Canadian cinema from boom to bust: the tax-shelter years

TAKE ONE, Dec-March, 1998 by Wyndhan Wise

The federal government was not insensitive to the issue of quotas as Gerard Pelletier, then secretary of state, indicated in the First Phase of a Federal Film Policy, issued in July 1972: "We are aware of the problem and we have begun studying closely the system of distribution in Canada and abroad. I can only say that we are...looking into quota systems...and the problem of foreign ownership of our distribution companies and film theatres." When Hugh Faulkner replaced Pelletier, he promptly commissioned the Bureau of Management Consulting to do a study of the industry in Canada for the arts and cultural branch of the secretary of state. The Tompkins Report, as it became known, reaffirmed Pelletier's earlier view: "The production of Canadian feature films will continue to be constrained until something is done to break the hold of the foreign-owned distribution chains that prevents Canadian films from being seen by larger audiences both in Canada and abroad." The report also confirmed what the CCFM had been saying all along: "93 per cent of total distribution rentals from the Canadian box office were being paid to the Hollywood majors."

In 1975, Faulkner negotiated a voluntary agreement with the two major theatre chains, Famous Players and Odeon, where the chains were to guarantee a minimum four weeks per theatre per year to Canadian films, and invest a minimum of $1.7 million in their production. This policy initiative was accompanied with an announcement by John Turner, minister of finance, in his budget speech that a new income tax regulation would allow investors to deduct in one year, against income from all sources, 100 per cent of their investment in certified feature films. This provision was retroactive to include film productions begun after Nov. 18, 1974. The Faulkner/Turner "two step" is a classic example of the federal government's compromise on arts policy. In response to the cultural nationalists, the secretary of state introduced a watered-down system of voluntary agreements which were ultimately unenforceable, while the minister of finance offered tax subsidies which help to create an artificial industry based on dubious "international" (i.e. American) standards.

The 60 per cent write-off had become a farce, not unlike Zero Mostel's wheelings and dealings in Mel Brooks's classic, The Producers. Investors were assured of a profit even if the film was a total failure. In one such dubious financial arrangement, an investor would put up a small amount of money against an obligation to invest a much larger sum later, but only out of the profits (if any) of the film. If the film never made any money, the investor never had to come up with the total cash investment while profiting from a significant tax saving. Of course, it was in the investors best interest if the film never got released. This tax loophole brought into play a new type of film entrepreneur--the tax lawyers and accountants--who could make their way through the complicated tax laws and "lever" such investments on the basis of the original down payment. This new breed of "producer" was not concerned with the priorities of the CCFM and its "Winnipeg Manifesto." They were deal makers and representatives of large investment groups. They were adept at legally exploiting a grey area over which there was very little regulation and no substantive government policy directive. By 1974, the abused CCA scheme had already established the widespread notion that Canadian films were made to lose money and were box-office poison.