So, you have an idea for a great movie and think it has “legs”. Where do you start?

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Let’s look at it like any product to be sold in the marketplace. To understand how to make and market your movie, there are three basic questions that you need to answer:

1. What are you selling?
2. Who is the seller?
3. Who is the buyer?

The Product

First, you need to translate your idea into a concrete form. It might be recorded on film or it might be recorded in a digital format. It will be your idea translated into a tangible product. Regardless of how you have recorded or plan to record your idea, for the sake of simplicity let’s call it a film. What you will be selling is the copyright in your film. This is your product: the copyright in your film.

Copyright is a bundle of rights. Think of a package of licorice strings. You can divide up the package amongst your friends in any number of ways. Some friends get more strings than others. You can do the same with copyright. You can divide up your copyright in various ways and then sell it. You can divide the copyright into different territories of the world. You can divide the copyright into different platforms that exist today to exhibit films. You can exhibit your film in theatres or on television, or allow it to be streamed or downloaded. You can break your film down into smaller pieces or versions. You can create episodes from a longer version. You can expand your film to make sequels, prequels and series. You can translate your film into different languages. All of these are the “strings” that you can bundle for sale. So, for example, you can sell your film to theatres limited to North America for one year. Or you can sell your film to a streaming service in Europe for three years. If your film is a nature documentary, you can create stock footage (that shot of the caribou herd running across the tundra) which you can sell. If you have a musical score accompanying your film, you can create a soundtrack which you can sell.

You can divide up your copyright in various ways and then sell it.Because you are not putting licorice strings in a box and shipping them off, you need to pay attention to what rights you are selling. Selling the rights to your film is complicated. You need to be clear on what exactly you are putting in the conceptual box that is being shipped off. You need to keep track of all the rights you have sold and make sure you don’t do the equivalent of selling 200% of your licorice strings.

The term “sell” is not usually used when dealing with copyright because generally you will not give away your copyright. The term used when you deal in copyright is “license”. You let a user have the copyright for a period of time, and then usually the user returns the copyright to you.

The Seller

It may seem obvious but if you are going to license the rights in the film, then you must own the rights in the film. The rights to a film are assembled much like a car is assembled in a factory. A car is made up of many parts that are assembled in a factory. A film is made up of many parts that are assembled in the production and post-production “factory”. The parts consist of (to name but a few):

• the screenplay
• the computer graphics and animation
• the performances by actors or musicians
• the music
• the set design.

You need to buy these parts just like the car manufacturer has to buy the steel and the rubber. The parts you need to acquire for your film include the copyright owned by the contributors to your film. These include the copyright in any screenplay, computer graphics, animation, artistic works used on the set, and music. It includes the performing rights of the actors and musicians. You buy these parts by licensing the copyright from the owners. When you license these rights, you need to make sure you have the correct bundle of rights. That is, you need to make sure you have enough rights from the contributors to be able to sell your film in the intended markets. For example, if you hire a writer for your screenplay and only license from her all rights for a single theatrical production, you will not have the right to release your film to television or on streaming services. It is advisable to hire a lawyer to help you acquire all the rights for your film.

It may seem obvious but if you are going to license the rights in the film, then you must own the rights in the film.Continuing with our analogy, who owns the car? It is the manufacturer. As the “manufacturer” of the film, you should own all the rights. Who is “you”? In the film world often the acquisition of copyright for your film starts off with you personally acquiring rights to a screenplay. You hire a writer to help you with the first draft. The license with your writer gives you the rights to the first draft screenplay. As the budget and the financing for your film grows, it usually becomes necessary or advisable to create a corporation. Once you have created a corporation, you need to transfer the first draft screenplay rights to your corporation. If you have acquired any other rights during this development stage, you need to ensure all these rights are turned over to your corporation. And as you move into production, you need to ensure that all copyright acquired going forward is given to your corporation. On completion of the production, your corporation needs to have acquired all the “parts” in order to be the owner of the film.

