Canadian Heritage Committee on March 9th, 2015

[The Chair (Mr. Gordon Brown (Leeds—Grenville, CPC)), Conservative, Gord Brown]

Good afternoon, everyone.

We're going to call to order meeting number 36 of the Standing Committee on Canadian Heritage. Today we are continuing our review of the Canadian feature film industry.

We have two panels today. For the first hour, we have with us, from Dentons Canada, Ken Dhaliwal, who is here with us in the room. As well, we have J. Joly, chief executive officer and founder of CineCoup Media, who is also with us here today.

By video conference from Vancouver, British Columbia, we have Lui Petrollini, a partner in media and entertainment with Ernst & Young.

We will start with Mr. Dhaliwal for up to eight minutes.

[Ken Dhaliwal, Partner, Dentons Canada]

First of all, thank you for inviting me to be a witness at this committee. I don't have a very long statement, although, if you want, I could speak for hours, but I'll keep it brief.

I think the review is timely and very important in the current environment. What you will find over the course of the hearings is that over the last 10 years since the last review was done, there have been some interesting and significant changes, and anything we can do to assist the film industry going forward is a good thing.

We have prepared a brief, which I'll submit, but at this point I really want to limit my comments and let you ask whatever questions you may have. You have my bio on what I do. I can refresh your memories if you require, but basically I'm here as you require.

[The Chair, Conservative, Gord Brown]

Thank you very much. That was very quick and subtle.

We'll now go to Mr. Joly.

[J. Joly, Chief Executive Officer and Founder, CineCoup Media Inc.]

Thank you very much for having me. It was an honour to fly here from cherry blossom country in Vancouver to be with you here today—

[Some hon. members]

Oh, oh!

[J. Joly]

—and you have lovely weather, so I'm really happy to be here.

I've reviewed everything until now, and today I'd really like to talk about change and hope and how we built a business, my business, CineCoup. We started about three years ago. We were a private, Vancouver-based company, although we really do stretch across the nation. We set out to disrupt the way independent content was packaged, marketed, and financed, beginning with feature film, and recently moved into television as well. In terms of our focus, really we serve mostly 18- to 34-year-olds.

Our partners include on the film side Cineplex, and on the broadcast side right now the CBC. My board and investors include Michael Hirsh from Nelvana, who is now the chairman of DHX; and people like Bob Ezrin and Richard Stursberg, leaders in their field. We've also built a really world-class team of media mavericks to help us see this vision of scaling not only in Canada, but also around the world.

When putting these ideas together, I was going to make a PowerPoint presentation, but I decided that I would just give you a short intro and then let one of our creators, who basically came through our platform, our studio model, tell you about his experience, because I think that's more valuable than my speaking about it.

When I started this company three years ago, people thought I was insane. I said that I believed there was a better way, an accelerated way, a way whereby we could get to market with content faster here in this country and that we could be leaders doing it, but that we had to embrace change and had to embrace acceleration and urgency. I said that we had to look for more private capital, we had to create greater revenue earlier in the system, and basically be more democratic and transparent to allow Canadians, the people, the audience who are the equity, greater decision-making input and democracy in the culture and content they want to see. I also believe that we have to change the model to allow new voices to come into it, specifically on a gender level with International Women's Day yesterday. I'm proud that we've been able to have up to 38% women in our content creators.

The tenet I started this business with was, how do I discover talent where no one else is looking? You don't have to live in Montreal or Toronto or Vancouver. I actually believe that there is more talent in the flyover part of this country aggregated than there is in any single media centre. The great thing about this generation, this social generation, is that technology has been democratized. There are no more gatekeepers. It's easy to find a 2K camera. Non-linear editing comes on every computer. So the differentiator becomes, how do we turn these guys into entrepreneurs? How do we basically create rigour around them so that instead of doing it in two to five years, we get them to do it in 90 days and get to market quickly?

The five tenets that I wanted to set out with my company, and that we've been able to achieve, are:

How do we find talent where no one else is looking? Just to give you an example, Lowell Dean is from Regina, Saskatchewan. That's where this movie was shot, in a province with no tax credits.

