Interactive Digital Media Tax Credits

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Episode 36: Interactive Digital Media Tax Credits

Release date: June 14, 2011
Guest: Darren Speake
Running time: 13 minutes

Darren Speake discusses the Interactive Digital Media Tax Credit, the industries and projects it applies to, the potential size of the credit and how it works with Scientific Research and Experimental Development claims.

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Interactive Digital Media Tax Credits

You’re listening to another episode of PwC’s Tax Tracks at www.pwc.com/ca/taxtracks. This series looks at the most pressing technical and management issues affecting today’s busiest tax directors.

Gerry Lewandoski:Here with us today is Darren Speake, a senior manager with PwC Canada’s Tax practice based in Toronto. Darren provides a broad range of Canadian tax services to both inbound and outbound corporate clients in various technology industries. He specializes in helping companies prepare claims for both the Interactive Digital Media and the Scientific Research and Experimental Development tax credit programs. Darren's experience includes Canadian and international tax planning, and tax compliance work as well as significant experience in helping companies with their tax accounting needs.

Thanks for joining us, Darren.

Darren: Thank you Gerry. It’s good to be here.

Gerry: Today we are looking to discuss the Interactive Digital Media Tax Credit. It sounds like it would be applicable only to a very narrow industry — perhaps the video gaming industry?

Darren: You are correct in that this tax credit does apply to the gaming industry. In fact, this tax credit was originally aimed at the video game industry with a goal of attracting game development work to Canada. However, the rules do allow companies outside of the gaming space to qualify for this lucrative tax credit.

Gerry: And what is that definition?

Darren: I can speak to the Ontario rules but most provinces do have similar tax credit programs. Any Interactive digital media product that has a primary purpose of “entertaining, educating or informing” can qualify. The product has to present information using two of the following forms, being text, sound or images/video, which most digital products would meet. Keep in mind that this is a tax credit for the development of content so the product does have to have its own self-contained content that has been originally developed by the company or content that has been licensed from a third party which has been augmented or adapted by company. The product can’t be a player or blank platform that requires content from elsewhere to function. As long as the end product is digital it doesn’t matter what the delivery platform is — it can be viewed by the end user on a hand-held device, mobile device, tablet, a smart phone or run on social media platforms — the delivery platform itself is not the question. Furthermore, the product must be licensed to an arm’s length party.

Gerry: So you need to look at the specifics of the product — are there other rules regarding eligibility?

Darren: Gerry, when you get right down to it, there isn’t a great deal of guidance around what products qualify for the tax credit. At this time, there is a certain measure of subjectivity to the eligibility.

One thing to note though — the resulting electronic product cannot be used primarily to present, promote or sell the products of the corporation. A good example of this would be a traditional commercial website where the primary purpose of the website is to sell or showcase products of the company. These types of websites don’t qualify for the tax credit.

Gerry: Darren, can you give me an example of an organization outside of gaming that you have worked with that has qualified for this tax credit?

Darren: Well, on-line learning comes to mind. Any sort of e-learning, including companies that prepare corporate external training, can qualify. Again, the tax credit here isn’t so much for digitizing content as it is for the creation of original content.

Gerry: If a project qualifies for these tax credits — are we talking about a significant dollar value?

Darren: The Interactive Digital Media Tax Credit is definitely lucrative. Here in Ontario a company can receive up to a 40% fully refundable tax credit on development costs, including salary and wages, contract payments, and even up to $100,000 on marketing expenditures.

Gerry: Darren, I get the impression that many companies may not recognize that the work they are doing could qualify.

Darren: I agree with you, Gerry. My recommendation is that any company that is developing content that is being digitized should be reviewing the product to determine if they qualify.

Gerry: How do companies apply — does it take a lot of effort and time?

Darren: The application process can be quite complex as there is a significant amount of information required to support these claims. Again, each province is different, has different rules and regulations, and there is not a lot of clear guidance around eligibility. However, PwC has been involved with many applications and we can leverage our experience and significantly lighten the load of the application process.

Gerry: Are these claims based only on the current year?

Darren: Good question Gerry — actually you can make a claim for any open taxation year — so here in Ontario that means you can go back and make an application for the last four or five taxation years. This is what we have done for a number of companies, so it can end up being an extra big win for companies.

Also to note, you can claim your digital media development costs leading right up to your product release date.

As we discussed earlier — it is certainly worth the effort as these credits can be lucrative.

Gerry: Do these claims work alongside the Scientific Research and Experimental Development (SR&ED) claims?

Darren: If you claim expenditures for SR&ED, you can’t “double dip” and claim the same expenditures under the Interactive Digital Media Tax Credit programs. So, we look at optimizing these two programs for our clients and work closely with our PwC SR&ED subject matter experts to determine the best and most lucrative results for our clients.

Gerry: Where can our listeners get more information on these Interactive Digital Media Tax Credits?

Darren: PwC produces an annual table called the “Big Table of Digital Media and Animation Incentives in Canada”. It’s on our website at www.pwc.com/ca/bigtable. Of course, our listeners are also encouraged to contact their local PwC professionals for further information.

Gerry: Thank you for joining us today Darren.

Darren: My pleasure.

Thank you for tuning into Tax Tracks at www.pwc.com/ca/taxtracks.

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Through interviews with prominent PwC tax subject matter professionals, Tax Tracks is an audio podcast series that is designed to bring succinct commentary on tax technical, policy and administrative issues that provides busy tax directors information they require.