The Buyer

A buyer can appear at any time. There may be a buyer or buyers so interested in your film that they are willing to help finance the production process. The financing may be in the form of a license from a broadcaster who will pay you for the exclusive right to broadcast your film once the film is completed. The financing may be in the form of a distribution advance from a distributor who believes that your film will be very saleable and gives you an advance on future sales. In fact, in Canada, to be eligible for certain tax breaks and grants, you often need to have a broadcast license or distribution advance in hand before you can even apply.

If you do not find a buyer during the production process, or if you have not fully exploited the sales of your film, then you will be looking for a buyer of your completed film. You can try to sell the film on your own to the various owners of media platforms around the world. Or you can try to find a distributor who will help you do all or some of this job for you.

Because of the complexity in licensing copyright, any licensing of film rights needs to be set out in writing. Furthermore, under Canadian copyright law, you cannot enforce a licensing agreement that is not in writing.

As with the sale of any product, you need to be concerned with what you are being paid and when you will be paid. If you are selling directly to an end user, such as a broadcaster or streaming service, you will usually be paid a set amount. Generally there are conditions you must meet before you are paid. Make sure you have read your agreement and understand what these conditions or requirements are. For example:

• What are the specific technical requirements that your film must meet?
• Do you need to provide the translation into another language?
• Do you need to register the copyright in the territory?
• Do you need to provide proof of errors and omissions insurance?

If that is the case, you need to know what it will cost you to meet these conditions.

If you are using a distributor to sell your film, then you usually authorize the distributor to sign license agreements with the end user on your behalf. The distributor must keep your apprised of the license agreements they have entered into.

… under Canadian copyright law, you cannot enforce a licensing agreement that is not in writing.If you are allowing a distributor to sell your film, then what you are paid will usually depend on the sales they make from your film. Generally, the distributor collects all of the revenue from sales. Before the distributor pays you, it reimburses itself for its expenses in marketing your film. You and your distributor then split the remaining amount according to your agreement.  If you entered into any agreements to share profits with financiers, writers, musicians, cast or crew, these amounts need to be taken into account too.

What expenses the distributor can claim is often a point of contention. So is how the split with your distributor is calculated. You should carefully examine your agreement to make sure you understand how all these are calculated. The agreement with your distributor also needs to be clear on who pays out the profit shares to the other parties and out of whose share (yours or the distributor’s) these profits are paid.

Your distributor will usually pay you periodically. It could be monthly, quarterly, semi-annually or annually. The distributor should be required to provide, on a regular basis, a report to you on the sales of your film along with a clear calculation of how your share is determined. The distributor should also be required to provide you with copies of all licensing agreements for your film.

A sales agent is similar to a distributor in that you are giving them the right to sell the film on your behalf. The difference is that usually the sales agent negotiates the agreement with an end user. However, it is you, not the sales agent, who signs the agreement.

Conclusion

Technology is making it easier to pick up a camera and tell a story that you can share with the world. To be successful though, you need to understand the market you are in and what you are selling.

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In the past few months, lack of access to my regular activities has “forced” me to make significant behavioural changes to my daily routine. Some people may have taken the opportunity to get in better physical shape or learn a new language. I will be the honest voice and admit that I have mostly increased my consumption of movie and television products – besides baking bread, of course.

Regardless of what people might think, consuming media does not necessarily stop your brain from functioning! In fact, nagging questions kept popping up every time a new movie or a fresh episode would appear on my screen: Who rates this content? Why? How does it work for different platforms? Are there laws about the classification process? These highly existential questions launched a digging expedition to satisfy my own curiosity. My findings can perhaps answer queries you have secretly been harbouring in the back of your mind but were afraid to ask!

A movie rating – or classification – is a public notice that indicates what kind of content you can expect to see. It provides people with the information they need to make informed viewing choices for themselves and their children. This type of content evaluation is about protection rather than censorship.

Rating Systems

The United States does not have laws governing the classification of films. The American film industry voluntarily participates in a rating system created by the Motion Picture Association of America (MPAA). We (Canadian viewers) typically see these indicators as we consume a lot of American entertainment products.

In Canada, there is no federal rating system but there are associations and provincial laws that create them. Classification for home videos is usually based on the Canadian Home Video Rating System (CHVRS). Provincial laws and regulations apply to theatrical classification. Only four provinces have actual classification authorities: British Columbia, Alberta, Québec and Nova Scotia. The other provinces and territories have agreements with one of these four boards to use their classification services.