The second thing is, how do we find brave, new, original ideas, new IP, new intellectual property, that can be franchised?

The third thing is, how do we build an audience before we start financing a picture, and measure them?

The fourth thing is, how do we reduce discovery costs? I can't afford to read 400 scripts. I can afford to read 40, so I need to come up with a new rigour to do that.

The fifth thing is, how do we use analytics to basically moneyball what's called “marketing spend” so that we're not trying to outspend the Americans in our own market when we bring a movie to market.

The last thing is, if we can achieve this and build a pipeline of low-budget, high-performing content with a built-in audience, that will be the arms race of tomorrow when you look at Netflix and everybody. We shouldn't be trying to answer problems today; we should be building a business where it is three years from now. That's the problem with where we are now. We shouldn't be throwing more money at something basically to shore up a status quo. We need to start experimenting more and take more risk and be braver.

That all being said, I'm going to leave that issue for questions from you guys. But I'd like you to hear the story of Lowell Dean from Regina, Saskatchewan.

We were his last resort; everybody had turned his movie down when he joined our platform. In less than a year, he had a movie in Cineplex. It was sold into 20 countries; on Friday it opened in the Philippines in 20 cinemas; it won a jury award at one of the top film festivals; it has an action figure, a graphic novel, a regular novel; it just sold a thousand pieces of vinyl. And he is making WolfCop 2 in Moose Jaw, where he shot the first one, for three times the budget. This is a cycle that took just under two years.

Without further ado, let me present Lowell Dean and Bernie Hernando, the producer and director of WolfCop, from Regina.

Play the video.

[Some hon. members]

Oh, oh!

[The Chair, Conservative, Gord Brown]

There is going to be translation of this, for those who wish to listen in the other language.

[Video Presentation]

[J. Joly]

Here is just a little thing. This movie has already screened in Canada, and it is being released in the U.S. tomorrow. We just opened the new cohort. The deadline was yesterday, and we have another 90 projects from across Canada that you guys can all watch in real time as of March 16 for 90 days, as they all compete for a million dollars and a guaranteed theatrical showing that we're putting up.

I hope you watch and tell all your friends, and please get behind the ones that you want to see made.

[The Chair, Conservative, Gord Brown]

Thank you very much.

We're now going to go to Vancouver to hear from Mr. Petrollini.

You have the floor.

[Lui Petrollini, Partner, Media and Entertainment, Ernst & Young]

Thank you.

I come to you from a very beautiful day today in Vancouver—cherry blossom country, as Mr. Joly referred to it.

I come at you from a different direction. I'm not a producer of Canadians films, but rather a service provider to the industry. I get involved at the conceptual, financial, or pre-production stage with producers. I advise throughout the production phases on financial matters. I assist in the wrap-up and financial reporting to achieve compliance with the various rules and regulations that producers are required to meet, including to gain access to the production tax credits that are available, both provincially and federally.

I also work very closely with interim financiers, such as the chartered banks here in Canada. Legal representatives, such as Mr. Dhaliwal, seek my advice on not only providing comfort on estimates of tax credits that will be claimed by producers, but also in terms of specific wording in the structuring of legal agreements in order to have the producers comply with the various rules and regulations around the tax credits.

Like Mr. Joly, I think that change is good, but change has to make sense as well. The benefits have to outweigh the cost of change. Keep in mind that my comments are general ones that come from years of experience in reviewing production budgets, financing structures, and cost reports; in preparing tax filings; and in working with various organizations like CAVCO, the provincial films organizations, and Creative BC here in B.C. I also work closely with the CRA in their reviews of tax credits and their interpretations of the various guidelines.

My comments are based on that, but also with the objective of any review being undertaken, such as yours, on how to improve as a country.

We've been successful in building this production industry in this country, which has been idolized by many other countries. We've also become known as a best in class for these tax credit programs that we have and that have been replicated all over the world. That being said, how do we improve? There are a number of things that we can do, but it plays on my experience that I've had over the last 21 years.

