TAX NEWS - JUNE 2010

Canada Tax: Should film tax credits be eliminated?

Maureen Bader

YES:

What is it with politicians and the film business? Across North America, politicians line up to throw other people's money at Hollywood millionaires, even though those other people might have other ideas about how to spend their money.

Handouts to business help politicians create the illusion they are "doing something" to benefit the economy. However, there is no evidence that tax handouts to any business, let alone to a film business, create a net benefit for the economy.

If government wants to "do something" for the economy, it should get out of the way and reduce red tape and punishing taxes, and let all businesses compete on a level playing field. Sure, a particular business or industry benefits from money picked from other people's pockets, but that just leaves other people with less to spend on what they want, and this reduces demand -- and jobs -- someplace else.

The film industry and its lobbyists have a knack for easy riding on the backs of taxpayers by setting one government against another. Right now, taxpayers are confronted with this very scenario.

When the Ontario government increased its film tax credit, the B.C. government followed suit. Ontario expanded its production services tax credit for foreign producers from 25 per cent of labour costs to 25 per cent of all costs.

The B.C. government responded with a barrage of boutique tax changes that would probably make a film industry accountant's eyes light up but any non-accountant's eyes glaze over.

For example, it created a new interactive digital media tax credit of 17.5 per cent of labour costs for the development of video games. It then also increased the labour tax credit for foreign producers from 25 per cent to 33 per cent, the qualified labour expenditure cap from 48 to 60 per cent, and the digital animation and visual effects tax credit from 15 to 17.5 per cent. All told, film, television and production services tax credit handouts will cost B.C. taxpayers $153 million in 2009 and that will rise to $183 million by 2012.

In reality, these tax credits are nothing more than corporate welfare. Film companies don't have to actually pay any taxes to get these "tax credits" -- all they have to do is spend. For example, if a film company applies for a tax credit of $10,000, and doesn't owe any income tax, it gets a refund of $10,000.

Film welfare recipients say if we cut off their handouts, the entire industry would collapse and thousands of jobs would make the hills somewhere else come alive. This would, according to them, reduce the government's overall tax take.

Yet, a study done in 2005 for the B.C. Ministry of Economic Development showed that if all tax credits were eliminated, film production in B.C. wouldn't disappear, it would decline by 15 per cent.

And these handouts are costly. The study also showed that in 2004, the film and television industry paid $8.7 million in corporate income tax. Meanwhile, the cost of the film, video and production tax credit was $70 million.

Film welfare recipients counter this tax vanishing act by saying their employees pay income tax, so the tax take from the industry is really much higher than just the corporate income tax take.

But much of the employment in the film industry is displaced from other industries, so there is no net gain in tax revenues. As the 2005 study showed, if an electrician moves from another industry to the film industry, there is no net gain in tax revenue for government.

Politicians have a love affair with the film business, but just like any bad movie, it must eventually to come to an end. All government can do, and should do, is create an attractive investment climate and a level playing field so businesses, including those in the film industry, can compete for our dollars in a fair environment.

Instead of letting the film industry hold taxpayers hostage, the government should be prepared to say: Hasta la vista, baby.

Maureen Bader is B.C. director of the Canadian Taxpayers Federation.

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PETER LEITCH

NO

British Columbia's film and television industry has been one of the leading economic growth stories for the province over the last 20 years. Rising from $211 million in spending in 1992 to $1.3 billion in 2009, B.C. has emerged as the third-largest centre for production in North America and one of the global leaders in the production of digital entertainment.

Convergence with new media and a growing cluster of highly specialized companies in visual effects, animation and interactive gaming suggest that B.C. is in an excellent position to capitalize further on the infrastructure that has been established here, with significant potential for future jobs and investment in this province.

Progressive government tax policy has helped create a competitive business environment that attracts private investment in B.C.'s comprehensive industry infrastructure. British Columbia is a leader in private-sector investment in the film industry in Canada, exceeding $1 billion invested in world-class studios, production companies, post-production, visual-effects and animation facilities, and specialized equipment and service companies.

opinion

Success in B.C.'s film-and-television production sector has been well documented in local media over the years, but about once a year for the last five years, film-industry tax credits come under editorial scrutiny, with their return on investment measured in the context of a 2005 film-industry study whose assumptions and conclusions have long been considered questionable.

In the meantime, B.C.'s tax policy on film production has been refined over the years, in an effort to keep British Columbia competitive, but by no means following the multitude of filming jurisdictions or offering the richest tax incentives available in North America for film production. When Ontario, B.C.'s biggest competitor for foreign and domestic production, introduced its unprecedented 25-per-cent "all spend" tax incentive in July 2009, the B.C. government did not follow suit but deliberated extensively before introducing changes to labour tax credits in February 2010 aimed at keeping B.C. competitive and encouraging investment in technology based digital entertainment sectors.

B.C.'s motion-picture production industry has an important role to play in a diversified British Columbia economy. It is a technologically enabled, knowledge-based, environmentally conscious business sector that has demonstrated its ability to compete in world markets. The industry is currently undergoing a fundamental transformation, but motion picture and digital entertainment will remain a pivotal source of economic growth. B.C. has the potential to increase employment, create wealth and become a global centre of production excellence.

Our province cannot afford to cede these opportunities to other jurisdictions.

Peter Leitch is chairman of the Motion Picture Production Industry Association of B.C.