I have just thrown a lot of organizations and acronyms at you, haven’t I? Essentially what you need to know is that there are different authorities and agencies for rating films. And each authority or agency has a slightly different way of labelling content.

There is no universal application of ratings for streaming services.For example, most places have a 14A rating for films suitable for children over the age of 14 with adult supervision. But in Québec, this rating is called 13+. It is also interesting to point out that the same movie might receive a different classification depending on where you are. For example – and this will show my age – the movie “Saturday Night Fever” is rated 14A in Alberta, 18A in British Columbia, G in Québec, and R in Nova Scotia as well as in the MPAA system. Incidentally, each of these websites provides a search feature that you can use to check on any movie. Give it a try, it’s fun!

This can be a bit confusing but the good news is that rating systems provide more comprehensive details than a mere age indicator. Their actual description of content is a lot more consistent so you get the best information by reading a little further instead of just relying on the code itself!

When it comes to legal implications, most provinces only impose classification on movies shown in theatres charging admission in that province. In Alberta, the Film and Video Classification Act says movie distributors must apply for a theatrical classification from the government for any given movie in order to get a license to show the movie. Failing to do that, or allowing admission without abiding by the classification (i.e. allowing a 10-year-old alone to see a 14A movie), could result in fines or even jail time. Of course, these instances would have to be uncovered either via an inspection or a specific complaint. So yes, a few people in Alberta have the job of watching entire movies and applying a rating to them! Public participation is also welcome! If you want to find out about the process in Alberta, you can venture to the Alberta Film Classification Office website.

Streaming Services

That all being said, do you remember the last time you were in a movie theatre? These days, movie viewing happens primarily through “streaming” services. These services are not governed by provincial legislation or classification requirements. There is no universal application of ratings for streaming services. Each company compiles ratings from sources of their own choosing. So how do you know what the classification means? The key is once again to do some research. Even though streaming companies do not have to abide by the same rules, they still care about providing important viewing information.

When it comes to legal implications, most provinces only impose classification on movies shown in theatres charging admission in that province.Here is what I found out:

• Netflix has just recently (in 2018) made their ratings even more visible on screen. They have adopted a rating system loosely based on the MPAA.
• Disney + uses the MPAA rating system for their content. It is interesting although not surprising to note that there is no need for the R rating for Disney content!
• Amazon Prime endeavours to use a rating system for each country where their content is streamed, therefore adapting to local standards.
• Crave uses a rating system developed by the Action Group on Violence On Television (AGVOT). You can find this system on the Canadian Broadcast Standards Council website.
• YouTube presents a bit of a different system which relies heavily on uploaders to accurately rate their own content. Their tagging system provides very specific descriptions to facilitate the process. Instead of age-related classification, videos are rated by types of mature content (language, nudity, etc.) with three levels per type of content (none, mild and restricted 18+).

The good news about most streaming services is that they also allow for parental control features!

It is important to note that, in Canada, content broadcast over the internet does not require licensing from the Canadian Radio-television and Telecommunications Commission (CRTC). When it comes to offensive content, there are laws and industry-developed guidelines to deal with content generated in Canada. Your internet service provider’s “acceptable use policy” (you know, the small writing that we never read?) can provide more information about their standards. You can always report concerning content of an illegal nature to local police as well.

Another Rabbit Hole?

As I was emerging from the bottomless hole that is the internet, I noticed that different ratings are also used for video games through the Entertainment Software Rating Board (ESRB) … perhaps an article for another time? For now, I really need to replace my screen with some kind of natural environment (rated G) where I can find real rabbits prancing around in the daylight. Until next time!

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For over a century, music has been used in film to not only enhance the viewing experience, but it has become very much an integral part of the film. For example, it is hard to imagine watching Star Wars without the score by legendary composer John Williams. Songs, by especially popular artists, can also rise to become the proverbial flag-bearers of a film. Think “Eye of the Tiger” by Survivor in Rocky III or, even though it makes me gag mentioning it, “My Heart Will Go On” by Celine Dion in Titanic.