First and foremost, given that there are so many parties that play in the space—whether it be the various government agencies, provincial and federal, including the CRA as an example—we all have to work together. We have to work for the common good. We have to be as cohesive as we possibly can in administering the various programs, and we have to improve the cohesion. There's a lot of red tape that's involved in this industry, with the producers constantly having to prepare and compile information and supply it to the various organizations, whether they be the provincial institutions or federal institutions such as CAVCO, the CMF, or the CRA. We have to make this as easy as possible for producers so they're spending more time in the production or distribution of their films, as opposed to the administration around their productions.

When you consider incentives, we need to start considering incentives around the promotion of films.

There have been a number of producers who have said to me that producing films is easy, but that selling them is hard. That's so true because films are costly and risky to produce. With all the years that I've had in reviewing production budgets, there's one thing that I've noticed time and time again, which is that all the dollars that are raised by producers are going into the production and not into P and A. By P and A, I'm referring to prints and advertising, which are costs incurred in the distribution of film.

When we look at the tax credits that are so generous in this country, we're seeing those tax credits going into the financing of the productions. It's very seldom that you see excess tax credits being generated by a production company that are then being plowed back into the capitalization of that company, or prints and advertising for the promotion of its films.

Some of the things we have available to us here in British Columbia include an international financial centre. British Columbia has been designated as that. That means that companies, like brokerage firms, that work with foreign customers are able to gain access to reduced provincial taxes based on the work they do or the sales they make to these foreign clients. It's based on a net income and it's a percentage of their net income related to their IFC activities.

One of my thoughts is that if we could get a similar program for distributors of film to help them gain access to reduced taxes on sales of Canadian feature films, that would go a long way to promoting the distribution industry here in Canada.

When we look at existing tax credits, I'm sure you all know by now from the other interviews that you've had that the federal credits actually grind the provincial tax credits that are generated. By grind we mean that the base on which the federal tax credits are based is far less than the base of the provincial tax credits because the provincial tax credits are taken into effect.

I know there's a movement that would request that the federal grinds be reduced or eliminated. The only issue with that is that you've got to be careful about the costs this may add to the federal government in terms of additional tax credits, but you've also got to be concerned with the consistency with other industries such as the technology industry where SR and ED calculations also grind federally by provincial assistance programs that are similar in that space.

At end of the day it all comes back to the commercial viability of Canadian feature films. We need to investigate the costs versus benefits of protecting Canadian heritage over the commercial viability of productions. One of the things I've considered in making this presentation is whether we can look at the components behind tax credits on Canadian certification and play with those components to make it easier for producers to make their films more commercially viable.

We look at things like the producer-control guidelines and whether we can relax those to a certain extent. We look at things such as the need to have one of the top two highest paid actors be Canadian. Can we relax those, so that we can bring more foreign talent that is more recognizable in the world to our productions without damaging or impacting our ability to claim a Canadian certification in tax credits? Or do we reduce the spend criteria on Canadian productions, so that we can have more foreign influence?

Finally, the last point I wanted to make is about commercial treaty productions. As you know, or you may not know, there is no co-production treaty with the United States. We have many co-production treaties with other countries around the world, but we have various guidelines that restrict the ability of co-producers to use talent or services from outside of those co-producing countries.

If we were to perhaps relax those restrictions, we could potentially enter into more co-productions and bring talent outside of those co-producing countries that might make our productions more commercially viable.

Those are just a few points that I wanted to raise. I'm sure you have a number of questions, so I'm going to leave it at that. I thank you for giving me the opportunity to address you, and I look forward to entertaining any questions you may have.

[The Chair, Conservative, Gord Brown]

Thank you very much, Mr. Petrollini.

We're now going to move to questions.

Mr. Yurdiga, for seven minutes.

[David Yurdiga, Conservative, Fort McMurray—Athabasca, AB]

Good afternoon everyone. Thank you, Chair, and thank you to the witnesses for being here today.

What's really interesting to me is the interim financing and I'll direct my first question to Mr. Joly.

What kind of collateral do you have? If I'm producing a film, what steps do I have to take in order to get financing? Is it a lengthy process?

[J. Joly]

Within my model?

[David Yurdiga, Conservative, Fort McMurray—Athabasca, AB]

Yes.

