Canadian Capital Doesn’t Have The Guts to Make Movies

As the members of the US Screen Actor’s Guild join their counterparts in the Writers Guild on the picket lines, the Canadian film industry finds itself in a predictable crisis.

The Writers’ Guild of Canada WGC and the Alliance of Canadian Cinema, Television and Radio Artists (ACTRA) have both pledged solidarity with their American counterpart unions, refusing to replace American writers and actors in American productions being undertaken in Canada, but are not on strike themselves.

For the Canadian film crews that get these shows set, costumed, canned and animated; it’s the same difference. If Jared Leto can’t work, neither can anyone else.

From a business perspective, the making of movies and television shows is a sort of necessary cost associated with owning the rights to distribute and charge for them. Accordingly, the film studio business doesn’t exist in Canada the way it does in the US. Canadian production companies generally partner with large American studios to shoot projects that become the intellectual property of the US studios, who then use it to feed their own networks, streaming platforms and theatres.

Lionsgate Entertainment (NYSE: LGF.A, LGF.B), founded by Frank Giustra in 1997, is the closest thing Canada ever had to a Hollywood studio. It has since moved its headquarters to Santa Monica and spun out its Vancouver production studios, to fit into a business landscape where most of the margin is made in owning and re-licensing IP to the enormous American market.

Creative BC presently lists seven active film and TV productions being undertaken in BC, and six more scheduled to begin in July and August. Filming of NBC Series The Irrational has been put on hold because of the strike, and the Tron: ARES staring Jared Leto, will likely get pushed back, too, unless there’s a resolution before it’s scheduled to begin filming in August.

Canadian productions Can I Get A Witness?, starring Sandra Oh, and The Bearded Girl are the only features being shot right now, and the only scheduled dramatic production that doesn’t look like it will be affected by the strike is CBC streaming show Wild Cards.

The province hosted 1,000 different productions in 2022, by Creative BC’s count, and a basic visual sampling indicates that they were mostly American productions who set up shop to take advantage of British Columbia’s talent, scenery, exchange rate, and tax credits.

More information on BC’s Production Services Tax Credit here.

Calling them “tax credits” is pretty generous. The Canadian production companies that put these projects together are generally special-purpose entities that only exist for the life of the production, and can collect their “tax credits” in cash, so it’s more like a subsidy.

The companies are capitalized by Netflix (NASDAQ: NFLX) or Disney (NYSE: DIS) or whatever, spend their investors’ money on the filming, animating, post-production, etc. being done in Canada, give the product to the US studio that backed them, file a Canadian tax return that shows a massive loss, collect a check for 16-34% of whatever they spent on all that film labour, and are then dissolved.

In the year ending March 31, 2022, 559 productions certified as eligible for tax credits in BC collected a total of $735.3 million in tax credits on $3.1 billion in gross production expenses. That’s a pretty great deal for Disney and Netflix, who can earn from the finished product without paying a dime in tax to the government that incentivized the production. The government gets their end taxing the production’s payroll, which basically means the props master and craft services contractor are subsidising Netflix… when they’re working. Right now, they aren’t.

This space has been critical of CTV parent-co Bell (TSX: BCE) for buying distribution rights to US content instead of creating original content that its subscribers want to watch, but it isn’t as though we don’t understand the position Bell has put itself in as a Canadian media distributor. The CTV Network and Crave streaming platform serve the Canadian market, which is one tenth the size of the American market, and often wants to watch American shows.

Bringing in heavy hitters to produce something good enough to compete in the American market is a lot of risk for the dividend-machine that is Bell Canada, tax credits or no tax credits. It’s the kind of thing that tends to suck up a lot of money that could otherwise be given to their shareholders.

A company with as much capital as Bell that had an ounce of imagination might be looking at these US guild strikes as an opportunity. The behind-the-camera talent that puts the most successful film and TV together is sitting right in their back yard, looking for work. Their relationships with the Canadian unions of screenwriters and actors is fine, and the best of them would probably leave L.A. for the first time in years if it meant getting some work on a production.

Bell isn’t the only one. There is an ocean of capital in this country that could absolutely take the risk of making a few pictures and shows with the knowledge that content-thirsty US studios will be looking for product. But why would it? Annualized returns on rent-seeking businesses like telecom, real estate and banking are exceptional, and can be collected with very little tax.

If a capitalist starts investing in labour-intensive things like film production, spreading money around to Canadian actors writers and production crews, then as soon as the money starts rolling in, the greedy bastards are liable to go on strike!

Information for this briefing was found via Reuters, Bloomberg, and the sources mentioned. The author has no securities or affiliations related to the organizations discussed. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

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