Aspiring filmmakers know of the power of using music in their projects. In these times of COVID-19, you might be more tempted to add music to your video content that you are making more and more for virtual classrooms, seminars and conferences. But how can you legally use music in your films and video projects? Unfortunately, the answer is not very straight-forward.

I attended a music licensing workshop a couple years ago by Elizabeth Klinck, who is a very competent researcher and music supervisor for hire. She described the system of licensing music for film as “Byzantine.” And she’s not wrong. Different types of rights need to be licensed depending on the music you are using, such as an existing recorded song, an existing song for which you want to record your own rendition, or a new song you want to have written and recorded. For sake of reference, “song” refers to a musical work whether or not it includes vocals.

1. Using an Existing Recording of a Song

Let us say you really like Taylor Swift and you think her latest hit “Cardigan” would work amazingly in your short film. You would need to obtain not one, but two licences.

The first of those is a synchronization licence (‘sync licence’) to reproduce the music “in timed relation” with your audio-visual work. Here, the songwriters or composers are giving you permission to use the song in your film. You would track down, or hire a music supervisor to track down, which big label(s), e.g. Universal Music Group, administers the publication rights on each of those songwriters’ behalf and their respective percentage ownership of those rights. You would then try to negotiate a fee for the sync licence that would fit into your budget and based on how you are planning to use the song. Then the publisher(s) would prepare their standard sync licence agreements for all parties to sign. But you are unlikely to even get that far for a Taylor Swift song, unless you have a massive music budget for your project. Even if you are able to negotiate a sync licence price for “Cardigan”, you still only have one-half of the permissions you need!

… stock music sites try to be a one-stop shop where their licence can include all rights to the music you need to use in your film.The next permission you need for using “Cardigan” in your film is a master use licence, which is the right to use that particular recording of the song. The master use rights holders for that recording, likely one or more major record labels for that Taylor Swift song, is not necessarily the same as the publishers for the sync rights. Like with the sync licence, you (or your music supervisor) would track down all of the potentially multiple rights holders of the master and negotiate a fee, which must usually be no less than the fee for the sync rights.

Unlike for public performance rights (e.g. playing recorded songs in a restaurant), there is no central administrative organization like SOCAN or ASCAP that doles out sync and master use licences based on set rates. Sync and master use rights are all free market negotiable with their respective rights holders, unfortunately. Byzantine indeed!

You may want to steer clear of expensive songs by popular artists like Taylor Swift and instead license songs from small local bands. The same rules apply here, except you might be dealing with the artists themselves to figure out the percentage splits between the songwriters for the sync rights and whoever owns the master. You can find examples of sync and master use agreements on this page.

2. Recording a New Version of an Existing Song

There’s a fantastic cold open for a Brooklyn Nine-Nine episode where Jake Peralta gets a lineup of perpetrators to sing a few lines of “I Want It That Way” by the Backstreet Boys. Unlike licensing an already recorded rendition of a song like in our above Taylor Swift example, there is no master here to license because the actors sing it. Thus, the context of the sync rights they would have negotiated with the publication rightsholders would be to perform parts of that copyrighted song. I have heard that this can sometimes push up the fees so much that it would be cheaper to just get a sync and master licence to use a version that was already recorded! However, if performing your own version or a new version of an existing song is important, you will need to explore this avenue of licensing.

3. Creating New Music

Different types of rights need to be licensed depending on the music you are using …Another way of legally using music in your film is to hire a composer or songwriter to write it and record an original song. Budget permitting, this is the choice for film producers who want a custom score to convey the intended effect and emotions in the film. The ins and outs of a composer agreement deserve an article in itself, but this is one way to ensure you have all the rights you need in the music for your project.

4. Stock Music and Public Domain Music

There are a couple of options to avoid the high costs and having to navigate the complexities of the above options. Stock music from sites like Pond5 and PremiumBeat can be relatively affordable sources for music to use in your film or video project. Rather than having to chase down many rights holders, stock music sites try to be a one-stop shop where their licence can include all rights to the music you need to use in your film. However, you should carefully review – better yet have your lawyer review – the terms of their standard licence agreement to make sure that licence gives you the rights you need because not all stock music sites are created equal and they usually have different levels of licences. On several occasions, I have reviewed the standard terms of stock music licences and told clients to absolutely not use music from that site.

