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William Shatner, part owner of C.O.R.E. Digital, which was forced into bankruptcy last month, tried to save the company after the Province of Ontario pulled out of negotiations with C.O.R.E. and the Royal Bank of Canada.

Danny Moloshok/Reuters

An air of mystery continues to swirl around the recent demise of Ontario's largest animation and special-effects studio, C.O.R.E. Digital.

The 16-year-old Toronto company, partly owned by actor William Shatner, was forced into bankruptcy last month, laying off 120 staff and shutting production of several projects, including work on a TV miniseries, The Tudors, and on Planet Sheen, a new animated series for Nickelodeon.

The bankruptcy followed a seven-month negotiation involving C.O.R.E., the Royal Bank of Canada and Ontario's Ministry of Finance. By the middle of March, according to documents filed in Ontario Superior Court, C.O.R.E. was in default on loans, lines of credit and rent to the tune of $7.3-million.

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Until then, according to an affidavit sworn by a Royal Bank executive, government officials had indicated a willingness to help C.O.R.E find a solution to its problems. Indeed, said former C.O.R.E. president Ron Estey, the discussions were so advanced that finished documents had been drafted.

The lingering mystery is what caused the government to change its mind, "not at the 11th hour, but at 1 a.m.," Mr. Estey said.

Colin Cochrane, the RBC special loans adviser who handled the dossier, declined to comment. However, when Queen's Park backed out, the bank immediately triggered bankruptcy proceedings.

The government's position, according to Finance Ministry spokesman Scott Blodgett, is that no formal loan program was available under which C.O.R.E. would have qualified. But as various industry observers have noted, it would not have taken seven months to determine this.

In any event, said Mr. Estey, the company wasn't seeking new money - simply a guarantee of its indebtedness.

Mr. Shatner was unavailable for comment, but it is known that he personally made calls to senior Ontario government officials, seeking to change their minds.

"It's a shame to see them go under," said Dennis Berardi, president of Toronto's Mr. X Inc., another special-effects house. "It underscores what a tough business this is - really tight margins, a tight labour pool and high capital costs."

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The recession, fierce competition and the sharp rise of the Canadian dollar have also complicated the business environment.

Although the special-effects side of the business has lately enjoyed something of a rebound, animation continues to languish. Another Toronto producer, Cookie Jar Entertainment, recently laid off 25 staff, most from its animation division.

Burdened by a $21-billion debt, Ontario last summer committed $263-million, over 10 years, to Ubisoft, a video and computer games maker. The French-owned company has promised to create 800 jobs here over the decade.

Making the announcement last summer, Premier Dalton McGuinty said the tax incentives were "about strengthening the industry we already have here."

"So McGuinty has a quarter of a billion dollars to cede to a foreign company for 800 possible jobs, but can't underwrite less than $10-million to save 120 existing jobs at C.O.R.E," said one industry executive. "It's perplexing."

Vying to bring job-creating productions to Canada, many jurisdictions dangle ever-more sweetened tax subsidies. Ontario offers one credit - OCASE, a rebate on labour costs - expressly tailored to post-production suppliers. The program has worked, but not without complications.

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For example, TV and film producers often ask animators to discount their services by the amount of their future rebate. To win the business, they do, though it might be two years before the tax credit is rebated to the animator.

Even then, companies incur the costs of administering the tax credit files. And, noted Mr. Estey, they have no recourse if the Canada Revenue Agency later disallowed a credit application.

Mark Mayerson, an animator who teaches at Sheridan College, said, "The large multinational media conglomerates pit the [special]effects studios against each other, causing budgets to go as low as possible … often putting studios into the red."

One reason Ubisoft was a better bet for Ontario than C.O.R.E, Mr. Mayerson suggested, is that Ubisoft owns intellectual property and earns a trailing interest after games are released. Ubisoft, in short, has cash flow. "C.O.R.E., once it finished a project, never received another nickel. It and all effects studios are in a much riskier business."

Too late to help save C.O.R.E., noted Michael Carter, president of Computer Animation Studios of Ontario, an industry association, Ontario sweetened its tax credits in the 2010 provincial budget. Ironically, "those changes were in large part due to C.O.R.E. and Ron Estey."

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