Ontario Interactive Digital Media Tax Credit
The Ontario Ministry of Finance has proposed a regulatory amendment regarding eligibility of certain types of embedded websites, effective November 1, 2017. See Ontario Creates Bulletin Tax Credit Treatment of Embedded Film and Television Websites for more info.
Please note that an application deadline for specified and non-specified products passed into law December 8, 2016 and took effect May 15, 2017.
What Is It?
The Ontario Interactive Digital Media Tax Credit (OIDMTC) is a refundable tax credit based on eligible Ontario labour expenditures and eligible marketing and distribution expenses claimed by a qualifying corporation with respect to interactive digital media products.
How much is the Tax Credit?
The OIDMTC is a refundable tax credit available to qualifying corporations for expenditures related to the creation of eligible interactive digital media products. A 40% tax credit is available for eligible Ontario labour expenditures and eligible marketing and distribution expenses incurred by qualifying corporations that develop and market their own products (known as “non-specified products”). The credit is 35% on eligible Ontario labour expenditures for products developed under a fee-for-service arrangement (known as “specified products”). A 35% credit on eligible labour expenditures is also available to qualifying digital game corporations and specialized digital game corporations (see large digital game corporations below). There is no limit on the amount of eligible Ontario labour expenditures which may qualify and there is no per-project or annual corporate limits on the amount of the OIDMTC which may be claimed. Eligible marketing and distribution expenses are capped at $100,000 per non-specified product.
Who is Eligible?
A qualifying corporation is a Canadian corporation (Canadian or foreign-owned), which develops an eligible product at a permanent establishment in Ontario operated by it, and files an Ontario tax return.
Corporations that are prescribed labour-sponsored venture capital corporations under the regulations made under the Income Tax Act (Canada) and corporations that are exempt from tax or are controlled directly or indirectly by a corporation exempt from tax are not eligible for the OIDMTC.
What Types of Products Are Eligible for the Tax Credit?
There are four types of products that can be claimed under the OIDMTC: non-specified products, specified products, eligible digital games developed by a qualifying digital game corporation, and eligible digital games developed by a specialized digital game corporation. Types of interactive digital media products that may be eligible for the tax credit include, but are not restricted to, digital games, mobile applications and e-learning products for children. Operating system software is not eligible for the tax credit.
A product must be an interactive digital media product whose primary purpose is to entertain users or educate children under 12, and that achieves its primary purpose by presenting information in at least two of: (i) text, (ii) sound and (iii) images. The OIDMTC regulations exclude certain types of products, including most websites. Please note that where products were commenced before April 24, 2015 that are not eligible under the new regulatory requirements of April 23, 2015, qualifying corporations may claim a tax credit but are limited to eligible expenditures incurred on or before April 23, 2015 when calculating their OIDMTC claim.
An eligible product must meet a quantitative rule known as the 80/25 rule which is based on labour costs of the company developing the product. The 80/25 rule is based on two concurrent labour tests and both must be met. 25% of the total development labour to create the product must be attributable to eligible wages of employees of the qualifying corporation. Also 80% of the total development labour to create the product must be attributable to eligible wages and eligible remuneration paid to individuals, personal corporations, or sole proprietorships that do not have employees.
Large Digital Game Corporations
Qualifying digital game corporations are those that incur a minimum $1 million of eligible Ontario labour costs over a three- year period for fee-for-service work done in Ontario that is directly related to the development of a digital game. Qualifying digital game corporations would not be required to be at arm’s length with the purchaser corporation and do not have to meet the new 80/25 rule.
Specialized digital game corporations are those that have either 80% of Ontario payroll or 90% of annual revenues attributable to interactive digital media game development with a minimum of $1 million of Ontario labour expenditures in the taxation year directly attributable to the development of eligible digital games. Specialized digital game corporations are entitled to file an annual OIDMTC application and would not be required to contract with an arm's length purchaser and do not have to meet the new 80/25 rule.
What Expenditures Are Eligible?
The credit may be claimed with respect to qualifying Ontario expenditures which include eligible labour expenditures and marketing and distribution expenditures (for non-specified products only). Eligible labour expenditures include salaries and wages for employees and remuneration paid to arm’s length persons who are not employees. For specified and non-specified products, “persons” may include individuals, partnerships and corporations. Please note: for eligible digital games developed by qualifying digital game corporations and specialized digital game corporations, remuneration does not include amounts paid to another taxable Canadian corporation for the services of its employees.
Eligible Labour expenditures must also be paid to individuals resident in Ontario, directly attributable to the development of the eligible product, and paid for services rendered at a permanent establishment in Ontario. Eligible labour expenditures incurred in the three-year period prior to the completion of the product can be included in the OIDMTC claim.
Up to $100,000 of eligible marketing and distribution expenditures related to a non-specified product can be included. Eligible marketing and distribution expenses are those incurred in the 24-month period prior to the completion of the eligible interactive digital media product, and those incurred in the 12 months following the completion of the product. Expenditures that have already been claimed as eligible Ontario labour expenditures cannot be claimed as marketing and distribution expenditures.
For specified products and eligible digital games developed by qualifying digital game corporations or specialized digital game corporations, qualifying expenditures are restricted to eligible labour expenditures and do not include marketing and distribution expenditures.
How is the Tax Credit Administered?
The OIDMTC is jointly administered by Ontario Creates - an agency of the Ministry of the Provincial Government of Ontario - and the Canada Revenue Agency. Application is made to the Ontario Creates for a certificate of eligibility, which the qualifying corporation files with the Canada Revenue Agency together with its tax return in order to claim the OIDMTC. The amount of the credit, net of any Ontario taxes owing, will be paid to the qualifying corporation. If the qualifying corporation does not owe any taxes, the full amount will be paid out.
* PLEASE NOTE: CANADA REVENUE AGENCY (CRA) ADMINISTERS BOTH FEDERAL AND ONTARIO CORPORATE TAXES. THE CRA IS THE FIRST POINT OF CONTACT FOR ALL CORPORATE TAX ENQUIRIES (1 800 959-5525).
Note: This sheet is a general guide and may not be relied upon in order to determine eligibility or the amount of an anticipated credit. Please consult the OIDMTC legislation and regulation for further details.