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Netflix production stills for Alias Grace starring Margaret Atwood.

Sabrina Lantos /Netflix

Strains of violin music waft through a cavernous sound stage in Toronto’s north end, as a group of ballet students rehearse. On a set built to resemble a dance studio, the air is suffused with smoke to enhance the quality of the light streaming through the arched windows.

The set of the coming drama Tiny Pretty Things was chosen by Netflix Inc. to show off as an example of its investment in production in Canada. In 2017, the online streaming service announced a deal with the federal Department of Canadian Heritage, committing to spend $500-million over five years on producing film and TV content in the country. Netflix now says it has already spent more than that amount in just two years.

“Our production levels have been steadily increasing over the last three years in Canada," said Stéphane Cardin, Netflix Canada’s director of public policy. Canada is Netflix’s second- or third-largest production territory in the world, depending on the year.

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Netflix has a stake in revealing the progress of its investment: the government has been reviewing its cultural policy, and considering whether streaming services including Netflix, Amazon and soon-to-arrive services from Apple and Disney should be regulated like broadcasters. Whoever wins the next federal election will inherit this policy question: How should Canadian culture be funded, and should streaming services be required to pay into the system?

Netflix has maintained that it already spends a significant amount of money on Canadian content production and should not be subject to spending requirements and rules about what constitutes a Canadian production, as traditional broadcasters are.

Tiny Pretty Things is an example of Netflix’s spending on Canadian production, if not strictly on Canadian stories. The show is based on an American novel and set in Chicago. Its writer and show runner is Michael MacLennan, a Canadian playwright and TV writer and producer; the cast includes Canadian actors and dancers trained at the National Ballet School; the shoot is in Toronto; and it employs Canadian crews and set builders.

“The quality of the show depends so much on those key creatives," Mr. MacLennan said.

Canada has reached a record amount of TV and film production, according to a recent report from the Canadian Media Producers Association, and almost all of the growth is coming from foreign productions. “Foreign location and service” accounted for 53 per cent of the $8.92-billion production industry in the CMPA’s 2017-2018 fiscal year.

The amount of activity means that studio space is at a premium. Last February, Netflix announced a deal to create a dedicated production hub in Toronto, signing multiyear leases at Cinespace Studios and Pinewood Toronto Studios. (Netflix does not count the leasing costs toward its $500-million commitment.) It is also increasing its production activity in other markets, especially Vancouver.

“We have stages we’re going to just try to occupy year-round, at this point … and to start to make overall deals with our line producers and with the crew, and just keep them year-round," said Lisa Hamilton Daly, director of original series at Netflix.

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Vancouver has always been a busy production destination for American studios, but activity has doubled since 2012, and recent growth is driven mostly by the streaming companies, said David Shepheard, director of the Vancouver Film Commission. Some in the industry say foreign investment is key in convincing developers to invest in new spaces, and in building up Canadian production talent.

“The local business is built on the back of that service business, and now it stands on its own,” said J. Miles Dale, a Canadian producer who won an Oscar for The Shape of Water and is working on another film with director Guillermo del Toro at Cinespace – where Netflix is subleasing the space to a U.S. studio for the production.

Netflix is also on track to spend another $25-million announced in 2017 to fund development of Canadian talent. Its funding has already gone to programs including the Pacific Screenwriting Program -- where a graduate was hired to work in the writers’ room on the Netflix show The Order. It has also funded the launch of development programs at indigenous arts organization ImagineNATIVE, whose leaders hope it could lead to professional opportunities for filmmakers and writers.

“My family, friends, we all have Netflix and we want to see our content on there too,” said ImagineNATIVE’s executive director, Jason Ryle.

But critics say that creating jobs is not the same thing as fulfilling a policy goal of supporting Canadian culture.

“Canadian culture is not just based on where the money is spent. Canadian content has to do with creating our own stories,” said Daniel Bernhard, executive director of cultural advocacy group Friends of Canadian Broadcasting. He believes streaming companies should be subject to stricter rules. “Netflix’s definition of Canadian culture is purely industrial. ... For this company to say that their goodwill should be sufficient, is ridiculous.”

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Former heritage minister Mélanie Joly faced particular criticism of the Netflix deal in Quebec. Mr. Cardin acknowledges the company could be doing more there. Its first Quebec-made film, Jusqu’au déclin, has just wrapped shooting, and Netflix has inked another deal for its first drama series made in the province.

“Everyone’s still skeptical,” the film’s director, Patrice Laliberté, said. “Everyone’s very curious to see if that investment will be significant [in the province].”

Netflix has also discovered that there is an audience for distinctly local stories even outside of the markets where they are filmed – the Spanish series Elite was a global hit, for example – which means producers do not feel as much pressure to pitch shows that are set in Anytown, USA.

Netflix has recently signed a deal with Toronto-based Neshama Entertainment for a new show set on Canada’s east coast that will be unmistakably Canadian, Ms. Hamilton Daly said.

“For us, the important thing is that we are actively contributing to the Canadian ecosystem," Mr. Cardin said.

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