Finally, there is music from public domain (often referred to as just “PD”) sources. For PD music, this can of course be a cheap (i.e. free) way of obtaining music for your project. However, you need to make sure that the music you are considering is fully in the public domain. Just because the copyright term of the composition for Mozart’s “Symphony No. 40” has long expired, that does not mean at all that the London Philharmonic Orchestra’s performance and recording of it 10 years ago is PD. You may still need to hire a music supervisor or a researcher to verify that a musical work (and its recording) is PD.

So, cue the final credit roll and happy hunting for music to use in your next film or video project!

If you want to learn more about music licensing in film, please check out our four-part series on that subject we posted in summer 2019 on our entertainment law podcast Legal Cut Pro, which you can find on your favourite podcast catcher.

Jean-Baptiste Colbert said, “The art of taxation consists in so plucking the goose as to procure the largest quantity of feathers with the least possible amount of hissing.” I suspect that this is the closest that most would equate tax and the arts.

But the arts provide the livelihood of artists, and income tax applies to that livelihood as it does to other forms of income. Unusual tax issues can arise within the arts, issues which the income tax system is forced to address. This article discusses a sampling of such issues.

The Kindness of Others

Photo from Pixabay

Many arts organizations are charitable organizations. Most Canadians are well aware that donations to registered Canadian charities generate a personal income tax credit.

Donations of “cultural property” to organizations such as museums can generate a further benefit – no portion of capital gains on such property is included in income for tax purposes. Prior to donation, the Canadian Cultural Property Export Review Board must certify and value the property. The receiving institution may be familiar with this process, or at least willing to learn in order to secure the donation.

What is “Art”?

The income tax system thrives on definitions. Art, by its nature, defies precise definition. As a result, different provisions may apply to different “arts”. One special rule is provided for a business which is an “artistic endeavour”. The legislation describes an artistic endeavour as “creating paintings, prints, prints, etchings, drawings, sculptures or similar works of art” but excludes a business which reproduces such works. The individual carrying on such a business may elect to value inventory of that business at nil.

Normally, inventory must be valued at the lower of its cost or fair market value at each business year-end. Imagine trying to determine the cost of canvasses, paint or supplies used in sculpture which form any given piece of artwork. Then, assess the value of any artist’s work when it has not yet been sold. This election provides a much-needed simplifying assumption.

Given the cliché regarding the value of art during and after the artist’s lifetime, determining that value immediately prior to death – to report a deemed disposal at fair market value – would create further interesting arguments at the Tax Court and unwelcome costs for those administering, or benefitting from, the artist’s estate.

Working for the Man

Of course, not all artists are self-employed. Employees who earn income from an “artistic activity” may deduct expenses incurred in respect of such costs, to a maximum of the lesser of $1,000 and 20% of their earnings from such employment. They can carry forward any excess for possible deduction in future years. Certain amounts deducted under other provisions, related to interest or depreciation of a vehicle, or to musical instruments (discussed later in this article), reduce this annual limit. Other expenses deductible under the rules applicable to all employees could be deducted under those provisions. For example, employees may deduct costs of supplies they must provide which they consume in the course of their employment.

Two special tax credits are available to corporations involved in film or video production.The definition of “artistic activity” is broader than the “artistic endeavor” described above. Artistic activity covers:

• creating (but not reproducing) paintings, prints, prints, etchings, drawings , sculptures or similar works of art;
• composing dramatic, musical or literary works;
• performing of a dramatic or musical work as an actor, dancer, singer or musician; or
• any activity in respect of which the taxpayer was a member of a professional artists’ association certified by the Minister of Communications.

 The Sound of Music

Employed musicians enjoy a special provision allowing them to deduct costs related to a musical instrument which they must provide in the course of their employment. These costs could include rental, maintenance or insurance of the instrument. As well, employed musicians can claim a “capital cost allowance” (the tax term for depreciation) on these musical instruments. Few other assets generate such claims for employees.

