Exploring Film Tax Credit Financing in Canada | 7 Park Avenue Financial

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Maximizing Your Film's Budget: Mastering Tax Credits in Canada

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 Engage with our insights because knowing how to navigate tax credit financing can unlock substantial funds for your next Canadian film project

Canada's Cash Flow Hack for Filmmakers: Tax Credit Financing 

Financing Film Tax Credits in Canada  

Financing film, television and animation projects could hardly be described by an outsider as risk-free, but in the current Canadian environment the non-repayable tax credits and your ability to finance and monetize them are about as close as we can get to any form of risk-free financing.

  

The Role of Tax Incentives in Project Financing  

The current generous tax incentives provided by federal and provincial governments in Canada assist productions as an integral part of the overall financing strategy that any project employs.

Traditional Business Financing in the Film Industry  

Film, TV and animation projects are financed in exactly the same manner as any type of business financing in Canada – by that we mean there is an equity component and a debt component. It is of course incumbent on the owners to determine the optimal amount, or ‘mix ‘of owner capital and borrowed funds.

The financing of animation, fil and television tax credits is a part of the overall debt side of the production company, but it is critical to note that the financing of your tax credit is not a debt or a loan – it is simply the monetization of the tax credit that is owed to you by the government - for example for eligible labour expenditures. You are essentially factoring, or monetizing that asset.

  
Case Study: A Financing Scenario  

Let’s use a quick example of a production that is financed, say for a million dollars. You as the owner assume a 500k equity position and the other 50% will come from international distribution and pre-sales. Your tax credit on the production could well be in the $400,000.00 range based on the current generous legislation in place. You have therefore recovered, and are able to utilize a very significant portion of your overall budget.

  

Timing for Tax Credit Financing  

Financing a tax credit can be done at two different time periods – naturally the logical one is of course at the time of filing and final certification. However, many of our clients are surprised to hear that tax credits can be financed on an accrual basis if your project qualifies. The qualifications for an accrual type financing are not as harsh as one would think – they are actually common sense qualifications. They include your team's experience, successful utilization in the past of tax credits, and, as important your proven ability to budget and document your projects.

Industry Revenue Streams and Tax Credit Financing  

We again reiterate that tax credit financing is available for the three major revenue streams of the industry – namely film, television, and digital animation – the latter being non-existent years ago and becoming more popular all the time with the advent of new media. Growth in these three areas of entertainment continues to be explosive and partially resistant to the global economic slowdown.

"Hollywood North" and Tax Incentives  

Hollywood North, aka 'CANADA' continues to view the tax grants available in Canada as a great way to subsidize any project's production cost. The utilization of a tax credit naturally enhances overall equity returns on invested capital, and it is safe to say many productions in film, TV and animation might never see the light of day without the monetization and receipt of tax credits.

  

Additional Financing Components  

Naturally, tax credit financing itself is only one component of an overall financing strategy – other components include:

- Leaseback deals on copyrights
- Your ability to pre-sell projects overseas
- Product placement
- Equity injections

However, it is very safe to say tax credits are an integral component of an entertainment financing strategy.

  
Executing Tax Credit Financing  

So how do you finance your tax credit? Clients ask … again we stress common sense fundamentals. Locate a credible, experienced, and trusted advisor in this niche area of business finance. Ensure you have a proper team in place, i.e. accountant, lawyer, etc., preferably with a track record in assisting your documentation and certification of your project. Financing of tax credits can generate anywhere to 40- 80% of your actual or projected tax credit filing. Funds can be used for a general purpose, and are repaid in full when the government clears and pays your tax credit claim. Maintaining proper paperwork and up to date certifications and filings is essential.

Catalyst for Innovation in Filmmaking Technology

Canadian film tax credit financing is typically viewed as a tool for budgeting and cash flow management, but it can also serve as an indirect catalyst for technological innovation within the film industry. With the financial relief provided by these credits, production companies may be more inclined to invest in cutting-edge filming technologies, such as virtual reality or advanced CGI, which they might otherwise consider too risky or expensive. This can lead to a surge in technical advancements within the Canadian film sector, potentially setting new industry standards in cinematic experiences.

Cross-Industry Economic Stimulus  

Beyond the immediate sphere of film production, the injection of funds from tax credit financing into a film project can stimulate economic activity in related industries. For instance, a portion of the budget freed up by tax credits can go into more elaborate set designs, which in turn benefits construction businesses, local artisans, and material suppliers. Similarly, the need for local talent, both on-screen and behind the scenes, may increase, thereby supporting the wider creative economy. This often-overlooked ripple effect underpins not just the arts sector, but can also uplift various ancillary services and businesses.

 Key Takeaways 

1. • Non-repayable Nature: Recognize that tax credits are non-repayable financial incentives provided by Canada Revenue Agency and  the Canadian federal and provincial governments to encourage film, television tax credit funding , and animation production within Canada.
   • Purpose of Tax Credits: Tax credits aim to reduce the tax burden on production companies, effectively lowering the cost of production and promoting investment in the Canadian entertainment industry.

2. Monetization of Tax Credits:

   • Cash Flow Before Completion: Learn how producers can convert future tax credits into immediate cash flow via a refundable tax credit . This is not a loan but a financial arrangement where anticipated tax credits are sold to a third party for a percentage of their value, providing the production with upfront capital.
   • Accrual Basis Financing: Understand that financing can be obtained not only after a tax credit is granted but also before, based on accrued expenditures, which greatly aids in cash flow management during production.

  
Conclusion  

We strongly recommend a tax credit financing strategy to enhance the overall cash flow and working capital viability of your independent or studio projects in the television tax credit program, movies and digital animation - talk to a film tax consultant today!

FAQ

What exactly are film tax credits in Canada?

Film tax credits in Canada are government incentives designed to reduce the taxable income of film production companies that are an eligible corporation, effectively decreasing the overall cost of film production and stimulating the entertainment industry.



How can these tax credits benefit my film project financially?

Tax credits can significantly lower your production costs by providing a return on eligible expenditures. The tax credit certificate can be monetized early, giving you immediate cash flow to finance your production.


Are all film projects eligible for these tax credits?

Most film, TV, and animation video tax credit projects can qualify, but they must meet certain criteria set by the federal and provincial governments, such as spending thresholds and cultural tests.


Can I get cash from my tax credits before my film is finished?

Yes, the production corporation can finance your tax credits on an accrual basis, meaning you don't have to wait until your project is complete and the credits are claimed to access the funds.


Is financing film tax credits considered a loan?

No, it's not a loan. Financing film tax credits is the process of selling your anticipated tax credit for a percentage of its value, providing you with capital without incurring debt.



Are international productions eligible for Canadian film tax credits?

Yes, international productions can qualify for Canadian tax credits if they meet the specific criteria, including shooting in Canada and hiring Canadian personnel.


Can tax credits cover post-production costs?

Yes, post-production costs are often eligible under film tax credit programs, but specific eligibility will depend on the provincial or federal guidelines.


Do tax credits vary by province in Canada?

Absolutely, each Canadian province offers its own tax credits with unique rules and percentages, allowing for a tailored approach to financing based on your production's location.


What kind of expenses are usually covered by film tax credits?

Eligible expenses typically include labour, service contracts, and goods used within the province or country, but it's important to review the specific criteria of the tax credit program.


How long does it take to receive funds from financing tax credits?

The timeline around funding tax credit certificates for an eligible production can vary, but typically you can receive funds within a few weeks to a couple of months after the financing agreement is made and the necessary certifications are in place. By the way, international treaty co productions when applicable can be financed as well.