As there is a notable shift in the world due to digital technology forces, the federal government is evolving with technological advancements by offering various tax credits that are designed to drive innovation and further enhance the economy. Many tax credits are eligible for certain services and have specified requirements to follow. A tax credit program allows you to lower your tax liability and occasionally provide a cash refund. These program incentives enable businesses to sustainably fund the various projects which foster innovative and adaptive transformation. An example of this is the Ontario Interactive Digital Media Tax Credit.
What is the Ontario Interactive Digital Media Tax Credit?
The Ontario Digital Media Tax Credit (OIDMTC) is a refundable tax credit that is hinged on a corporation’s qualifying costs incurred on eligible products and digital games within a given tax year. The OIDMTC provides financial incentives related to services involving software development, digital application, and other related entertainment products. It can be claimed for developed interactive websites, mobile applications or any digital media products in Ontario, allowing a corporation to recover up to 40% of eligible labour expenses and up to $100,000 of marketing and distribution expenses. Moreover, it’s befitting for companies whose work may not qualify for the SR&ED (“Scientific Research & Experimental Development”) program. The focal point of this tax credit is on entertainment products and educational products for children 12 and under. In effect November 1, 2017, the tax credit also applies to websites related to television and film, purchased or licensed by a broadcaster and have not received an eligibility certificate. Products excluded are those related to news/public affairs, search engines, or databases for real-estate.
To better understand the eligibility requirements, we have compiled important information and essential requirements to equip you with the necessary knowledge to access this tax credit and provide support for your business endeavours.
Who is Eligible for the Ontario Media Development Corporation?
To be eligible for the OIDMTC, a corporation must first receive a certificate of eligibility from the Ontario Media Development Corporation (OMDC). A corporation must satisfy the following requirements to be eligible:
- Be a Canadian corporation;
- At a permanent establishment in Ontario, the corporation has finalized development on or developed an eligible interactive digital media product; as explained in subsection 93(16) of the Taxation Act, 2007 (Ontario);
- Not exempt from tax Part III of the Taxation Act, 2007 (Ontario);
- Not be controlled by one or more corporations at any time, directly or indirectly, and all or part of whose taxable income was exempt from tax under section 57 of the Corporations Tax Act (Ontario) or Part III of the Taxation Act, 2007 (Ontario); and
- At any time during the taxation year, not be a prescribed labour-sponsored venture capital corporation.
Additionally, the following criteria are also required to be satisfied by large digital game corporations:
- Be a corporation that continues to operate a business that comprises of digital game creation, through a permanent establishment in Ontario; and
- Not be a corporation whose primary operations are to provide services to a single individual and outstanding shares of the capital stock are owned by that individual.
Conversely, qualifying newly added services of websites related to television and film are eligible for the tax credit should they meet the following conditions:
- 80% of all labour costs for qualifying products must be attributable to eligible wages paid to individuals or corporations carrying on a personal services business; and
- 25% of all labour costs for qualifying products should be attributable to the corporation’s wages.
Note that the conditions for qualifying services related to television and film websites do not apply to large digital game corporations.
The OIDMTC is applicable in the following situations:
- Qualifying corporations that create and market their eligible products can claim a credit equivalent to 40% of expenditures. This also includes, for all tax years, distribution and marketing incurred expenses up to a maximum of $100,000 per eligible product.
- To claim a credit equal to 35% of expenditures, a qualifying corporation must develop eligible products under a fee-for-service arrangement.
- A 35% credit can be claimed by:
- Qualifying digital game corporations with labour expenditures incurred of $1 million minimum over 36 months for fee-for-service work completed within Ontario for a qualifying digital game.
- Specialized digital game corporations that create eligible digital games incur Ontario labour expenses of at least $1 million per year. A specialized digital game corporation typically would have a minimum of 90% of annual gross revenues or 80% of Ontario payroll directly attributable to the creation of digital games.
For qualifying products, eligible expenditures comprise of Ontario salaries incurred that are directly attributable to the qualifying product in a taxation year and are paid within 60 days of tax year-end.
A corporation can claim 100% of qualifying expenditures for remuneration. This incorporates amounts remitted to various Canadian corporations for services provided by its workers.
Claiming the Credit
As aforementioned, before claiming the OIDMTC, it is required that corporations apply for an eligibility certificate from the OMDC. Given that the product or digital game is eligible, the OMDC issues a certificate outlining an approximate tax credit amount. For the taxation year, only one eligibility certificate is issued for all eligible products or digital games.
To claim the credit, with your T2 Corporation Income Tax Return, file the following:
- An eligibility certificate issued by the OMDC
- For each qualifying product or digital game, a completed Schedule 560 – Ontario Interactive Digital Media Tax Credit.
Although extensive, the requirements are worthwhile as they provide financial support in the development of interactive websites, mobile applications, or any digital media products in Ontario. When applying for the OIDMTC, it is recommended to consult with a professional to ensure you are qualified for the program and leverage all the tax advantages available to your corporation.
SRJ Chartered Accountants can help you learn more about new and existing tax measures to minimize your tax liability. SRJ works with many small business owners to establish optimal business structures to reduce taxes paid at the corporate and individual levels and with tax planning. If you have any questions or want to connect with an Accountant at SRJ Chartered Accountants, please feel free to contact our offices at firstname.lastname@example.org or by phone at 647-725-2537.
What products are eligible for the OIDMTC?
Products that are eligible for the OIDMTC include e-learning products, interactive websites, mobile applications, or digital media products in Ontario. This can consist of online magazines used for educational purposes. Refer above for specific requirements regarding eligible products and expenditures.
Which products can be claimed under the OIDMTC?
There are four different types of products that can be claimed for the OIDMTC. These products include specified products, which are those products under a fee-for-service arrangement (developed for sale to arm’s length parties). Moreover, non-specified products developed without a fee-for-service arrangement, digital media games created by a game corporation, and digital media games developed by specialized game corporations.
Can wages be claimed for the OIDMTC?
Salaries and wages specific to the marketing and distribution of any non-specified product are claimable under marketing and distribution expenditures. This is limited to a maximum of $100,000 in qualifying costs that can only be claimed for a non-specified product. Additionally, specified products can be claimed under a fee-for-service arrangement of up to 35% of expenditures, including salaries and wages. Refer above for specific information regarding claimable wages for OIDMTC.
Can a product be claimed under a different language?
No, a product cannot be claimed if the product only includes a difference in language for the video, text, and/or audio.