The Digital Media Tax Credit Guide for Gaming Companies in Canada

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One of the under-appreciated aspects of gaming is just how difficult and expensive it is to ship a popular mobile, PC or console-based game title. Premium “AAA” franchise games easily rival Hollywood films in terms of budget size, often hitting $60-80 million or more when everything from game design to testing, art design, programming, quality assurance and marketing are all factored in. Competition is intense across the development budget spectrum, and gamers are an increasingly demanding and fickle crowd. Canadian gaming entrepreneurs and up-and-coming studios need every support available, from funding, talent, infrastructure and generous government support to launch the next big product.

Luckily, Canada has a solid record and has been successfully punching far above its weight in global gaming revenues for many years, ranking 8th overall at just under $4 billion in annual revenue. To continue to stimulate the growth of this sector, and to lure the jobs and considerable economic spillover benefits that come with it, the federal government and provinces have established a lattice of interlocking incentives schemes.

The federal government offers the Scientific Research and Experimental Development (SR&ED) credits, and many provinces offer a broadly similar array of Interactive Digital Media Tax Credit (IDMTC) programs. Within Canada, Ontario, Quebec, British Columbia and Nova Scotia have some of the most utilized provincial tax credit programs to accompany their growing local industry ecosystems. As important as tax credits are, companies must also ensure they have access to other key ingredients, such as qualified talent, high-quality specialists and advisors, and high-powered industry associations. As industries become established in a given province, they exert a kind of gravitational pull on follow-on studios (e.g. network effects), making it more difficult for provinces with less well-developed industries to break into the big leagues. Although Alberta phased out its IDMTC in 2019, in general provinces are always keen to attract new gaming entrepreneurs and it never hurts to reach out to local chambers of commerce, provincial ministries of finance and other local industry groups to see if there are sweeteners available. So, if you’re looking to take advantage of these credits, what are the key things you need to know? 

 

The Basics: Who qualifies? 

Provinces with strong media-based industries have adopted a tailored approach to their tax credit programs, creating unique programs for content creators from diverse industries such as filmmaking and animation to game design. This industry targeted approach between both layers of government has led to a flourishing landscape of incentives and tax credit programs, with over 450 sometimes conflicting, sometimes overlapping schemes available for qualifying industry participants.  Interactive Digital Media Tax Credits targeting the gaming industry in particular, have the following broad requirements: 

  • Provincial tax registration. Participating firms must register with the provincial ministry of finance for the tax years for which credits are being claimed. 
  • Residency. Claimants should be taxable Canadian corporations with permanent residency in the province for which credits are being sought. Tax-exempt entities, labour-sponsored venture capital corporations, employee venture capital corporations or any entities that are owned/controlled by any labour-sponsored or venture capital entities are excluded from the program. 
  • Absence of conflict/redundancy with other credit programs. Scientific Research and Experimental Development (SRED) tax credits have both provincial and federal components. Companies are encouraged to apply for federal tax credits, however, they must generally choose between the provincial version of this program or the specific industry tax credit that may also be available (IDMTCs in our case). British Columbia for example, does not allow both provincial SRED credits and the IDMTC to be applied for in the same tax year. While BC attempts to prohibit the “double-dipping” of the provincial tax credits schemes, other provinces have different policies. Moreover, be conscious that federal and provincial SR&ED schemes are different beasts entirely. It is often possible to leverage a provincial IDMTC along with a federal SRED tax credit. When it comes to competing province-specific tax schemes only, companies often wonder which program offers the superior benefits. An A/B test can also be completed for a particular gaming firm using forecasted spending levels while comparing and contrasting the relative savings across different tax credit programs. As long as the input assumptions are sound, it is often possible to determine which schemes are in the company’s best interest to pursue. 
  • The company must have qualifying net eligible salaries and wages. The focus of the provinces is to apply interactive media tax credits to salaries and wages that are directly involved in the production of interactive media. Some provinces such as Ontario have more flexibility for the inclusion of some overhead/administrative costs, while others such as BC strictly exclude the consideration of unrelated activities. 
  • Companies must have a certain scale. In Ontario, companies applying for the Ontario Interactive Digital Media Tax Credit (OIDMTC) “must have at least $1,000,000 of qualifying labour expenditures within any period of 36 months that ends in the tax year.” BC’s approach involves a more flexible approach for the principal business activities of firms with over $2 million in eligible labour costs. Gaming and gaming-related companies with over “$2,000,000 in eligible salary and wages for the tax year” automatically meet the ‘scale’ requirement for BC’s IDMTC. Smaller companies with lower than $2,000,000 but more than $100,000 in eligible salary and wages must meet stricter guidelines on their principal business activity being interactive digital media production, or the “provision of eligible activities to a corporation that has a permanent establishment in British Columbia and either has as its principal business the development of interactive digital media products or has eligible salary and wages of equal to or greater than $2,000,000* in the tax year.” The gaming production vertical often involves a large number of studios and subcontracting firms working together at various times on long, complex production timetables. The policy attracts large studios with diversified and not exclusively gaming production-related operations, while being more narrowly targeted to smaller studios in the market with more concentrated game production labour expenses. 

