Recent changes in the digital media sector
R&D Tax Update, April 8, 2010 (10-2)
Over the last months, many provinces have either introduced new digital media tax incentives or introduced improvements to existing ones. This issue of R&D Tax Update outlines the most recent tax changes related to the digital media sector.
New B.C. interactive digital media tax credit (BCIDMTC)
On March 2, 2010, the B.C. Finance Minister, Colin Hansen, confirmed a new tax credit for digital media and favourable changes to provincial film tax credits. These new incentives are in response to industry needs and recognize the contribution of film, television and visual effects companies to the B.C. economy. Although credits are available to video game developers in many other provinces, digital media incentives in British Columbia did not previously extend beyond films and television. The new credit will provide welcome relief for an industry that is struggling and the initial reaction is positive. However, it does not yet compete with the equivalent credits in Ontario and Quebec that offer higher rates and broader coverage.
As proposed, the tax credit will be effective for new qualifying video game development projects that begin after August 31, 2010. The tax credit will be 17.5% of qualifying B.C. labour costs. Although the legislation has not yet been released, it appears that it may be a refundable tax credit and certification will likely be required.
What does this mean for claimants?
Claimants of the new BCIDMTC will be required to identify eligible projects that begin after August 31, 2010 and may be required to modify their existing time tracking system to track qualifying B.C. labour costs.
If the new BCIDMTC legislation mirrors the credits in other provinces as expected, a taxpayer will be allowed to claim either the BCIDMTC or the B.C. SR&ED tax credit on the same qualifying expenditure, but not both.
We look forward to the BCIDMTC as this new government incentive will provide a boost for video game developers in the province of British Columbia.
Increases to B.C. film tax credits
At the same time as the introduction of the BCIDMTC, the B.C. government announced increases to the film tax credits effective for productions with principal photography that begin after February 28, 2010. The proposed tax measures include:
- The production services tax credit on labour costs for foreign productions is increased to 33% from 25%.
- The digital animation or visual effect (DAVE) tax credit bonus is increased to 17.5% from 15%.
- The qualified B.C. labour expenditure cap is increased to 60% from 48% of production costs.
These enhancements to the film tax credit program should make British Columbia’s film industry more competitive.
Other provincial digital media tax credits
Several other provinces have tax credit programs for digital media activities. Recently, Quebec and Manitoba have introduced modifications to their existing tax programs. The following section covers those recent changes and provides a brief summary of other provincial tax incentives related to the digital media sector.
Nova Scotia digital media tax credit
A corporation with an establishment in Nova Scotia can claim a refundable tax credit related to the development, in Nova Scotia, of interactive digital media products.
Since January 1, 2008, the digital media tax credit is 50% of eligible salaries, up to 25% of total production costs. In addition, a corporation is eligible for a bonus for producing its products outside the Halifax Regional Municipality area. The bonus is 10% of eligible salaries, up to 5% of total production costs.
A digital media product is generally a product that will meet the following criteria:
- it is interactive and its primary purpose is to inform, educate or entertain users;
- it must achieve its primary purpose by presenting information in at least two of three formats: text, sound or images; and
- it must be developed for use by either individuals or businesses.
Quebec tax credit for production of multimedia titles
Quebec has led the way in tax incentives for digital media. A qualified corporation that produces multimedia titles may be entitled to a tax credit for its qualified labour expenditure. The amount of the credit varies according to the type of multimedia title produced:
- 37.5% for titles that are produced without having been ordered, are intended to be commercialized and are available in French.
- 30% for titles that are produced without having been ordered, are intended to be commercialized and are not available in French.
- 26.25% for other titles.
A multimedia title is an organized set of numerical information in respect of which Investissement Québec has issued to the corporation an eligibility certificate, confirming that the multimedia title is eligible.
In its 2010-2011 budget tabled on March 30, 2010, the Quebec government broadened the rules concerning eligibility for the refundable tax credit relating to the production of multimedia titles. Consequently, production activities for a digital animation movie which is taken from a video game developed by the same corporation will now be eligible for the credit. As well, the eligibility period will be extended from 24 to 36 months to take into account the growing complexity of new generation multimedia titles. Lastly, the activities related to system architecture will now be eligible for the credit.
Ontario interactive digital media tax credit (OIDMTC)
The OIDMTC is a 40% refundable tax credit based on eligible Ontario labour expenditures and eligible marketing and distribution expenses incurred after March 26, 2009 by any Canadian corporation. (The OIDMTC ranged from 20% to 35% before March 27, 2009.) There is no limit on the amount of eligible Ontario labour expenditure. Eligible marketing and distribution expenses are capped at $100,000 per eligible product. Eligible labour expenditures are 100% of salaries and wages for employees and 100% (50% before March 27, 2009) of remuneration paid to arm’s length persons who are not employees.
Manitoba interactive digital media tax credit (MIDMTC)
The MIDMTC is a 40% refundable tax credit based on eligible Manitoba labour expenditures. Eligible corporations for this tax incentive are those having an establishment in Manitoba where they develop and produce interactive digital media projects. The maximum tax credit on an eligible project is $500,000. Eligible projects are those certified by Manitoba Science, Technology, Energy & Mines.
The MIDMTC was set to expire on December 31, 2010 but was extended to December 31, 2013 by the 2010 Budget.
Saskatchewan film employment tax credit
Saskatchewan, through its film employment tax credit program, offers a refundable tax credit equal to 45% of the labour expenditures associated with the production of eligible films, which include multimedia productions. For the purpose of this tax credit, eligible salaries cannot exceed 50% of the total production cost.
Under certain conditions, additional bonuses are available for productions that are carried out in rural areas and for large budget productions.
This publication is produced by Deloitte & Touche LLP as an information service to clients and friends of the firm, and is not intended to substitute for competent professional advice. No action should be initiated without consulting your professional advisors. Your use of this document is at your own risk.