[J. Joly]

No. We guarantee the financing, so the financing is waiting.

Just to give you a little bit of context on it, sir, as quickly as I can, and please stop me if any of this becomes jargonesque as we say, or say j'accuse, or whatever you want.

Basically I am a serial entrepreneur, so this is my second company. CineCoup is from a film accelerator background, so it really does build on a technology accelerator. Look at me like a VC, a venture capitalist, and everybody that comes into my funnel, say the 90 projects.... The first time we worked with the CBC we had almost 280 in our cohort that time, some as far away as Nunavut.

What we are doing is that we are creating meaningful milestones and a destination for people to put in a lot of sweat equity and build up their audience equity. Then at the end of it, we have a guaranteed theatrical.

If you want to talk about how I finance the picture, I'm happy to be transparent with that too. It's a combination of private equity, soft money from tax credits, and we also build revenue. Because I am aggregating 18- to 34-year-olds around culture, we have brands that come in like Canon and William F. White that want to connect with this next generation of filmmakers. So one of our big differentiators over a traditional studio is that where development used to be a sunk cost, we have actually learned how to monetize it. We are actually creating revenue from pre-script right up to the end of the funnel.

I hope that answers your question.

[David Yurdiga, Conservative, Fort McMurray—Athabasca, AB]

Yes. Thank you.

I have another question for you. Can you describe the challenges you face regarding the distribution of the films you produce or finance?

[J. Joly]

That's the great thing about the time we live in. That's why I am so well hated because I am trying to disintermediate, which means I'm trying to get rid of the middlemen. I went straight to Michael Kennedy at Cineplex. I read his quarterlies, I saw where his pain points were, and I addressed them.

It's one of those things where I do believe there's still a good reason to have traditional distributors, but for my model you really have to look at the business of making films. It's a bifurcated media just like video games. There are only two kinds of movies that make money from a consistent ROI point of view. You have the big Hollywood tent poles and then you have the sub-$5 million independent genre films. Everything else is kind of the city of broken dreams. It takes a lot of money to make them and a lot of money on P and A.

My big thing is that if I can connect directly with my audience and build a database—we were one of the first companies in the world to do this—then I can go directly to them and use all the analytics I create to basically moneyball that P and A spend that Lui was talking about.

We can't afford to compete as Canadians with The Avengers, when it gets released and they spend millions and millions of dollars in this country, and spend on the same earned media that they do. We have to be less like a shotgun and more like a sniper to get our job done. Again, I'm like Wayne Gretzky. I'm playing the puck where it is three years from now. I'm not trying to answer questions today but take big risks on tomorrow.

[David Yurdiga, Conservative, Fort McMurray—Athabasca, AB]

Thank you for the answer.

My next question is for Mr. Petrollini.

You mentioned there is quite a bit of red tape in the financing of any film. What type of red tape are you talking about? Is it government red tape, financial red tape, or is it a combination of the two?

[Lui Petrollini]

It's actually a combination of the two.

Let me just outline it as best I can. I'll take a British Columbia production as an example.

If you're producing a British Columbia film, you're required to submit applications to Creative B.C. for eligibility certificates, which will give rise to provincial tax credits at the end of the day. You're also required, on the federal level, to submit a similar application to CAVCO. That will be a lot of consistent information and a different application form, with costs to be incurred as well.

If you're interim financing your tax credits, as part of the financing you'll be required to have that interim finance in place. Typically, from what I see, it will be from one of the chartered banks here in Canada. One of the chartered banks, whichever it is that is providing the financing, will reach out to someone like me and ask me to go in and vet the budget and all of the assumptions behind that budget in order to provide a formal comfort letter outlining and supporting the calculations of the potential tax credits that this producer would be able to generate based on their production budget.

