not only that, but the model is totally counter to the way that film production works. Production is often financed by banks based on "paper", guarantees of money coming in from other sources - such as tax credits or a distribution deal.
"In our business," says Dewalt, "all the paper that producers raise on production is financed by the bank. Nobody pays us until we deliver the project. So we pre-sell a movie into Europe, to a buyer in France, they give us a piece of paper - as a producer I have to take that paper, go to a bank and borrow. An NRTC isn't bankable."
It's called interim financing, says Dewalt, a kind of lending model particular to film industries all over the world.
And no bank is going to supply interim financing based on an NRTC.