 

What if my industry isn’t quite a fit with interactive media? If you have a company that produces content that’s outside of gaming or simulations, there may well be a program that is available for you, it just likely won’t be the IDMTC program. Provinces generally have specific tax credit programs for industries such as film production, animation, audio-visual recording and more, so if you don’t see your industry represented by the interactive media tax credit, that doesn’t mean there isn’t a comparable tax credit program available.

 

What can you claim

A Quick Overview of Provincial Tax Credits on Qualifying Interactive Media Expenditures

British Columbia – IDMTC

Tax Credit on Qualifying Wages/Salary: 17.5%

Approximate Filing Fee: $1,000 – $5,000

Selected Local details: Over 900+ companies in the digital media sector

Certificate of Eligibility/registration certificate required? No

Eligibility Requirements
  • Registered with the BC Ministry of Finance for the tax year for which tax credits are being claimed. 
  • Has a permanent establishment in BC at all times during the tax year. 
  • Is a taxable Canadian corporation. 
  • $100,000 to $2,000,000 of qualifying salary/wage expenses if an exclusively gaming-related company. 
  • Over $2,000,000 of qualifying salary/wage expenses
  • Has not filed the tax credit late (>18 months after the end of the tax year
  • Has not applied for the provincial SRED tax credit for the tax year
  • Is not a labour-sponsored or small business venture capital corporation (See other exclusions in Part 3)
  • Can attach the T2 Corporation Income tax return to the application. 

 

Ontario – OIDMTC

Tax Credit on Qualifying Wages/Salary: 35%

Approximate Filing Fee: $100 – $2,000

Selected Local details: Marketing and distribution costs can sometimes also be covered.

Certificate of Eligibility/registration certificate required? Yes

Eligibility Requirements
  • Registered with the Ontario Ministry of Finance for the tax year for which tax credits are being claimed
  • Has applied for and received a certificate of eligibility from “Ontario Creates”
  • Is a taxable Canadian corporation 
  • Can attach the T2 Corporation Income tax return to the application. 
  • The corporation developed, started developing or completed the development of an eligible product or digital game at a permanent establishment in Ontario operated by the company. 
  • The company wasn’t controlled by a company or companies whose taxable income is exempt under section 57 of the Corporations Tax Act (Ontario) or Part III of the Taxation Act, 2007 (Ontario)
  • The company is not a prescribed labour-sponsored venture capital corporation.  
  • To make a claim under Section 93.1 as a Qualifying Digital Game Corporation, your company has to have incurred a minimum of $1 million in Ontario labour directly attributable to the development of a single game over a three year period.

 

Quebec

Tax Credit on Qualifying Wages/Salary: 26.25 – 37.5%

Approximate Filing Fee: $116 – $58,000

Selected Local details: Giants such as Ubisoft, EA, and Gameloft have a major presence here.

Certificate of Eligibility/registration certificate required? Yes

Eligibility Requirements
  • Company has an establishment in Quebec and produces eligible multimedia titles. 
  • Must have a valid initial qualification certificate issued by Investissement Quebec certifying that the title being produced satisfies all requirements. 
  • The title being developed must “include an appreciable quantity of three of the following four types of data in digital form: text, sound, fixed images and animated images. However, a title will be deemed to satisfy this condition if it is intended for customers with a disability” or “is produced on electronic media and controlled by software that allows for interactivity” 
  • The title must feature a French version and this version must at least be equivalent to the versions produced in other languages (exclusions for vocational training titles apply). 
  • Work completed must be deemed to be eligible production work as it concerns interactive and digital gaming production: “50% of amounts paid to a subcontractor dealing at arm’s length with the multimedia producer for the execution of eligible production work in Québec.”

