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Canada / U.S. Coproductions: Extending the Tax Benefits of ‘Twinning’

2010 November 7
by Peter Hamilton

The Canadian Radio-television and Telecommunications Commission (CRTC) has made it easier for U.S. producers to benefit from Canada’s favorable tax framework.

The change relates to Canada/U.S. coproductions, or ‘Twinning’.

We contacted Richard Hanet, a former Alliance Atlantis attorney who has worked on numerous ‘twinning’ projects, including with Discovery and AETN. 

The following notes were taken during our conversation and later reviewed by Richard:

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Enlightened Regulatory Framework

Canadian networks are licensed by the CRTC:

  • Many of them are guaranteed a predictable revenue stream from a per subscriber fee that the CRTC mandates and that is paid to the channels by their cable and satellite distributors
  • The system creates barriers that protect the Canadian networks from being swamped by the spillover of channels originating in the U.S.
  • For their part, as part of their licenses, the Canadian channels are obligated to run a certain amount of Cancon.  
    • As such, they tend to pay 5 times as much for the same show if it is Cancon vs. if it is not.
    • High end Canadian content earns a significant premium versus non-Canadian content

Example

  • An American producer completes a program for $300,000/hour, and sells it to a Canadian channel
  • The Canadian channel may pay around $20,000/hour for Canadian rights, if that
  • If the same program qualified as Canadian content, the Canadian channel would pay $50-100,000 / hour for Canadian rights
    • Half hours are in the $35 – 60,000 range

The Twinning Concept

  • A portion of the episodes (usually half) are produced in Canada by a Canadian production company, the remainder can stay with the US production entity
  • To accommodate the production in Canada, the U.S. producer assigns underlying rights to the Canadian producer and the copyright in the finished Canadian episodes is maintained by the Canadian producer
  • The episodes are packaged by each producer as a full series (i.e. The Canadian producer packages its episodes with those of the US producer to exploit in Canada – to do this the Canadian producer needs to control the exploitation of the US episodes in Canada, and conversely the same for  the US producer in the US (the Canadian producer runs the U.S. and possibly the  worldwide distribution rights back to the U.S. producer for the US exploitation)
  • Basically, if the guidelines are followed, Cancon status can be achieved for all the packaged episodes (even if a portion of them as U.S. episodes) 
  • Richard says that the practice of Twinning is ‘more amenable to Factual than Scripted entertainment’ as it is easier to producer creatively similar episodes based on the same concept in different jurisdictions in factual TV than in dramatic TV

Twinning is Somewhat Analogous to International Co-production. Example: Irish Tax Treaty

Canada and Ireland enjoy an International Co-Production treaty (a form of tax treaty), unlike the Canada and U.S.

  • For a 10-part series: 5 episodes are produced in Canada and 5 episodes in Ireland
  • The whole series is considered Canadian in Canada, and therefore qualifies for higher Canadian content license fee.  It is considered 100% Irish in Ireland
  • The Canadian producers earn tax credits for 5 episodes, and the Irish earn tax credits (if available in Ireland) for their 5 episodes

Applying Twinning to the U.S. – Public Notice 2000-42

Richard Hanet referred to Public Notice CRTC 2000-42, the CRTC regulation that sets out certain “co-production” requirements for U.S./Canadian co-pros:

  • PN 2000-42 aims to encourage Canadian access to U.S. channels by attracting U.S. producers as Canadian partners
    • Paras VII and VIII are the applicable sections
    • PN 2000-42 can be looked at as applying a modified “co-production treaty” model to U.S., although the U.S. doesn’t enjoy a co-production treaty with Canada
    • In practice, it enables the U.S.-produced 5 episodes of a 10-episode series to be considered as Canadian Content
    • The Canadian producer gets full Canadian tax credit on the Canadian episodes
    • American producer doesn’t get the Canadian tax credit – but could earn tax credits in a U.S. state or region

Requirements

According to Hanet:

  • The budgets have to be relatively similar for individual episodes across series
  • Broadcasters will require episodes to look the same:
    • For example, share the same graphics package
    • If there is one lead or host, he/she must be a Canadian. If there are two leads or hosts, one can be American
    • The latter  is more of a broadcaster-driven, creative matter, but not a twinning requirement.  You could technically twin 2 distinctly different series, assuming similar budgets and broadcaster license commitments

Benefit to American Producer

  • The U.S. co-producer gets to produce 5 episodes of a 10-part series instead of none (if there is insufficient financing in the U.S. for a full U.S. series)
  • The American producer can co-ordinate the exploitation of  rights worldwide:
    • Under PN 2000-42 , rights are negotiable
    • In practice, the U.S. producer often gets all or most rights outside Canada
    • The Canadian producer gets to own at least 20% of “back end” in US episodes, though the US producer can have a similar stake in the Canadian episodes

Copyright Co-mingling: Sometimes a Sticking Point

  • To qualify as Canadian content, the Canadian producer must own 100% of the copyright for Canadian episodes (though they can part with some back-end, just not copyright) and for twinning the Canadian need  20% or more of the copyright for U.S. episodes
  • The American producer therefore owns 80% of U.S. and 0% of Canadian copyright (but can have a non-copyright based 20% interest in the Canadian episodes)
  • Divesting  of copyright bothers some U.S. networks
    • The copyright is an asset that is sometimes booked on the balance sheet
    • However, it is the distribution rights that are exploitable, and they are clearly laid out in the agreement:
      • AETN, for example, often sticks over the issue of divesting of  copyright because it conflicts with AETN’s work-for-hire ownership mandate
      • DCI is more comfortable with the model

Co-ventures: May Apply to Feature Documentaries

  • If it is not a “separate-able” series, there is an in-between model called “co-ventures” which may be applicable to single and feature docs where a program can qualify for Canadian Content and higher license fee,
    • But at lower level tax breaks than series

Attitude of Canadian Channels

  • The channels are happy as long as they obtain a CRTC # for the project, which certifies their Cancon obligations
  • There is one important complication:  They have to work with two producers

Takeaways

  • Richard Hanet sees the opportunity from Twinning as a continuum where the parties have to find a ‘Sweet Spot’ that satisfies their creative, financial, copyright, and distribution requirements
  • Most major U.S. Factual channels strongly prefer to own all rights, and also to control the editorial process
  • The Twinning model may be most applicable to U.S. digi-nets who wish to share production costs with international co-pro partners

Contact
Richard C. Hanet
Lewis Birnberg Hanet, LLP
Media & Entertainment Law
693 Queen Street East
Toronto, Ontario, Canada M4M 1G6 
richardh@lbhmedialaw.com

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Sheffield Doc / Fest
Coming this week …
Notes from our well-received panel
What Do U.S. Broadcasters Want?
How Much Do They Pay? Who? When?
Lisa Heller
, HBO Documentaries
Alex Graham, Wall-to-Wall Productions
Dawn Porter, AETN
Tom Koch, PBS International
Moderator: Peter Hamilton

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