1/10/2006
Producer Investment: Deferral or Loan

By JEFF KULBAK, BComm, CA, Director of Media Services

Often, when preparing a production budget for a film, the question arises as to what to do with the “Producer Investment”. Producer Investment is the amount of money owed back to the producer has invested in the production, which can be scheduled to be paid out at the company’s year-end, with an option to loan back to the production company, or deferred until a later time.

By the time this question is addressed, the financing plan has often been altered so many times that producers, who are typically the last to get paid on their production, have not contemplated the full effect of their Producer Investment. I have seen a number of financing plans submitted to government agencies with little thought given to the tax implications of the Producer Investment.

Deferral of Fees

A producer may decide when preparing the financing plan to defer his or her fees until a period after the production company’s year-end. If a producer decides to defer his of her fees to a subsequent period, the effect is to reduce the overall cost of production.

In addition to reducing the overall cost of production, this method of financing frees the production company from certain time restraints that arise regarding payment of producer fees and tax credits; in order to claim tax credits on labour, the labour must be paid within 60 days of the production company’s year-end.

Another result of this means of financing is that it will also decrease the expected tax credits, as both the production cost base and the labour spent have been reduced.

If a producer chooses to defer his or her fees, the financing plan should then be re-visisted in order to ensure the tax credit calculation takes into account the deferral of fees.

Fees Loaned

Another common method of dealing with producer fees financing is where the producer fees are paid by the production company and then the producer loans the money back to the production to be repaid on receipt of the tax credits.

This form of financing does not reduce the amount of tax credit, as the producer’s fees are included in the overall labour cost. The caveat is that the producer must report the income on the fees received, and therefore, will be taxed without the benefit of possessing the actual cash sum which would have been paid out.

The production company tax credit tax return filing typically does not match when the producers report the tax. This form of producer fee financing, while beneficial for the tax credit calculations, could have an impact on the producer’s personal tax liability. The loan agreement between the producer and the production company must have bonafide terms including a repayment date and market rate of interest.

Based on the producer’s set of circumstances, producer fees and the way they are financed in the overall production budget can have a major impact on both personal and corporate tax filings.

This article has been prepared for the general information of our clients. Specific professional advice should be obtained prior to the implementation of any suggestion contained in this publication.