For incorporated musicians, the treatment of royalties they receive on their work as “active business income” (ABI) or “specified investment business income” (SIBI) significantly impacts the rate of corporate taxes applicable. SIBI is subject to higher corporate tax rates. This includes income earned from property, generally including royalties.

A 2018 tax case (Rocco Gagliese Productions Inc. v Her Majesty the Queen) examined the application of these provisions to a corporation which composed music. The Court concluded that royalties were the manner in which music composers collected active business revenues. Residual royalties from rebroadcasts were incidental to that active business. As such, this income was ABI for a composer, and not SIBI.

For a taxpayer like myself – whose ability to produce music of a quality anyone would wish to hear is limited to the radio, the stereo and streaming services – such income would be SIBI earned on property (purchased royalty rights). It would be taxed like term deposit interest or real estate rental income. The composer, however, carries on the active business of composing music.

Lights, Camera – Tax Credits

Two special tax credits are available to corporations involved in film or video production.

The definition of “artistic activity” is broader than the “artistic endeavor” …The Canadian Film or Video Production Tax Credit is available to certain Canadian corporations whose primary activity is film or video production carried on in Canada. A refundable income tax credit is available for 25% of “qualified labour expenditures” incurred in respect of a production certified by the Minister of Canadian Heritage. Among other requirements, certification requires that Canadian entities retain an “acceptable” share of revenues from non-Canadian markets.

Eligible labour costs are subject to detailed definitions. They can include payments to both employees and non-employee service providers (with the latter restricted based on the service provider’s labour costs), with restrictions for services rendered by non-residents of Canada.

The Film or Video Production Tax Credit provides similar assistance for “accredited productions”, requiring similar Ministerial certification. The rules are similar, but the credit is 16% of “qualified Canadian labour expenditures”. These must relate to services rendered in Canada in respect of the production. This is a less lucrative credit available for productions not meeting the requirements of the first credit.

Some provinces also have credits for film, video, digital media or animation projects. These would expand the scope of this article beyond any practical size. Interested readers can review PWC’s summaries of these incentives at PWC’s website.

Gimme Shelter

Tax credits often attract tax shelter promoters, which have intersected with the arts over the years. The Canadian Film or Video Production Tax Credit discussed above is not available for any production where the production, or a person with a significant interest therein, meets the definition of a tax shelter.

A series of high-profile tax shelters in the 1990’s and early 2000’s, referred to as “buy low – donate high” shelters, attempted to take advantage of uncertainties in the term “fair market value”. These shelters purchased various commodities in bulk and then donated them to charities. They would claim the donation based on a much higher value, on the argument that this should be without the discount applicable to bulk purchases. In the years since, the courts have held that many of these tax shelters relied on unsupportable valuation numbers, even considering these uncertainties.

In the interim, however, the government implemented legislation to limit the value of certain donations of property to the cost of the property. These rules apply to property acquired under “gifting arrangements” which were tax shelters and other properties held for less than three years before being donated (ten years if the property was acquired for the purpose of being donated).

The Power of the Press

Employed musicians enjoy a special provision allowing them to deduct costs related to a musical instrument … According to my own less than comprehensive research (a google search), journalism is an art, not a science. The government has recently implemented several tax incentives to assist Canadian journalism. These incentives are not addressed here for reasons of length of the article, the fact that few people would include journalism in a plain English definition of “the arts” and to save the topic in case there is a future edition of this publication addressing legal issues relevant to the news media. However, should the reader be interested, the Canada Revenue Agency discusses these measures.

The Fine Print

As with virtually all articles on taxation, the above is a general overview. Often, specific criteria must be met to claim certain credits and deductions. Professional advice to ensure a complete understanding of these requirements is strongly advised.

Overall

As with many cultural areas, the Canadian income tax system seeks to offer incentives to Canadian taxpayers within, or contributing to, the arts in Canada. As indicated above, however, the rules can become quite complex – one might say there is an art to both drafting and interpreting such legislation. At least, if one is a self-confessed tax nerd lacking any true artistic skills, which certainly describes the writer.