Canada's tax department said March 31 that it will deny about CAN$140 million ($114.7 million) in deductions claimed by a popular tax shelter for investments in U.S. movies shot here in 2001.

TORONTO (The Hollywood Reporter) -- Canada's tax department said March 31 that it will deny about CAN$140 million ($114.7 million) in deductions claimed by a popular tax shelter for investments in U.S. movies shot here in 2001.

The move by the Canada Revenue Agency against Vancouver-based film-financier Sentinel Hill Ventures Corp. puts a cloud over about CAN$3 billion ($2.5 billion) in tax-assisted film financing raised by tax shelters in Canada between 1998 and 2001 for U.S. shoots.

"It's very scary. A lot of people will get hurt by this," Malcom Silver, a Toronto film financier, said of the CRA decision on Sentinel Hill.

But beyond the roughly 2,300 investors in Sentinel Hill's 2001 tax shelter, the audit has no direct impact on current U.S. movie production in Canada, as Ottawa phased out tax-sheltered film financing in 2002 at the same time it introduced tax credits and other lucrative incentives to keep foreign producers shooting here.

But Ken Gordon, a partner at Sentinel Hill considering taking Ottawa to court, said federal tax auditors had gone back on a 1998 advance tax ruling from the CRA that enabled the film financier to market units in a tax shelter to investors who could then deduct losses due to movie startup costs when filing tax returns.

"The federal government is reversing a position that they authorized in advance, and causing detriment and damage to investors," Gordon said.

Gordon said Sentinel Hill in 2001 raised about CAN$900 million ($737 million) for tax-sheltered investment in non-Canadian movies shot here, and that the CRA had denied around CAN$168 million ($137.6 million) from about CAN$500 million ($409.6 million) in deductions claimed.

Collette Gentes-Hawn, a CRA spokeswoman, declined on privacy grounds to discuss the Sentinel Hill tax ruling.

Gordon insisted the deductions denied by the CRA audit had little to do with actual movie-making costs, and related more to financing costs, fees paid to studios, and other non-movie budget expenses.

"The bottom line is investors and people will be wary of relying on an advanced tax ruling and of investing on the basis of an advance ruling," Silver said.