Following the completion of the production, there's also a need to apply it back to Creative B.C. and the federal government in CAVCO for completion certificates for those productions. Again, it's another application. It's another set of documents that focus more on the completion documents of the film, whereas the initial applications are based on budgetary information and assumptions related to the intended production of the film. Along the way, there's a lot of administration. There's obviously time that transpires between the time those applications are made and when they're finally processed. Moreover, a lot of time goes by in the eventual accessing of the tax credits, because tax credits are not paid to the producers until the filing of a corporate income tax return and the assessment of those returns by the CRA. That can occur a long time after the production is wrapped up, completed, and shown or distributed in the international marketplace depending upon how much time goes by. There's a lot of administration for the producer. You can imagine that in the case of a producer, very few of them can work on one production at a time. They may work on that one production during the time of production, but they're constantly developing new productions.

Ultimately, once a production has been wrapped up and delivered, that administration is still there while the producer is continuing to move on to produce or develop more productions for the future. There's a lot of administration, and that is the red tape that I'm referring to. To the extent that we can reduce the amount of red tape or work more quickly and cohesively as a group of organizations working towards the common good of developing the Canadian industry, then we'll be that much better off.

[The Chair, Conservative, Gord Brown]

Thank you very much.

We'll go to Mr. Stewart for seven minutes.

[Kennedy Stewart, NDP, Burnaby—Douglas, BC]

Thank you, Mr. Chair.

Thank you to the witnesses for coming today.

It's been very interesting, and I think you represent a good cross-section of the industry that is helpful for our deliberations here.

I'd like to zoom out. We've been talking a lot about tax credits and a little bit about other policy levers that we can use to help the industry. If we just leave tax credits aside, if you were going to blue-sky about what we could do, I'm wondering what kinds of policy levers we could use to help the industry grow,

Maybe all three of you could suggest one or two that we might consider.

Mr. Dhaliwal, perhaps.

[Ken Dhaliwal]

Sure.

I think Mr. Petrollini alluded to this, but one of the things—and this is a bigger policy question—is maybe relooking at the rules around what Canadian content is. This is something that was in the last policy review 10 years ago.

The point I'd like to make is that if you were looking at what Canadian content is, the current model that has existed in Canada for at least the last 15 years is a point system. The point system is based on 10 points. By contrast, looking at some of the other countries that have similar cultural tests or content tests, Germany has one that looks at local and global content and it goes beyond just the personnel. The Canadian test is just the personnel involved; the German test is much broader. The U.K. test, which is somewhere between the Canadian and the German test, is also much broader in terms of the number of points and the number of things that you can look at as elements of domestic content. It's not just the people involved but where it's shot, whether it has some history related to, in our case, Canada, or the diversity of Canada, and those kinds of things. I think that's actually a bigger policy point, but it's something that would impact the entire system and make it a little easier for producers to access things.

[Kennedy Stewart, NDP, Burnaby—Douglas, BC]

Thank you.

Mr. Joly, do you have something to add?

[J. Joly]

Again, I'm going to put my disruptive entrepreneur hat on here. We're in an exponential rate of change. The current speed of business, regardless of how you look at it, is too slow. You need to start deploying smaller bits of capital faster, experimenting more with it, and looking for measurable results. That's all my business, as well as making great content.

We can all pat ourselves on the back. We all make great content, but I believe that what we're terrible at is really building and understanding the audience in a meaningful way such that we can.... Again, this year's for learning, and next year's for earning, so that we're constantly moving forward as a nation to.... For example, there's WolfCop. I'm going to go back to it. As goofy as that title may sound, 90% of the people who worked on that picture were from Saskatchewan, a place with no tax credits at the time, and before we even financed the picture, they had fan art coming out of South Africa. They had blogs being written in Japan. Sixty per cent of their audience was international. They had done 160 million impressions, with 16 million unique people around the world, and with earned media worth almost $30 million without ever spending a dime. That, to me, is measurable KPI.

One of the things I always look at is that everybody is always asking for more money, and my big thing is that if we're going to put in more money, can we at least put it towards experimentation? Putting it into something like the government recently did with the accelerator program in Canada, where they took a five-year...where they deployed some capital to let it go to work to create more entrepreneurs, the people who are sustainable and who not only know how to make great content but also know how to market that content. More importantly in this world, in a world where there have never been more people so intimately connected, on such a massive scale, they know how to market themselves in this world.

I guess that's going on a little long, but I could go on. I'll leave it there.