 

Nova Scotia – DMTC

Tax Credit on Qualifying Wages/Salary: 17.5%

Approximate Filing Fee: $0

Selected Local details: HB Studios and Ubisoft have locations here. Qualifying companies can claim the lesser of 50% of the qualifying expenditures or 25% of total expenditures. Companies may also be eligible for a regional bonus of 10% on qualifying expenditures and 5% on total expenditures. Max tax credit = 60% on qualifying expenditures and 30% on total expenditures.

Certificate of Eligibility/registration certificate required? Yes

Eligibility Requirements
  • Must be a taxable Canadian corporation 
  • Corporation must have a “permanent establishment” in Nova Scotia; a fixed place of business in the province, assets in the province to develop the product, and personnel in the province who can contract on behalf of the corporation 
  • The content being produced must be “interactive” and primarily intended to educate, inform or entertain users. 
  • The company must not be a labour sponsored venture capital corporation under the federal Income Tax Act. 
  • The content must achieve its primary purpose of presenting at-least two of three formats: text, sound or images.  
  • “Projects with budgets above $500,000 require an audited cost report; budgets in excess of $100,000 but equal to or less than $500,000 require a review engagement report; and budgets equal to or less than $100,000 require an affidavit certifying the final cost report. These affidavits must be notarized.” 

 

Newfoundland & Labrador – IDMTC

Tax Credit on Qualifying Wages/Salary: 40%

Approximate Filing Fee: $0

Selected Local details: Tax credit limited to $40,000/employee and $2 million/company per year. Applications must be received within 6 months of the end of the tax credit year.

Certificate of Eligibility/registration certificate required? Yes

Eligibility Requirements
  • It primarily carries on the business of interactive digital media development;
  • It has a permanent establishment in the province of Newfoundland & Labrador
  • It is incorporated under the Corporations Act or an Act of the Parliament of Canada or another Canadian province;
  • All or part of its income is not exempt from taxation under Part I of the federal Income Tax Act; and
  • Holds a valid registration certificate under the IDM program.

 

Prince Edward Island

Tax Credit on Qualifying Wages/Salary: 25%

Approximate Filing Fee: $0

Selected Local details: Greater focus on aerospace and marine tax credit applications; The Innovation and Development Labour Rate (IDLR) provides a rebate equal to 25 percent of eligible salaries and wages. Eligible salaries and wages are paid to PEI residents for incremental, full time positions (1850 hours), and each position must have a gross wage of at least $35,000 per annum. Any individuals maintaining ownership in the company are not eligible.

Certificate of Eligibility/registration certificate required? No

Eligibility Requirements
  • Applicants must submit the following: 
  • Business Plan Marketing Plan Project
  • Feasibility or Market Study 
  • Competitive Analysis 
  • Resume 
  • If the application concerns a study, please provide the consultant’s proposal(s) and the study’s terms of reference. (Costs should be supported by written quotations.)
  • Outline the history and description of your business. 
  • Existing businesses are required to provide detailed Financial Statements for the previous two years. 
  • New businesses and businesses planning expansions are required to submit complete business plans. 
  • List all shareholders and key management personnel. 
  • Describe the proposed project or activity in relation to the products and/or services delivered by your company. 
  • Describe the economic benefits to your organization and to Prince Edward Island. 
  • Provide detailed information on the estimated costs of the proposed project or activity. (Cost estimates should be supported by written quotations.)
  • Outline all financial sources and provide appropriate contact information. (For example, lending institutions, banks, government loans and/or grants). 
  • Describe the size and capacity of your existing facility in relation to the proposed activity.

 

Manitoba – MIDMTC

Tax Credit on Qualifying Wages/Salary: 40%

Approximate Filing Fee: $0

Selected Local details: Must pay > 25% of company salaries to Manitoba residents

Certificate of Eligibility/registration certificate required? Yes

Eligibility Requirements
  • Applicants must submit the following: 
  • Business Plan Marketing Plan Project
  • Feasibility or Market Study 
  • Competitive Analysis 
  • Resume 

Key terms you should know 

  • Certificate of Eligibility. Ontario, Manitoba and Quebec specifically require applicants to apply for and receive a certificate of eligibility, or initial qualification certificate in the case of Quebec, prior to formally applying for the Digital Media Tax credit itself. In the case of Ontario, the Ontario Interactive Digital Media Tax Credit is jointly administered by “Ontario Creates” and the Canada Revenue Agency.

