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

TAKE ONE, Dec-March, 1998 by Wyndhan Wise

The final spark that ignited the "boom" was a modest production shot in a summer camp in Haliburton, Ont. Ivan Reitman's production of Meatballs in the summer of 1978 (released by Paramount Pictures in 1979) was the first feature to demonstrate that investment in Canadian films was viable and lucrative, grossing over $70 million worldwide on an original budget of just over a million. Reitman, who had previously coproduced the very successful National Lampoon's Animal House, applied the same formula to his summer camp comedy. And even though he is credited with only directing Meatballs (it was produced by Dan Goldberg and financed by Larry Neiss, king of Canadian interim financiers, using CCA and CFDC assistance) it was his drive and vision that was instrumental to the film's success.

By the fall of 1978 the "boom" was on, full-tilt. The Canadian financial community became aware of the industry and sensitive to the possibilities of tax shelter as an attractive vehicle for wealthy individuals and corporations. According to Toronto tax lawyer Michael Levine in an article he wrote for the Journal of Canadian Studies ("I Never Heard Them Call It `Show Art': The Business Side of Film Production"): "1979 was a very special year--the honeymoon--for the producer and his financiers in Canada. Interim financing was widely available and virtually all film units offered to the public were purchased. The result was that $150 million of feature-film production was funded in Canada that year." The CFDC, which led the way with its interim-financing policy, made this clear in the 1979-80 Annual Report: "The 1979-80 year witnessed a spectacular jump in the production of Canadian feature films. Some 70 Canadian motion pictures, with budgets totalling more than $150 million, were produced in 1979, compared to 40 films with budgets amounting to over $60 million in 1978.... The increase in production reflects the significant impact of the tax incentive offered by the 100 per cent CCA provided to investors in certified films."

Several chartered banks, trust companies, private interim lenders and individuals all became involved in the financing of the tax-shelter "boom." Brokerage houses would underwrite the public or private issue while the CFDC lent the money to the producer/entrepreneur until full financing was in place, usually at the end of the year. The issue itself, either a public prospectus or private offering memorandum, constituted a sizable amount of "legal art" and the new provincial securities commisson regulations obliged the producers to spend as much (if not more) on a prospectus than they would on a script. Then there were the "soft costs," the money that was not seen on the screen but crucial to "closing" the deal. Such "soft costs" would include, among other things, interest on interim financing (sometimes as high as 30 per cent per annum); finder's fees (sometimes as high as 15 per cent); cost of issue (often $150, 000); legal fees for the prospectus (often as high as $75,000); overhead expenses; certain publicity expenses; broker's commission (which ranged from seven per cent to nine per cent); as well as associate producer fees and the executive producer's fee. Such financial requirements reduced the number of "players" in the industry to a few wealthy individuals, well-connected to the CFDC and the established financial community. In addition, the Department of Revenue's ruling on revenue guarantees freed the producer/entrepreneur from the responsibility of making a marketable product while allowing him to act as his own sales agent, thereby creating another source of revenue "off the top" of any future distribution deal.