This is the first installment of a series of articles specific to film financing and tax credits in Manitoba.
Tax credits are used throughout Canada to promote film production. In many instances the availability of tax credits is the single most important factor influencing the decision on where a film is produced. Currently, Manitoba boasts the most generous suite of provincial film tax credits in Canada. Eligible corporations and productions may receive up to 65% of eligible salary or payroll costs or 30% of eligible Manitoba production expenditures. Film tax credits like the ones available in Manitoba make it cheaper for studios or producers to provide their services. Without tax credits, studios or producers in Manitoba may not be able to provide their services at a rate that would be competitive or attractive in the marketplace.
Every production service agreement will (or should) contain provisions that address tax credits. Often the language used is that the service provider will apply for tax credits and that they assign, transfer and/or hold the tax credits “in trust” for the benefit of the film studio. At times the language will speak specifically to a grant of a security interest in the tax credits.
The recent Ontario Superior Court of Justice decision in Grosvenor Park Media Fund L.P. v. Arc Productions Ltd. et al. 2020 ONSC 5651 (the “Grosvenor Case“) https://www.canlii.org/en/on/onsc/doc/2020/2020onsc5651/2020onsc5651.html is insightful and highlights the need for the parties to take practical steps beyond the inclusion of a provision dealing with tax credits in a production service agreement. The Grosvenor Case outlined that Arc Productions Ltd. (“Arc”) was a studio that provided animation services to third party film producers. Many of the film producers were well known and established in the industry. The service agreements would typically provide that Arc would be paid in full and up front by a film producer and that the work to be performed by Arc would be eligible for federal and/or provincial tax credits In the Grosvenor Case, all of the service agreements that Arc entered into with the film producers contained provisions that served to assign the tax credits to the film producer and/or indicated that the Arc would hold any tax credit amounts it may receive in trust for the film producer. Grosvenor Park Media Fund L.P. (“Grosvenor”), as interim financier, had provided Arc with various loans and was owed about $20,000,000.00. Related to the financing provided to Arc, Grosvenor received a general security agreement and registered its security interest over all of Arc’s assets in the Ontario Personal Property Security Registry. The film producers either did not register any interest they had in the specific tax credits related to their film or provided a broad subordination to Grosvenor. When Arc entered into a form of creditor protection, the receiver brought an application to court to get direction as to where $1,000,000.00 worth of tax credits was to be paid. Grosvenor argued that as the interim financier and first charge secured party, it was entitled to the tax credits. Each of the film producers presented a few arguments. The gist of the arguments were either that their respective service agreement entered into with Arc assigned the tax credits to them and therefore the tax credits were not the property of Arc but rather that of the film producers or that some form of trust was established with the result being that the film producers were entitled to the tax credits.
Justice Koehnen in the Grosvenor Case determined that all of the relevant provisions in the service agreements described, in substance, transactions that create security interests in the tax credits. Justice Koehnen went on to state that those security interests should have been registered under the Personal Property Security Act (Ontario) (the “ON PPSA“) in order for those security interests to potentially take priority over Grosvenor’s security interest. A ruling was made that the $1,000,000.00 in tax credits was to be paid to Grosvenor.
The decision in the Grosvenor Case is interesting for producers in Manitoba for a couple of reasons. First, the provisions of the ON PPSA that were analyzed in the Grosvenor case are identical to the comparable provisions of The Personal Property Security Act (Manitoba). As such, in similar circumstances, the Grosvenor Case may well be a very persuasive precedent. Second, the Grosvenor Case highlights the importance of the concept of privity of contract. The service agreements are binding and enforceable against the parties to the agreement, but have no bearing on third parties who are not a party to the agreement. To potentially protect their security interests in the tax credits, as described in the service agreements as against third party security interests, the film producers needed to avail themselves of the regime designed to do just that. That is, register their security interest in the ON PPSA. The same concept in these circumstances would also apply here in Manitoba.
Stay tuned for more upcoming articles related to film financing and tax credits in Manitoba.
Please do not hesitate to contact me if you have any questions or if I can be of assistance in guiding you through any film financing or entertainment law issues.
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