Companies submit their application to Ontario Creates for certification after their company’s year end, based on expenditures that have already been paid. If your company and the product being developed meet eligibility requirements, Ontario Creates will issue a Certificate of Eligibility. Application forms can only be accessed on the Ontario Creates Online Application portal. Companies must also include an administration fee of 0.15% of total final Eligible expenses. The minimum administration fee is $1,000 and the maximum is $10,000 per application. For Quebec, the application process is a public form for a certificate of availability that takes the form of a detailed excel spreadsheet and is available online at Investissement Quebec, under financing. Manitoba’s initial certificate application form also takes the form of a detailed excel spreadsheet with multiple tabs to record the details of the title being developed, input costs and a checklist of eligibility requirements for the production company entity. 

  •  Qualifying Salary/Wage expense. The majority of the tax credits are aimed at defraying expenses specifically incurred in the development of interactive digital media. In some cases, other expenses can also be covered as well (e.g. Manitoba and Nova Scotia both make special inclusions for “total” expenses that can be covered to an extent). 
  • Taxable Canadian corporation with a permanent establishment in the province. Almost every tax incentive program stipulates that the production entity, and the workers employed, ought to be located in the tax-credit issuing province. This makes intuitive sense, but in this age of remote teams and global production, it’s important that companies don’t fall afoul of these highly specific requirements. 

Tips for a successful tax credit application:

  • Apply for IDMTC with your taxes. As soon as you have the information required to complete the tax credit application, such as the information found in your corporate T2 return, you should apply. Game production schedules can easily take years, and so companies should access this tax credit as soon as they can. BC’s ministry of finance advises applicants to “claim the credit with the Canada Revenue Agency no later than 18 months after the end of the tax year in which the eligible salaries and wages are incurred.” Ontario advises applicants that “…game products do not need to meet the 80/25 rule. Your game products do not need to be completed.”
  • Familiarize yourself with all the required documents and review stages. Depending on the province (see above), there may be a requirement to apply for a certificate of eligibility to prove that the subject company meets the basic eligibility requirements for the tax credit. Most provinces now require this step in order to avoid lengthy adjudication processes for subject companies that may be judged to not meet basic eligibility requirements. 
  • Complete and submit the application form and supporting schedules. Although most provinces have the necessary forms online, the details and supporting schedules demand careful attention. Companies must also have filed their T2 income tax return for the year and often need to attach supplementary schedules as required (e.g. 560, 562 for Ontario; each province has its specific schedules). It goes without saying that any missing information can result in unnecessary and troublesome delays. 
  • Consider hiring a consultant. We sound like a broken record, but it is a reality that even small errors can create lengthy delays and risk timely processing of your tax credit application. Hiring a specialist can help ensure that the pressing day to day demands of running a gaming studio do not interfere with the application and review process. The adage that time is money is especially applicable in the fast-moving gaming industry. The opportunity cost of a delayed tax credit can easily range in value from tens of thousands of dollars to several hundred thousand or more. 

 

How long does it take to receive a refund? 

If all paperwork is completed properly and all supporting schedules, tax returns and other applicable information are filed accurately, refunds can sometimes be received in as little as six months. However, a more realistic timeline is between 9 and 18 months. These time ranges vary from province to province, and there are also plenty of situations where errors or inconsistencies in paperwork can result in many extra months of delays. Sometimes, a claim can be delayed for no reason at all other than backlog and administrative delays. For these reasons, early submission of claims is always advised. 

 

Is there a way to receive the tax credit refund faster? 

Yes! Salaries and wages are often the top variable cost for gaming companies. Preserving cash runway is always important, and Venbridge has a variety of customized programs available to provide low cost, non-dilutive funding to qualifying companies.

  • Our programs are designed to deliver funds to companies fast. Often as little as 3 business days. 
  • Cost-effective. While there is always a cost to a loan, it is significantly less expensive than equity. 
  • We pride ourselves on our simple and easy-to-understand loan documentation. 

 

How do I access my refund early with Venbridge financing? 

We are always available for questions and enquiries. We look for the following criteria when assisting clients with the IDMTC program: 

  • Reasonable size and scale to benefit from the credit itself. We look for a $150,000+ total salary and wages claim. 
  • We take intangibles into account, such as a track record of success. We regularly finance ventures from the start for established operators with great track records. 
  • We want to see skin in the game for low-revenue situations. Just like any other capital partner, we expect owners to be putting up reasonable equity to shore up situations where the revenues are on the low end.

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