In light of the recent Jenkins report, there has been significant discussion over the benefits and drawbacks of direct funding.  Direct funding allows the government to “pick winners” and scrutinize where funding is allocated, according to government policy.  Because companies who receive direct funding have to present a business case for each and every funding application, it allows the government to put “checks and balances” in place to ensure that the funding will be utilized for its intended purpose.  Direct funding mechanisms were pivotal in building capabilities in what became leading sectors in Ontario.

However, the downside of direct funding models, is that, according to a research paper by Nelson and Langlois (1983), the practice of “picking winners” by the government was the least successful form of government support.  Direct funding generally creates a larger administrative burden, especially to smaller enterprises and start-up ventures, who can ill afford to have an in-house grant writing team.  A Canadian firm intent on bringing its technology to market will likely be deterred from seeing assistance through direct funding because the lengthy approval process can delay the onset of time-sensitive work.

Secondly, a move towards direct funding could threaten the global competitiveness of Canadian enterprises.  International trade agreements, such as the World Trade Organization Agreement on subsidies and Countervailing Measures, cap direct subsidies to business.  For example, the controversial US-Canada lumber dispute revolved around Canadian stumpage fees being too low, making the fees de facto subsidies.

Finally, under a direct funding model, there is no legal process to appeal or obtain redress for disagreements between the administrators and the applicants for the funding.  A direct funding approach has no legislative support, and applicants can easily be discriminated upon if their objective does not directly advance government policy.  On the other hand, the tax credit system provides legislated rules so that any dispute about eligibility or payment can be heard by the courts.

There are arguments to be made for both tax credits and direct funding.  However, at the end of the day, it is important to keep in mind that entrepreneurs (and the start-up ventures they create) are the backbone and future of our economy.  It is paramount that these start-up ventures obtain the upfront capital necessary in order to undertake risky ventures, some of which will evolve and transform the economic landscape both in our country, and around the world.  Will the next RIM please stand up?

So, as a software company, what do you need to take advantage of the SR&ED tax credit? To determine your eligibility in qualifying for SR&ED refunds from a software or high-tech perspective, consider these questions:

-          Do we possess the intellectual property of the developed product? Can we sell the original or a modified version of the software?

-          Have we deviated from routine software development to overcome a technological constraint?

-          Was the product developed by qualified software engineer(s)/developer(s)?

-          Did we do more than just “trial and error”? Did we learn anything new?

If these situations apply to software your company has produced or is currently working on, you could be eligible to receive money back. For more information, or to evaluate the eligibility of your company’s software development product, contact NorthBridge Consultants.

Canadian Prime Minister Harper reiterated possible amendments to the Canadian SR&ED program at the World Economic Forum at Davos, Switzerland on Thursday.   “We believe that Canada’s less than optimal results for those investments is a significant problem for our country,” Mr. Harper stated.

Suggested changes, as previously mentioned by the Globe and Mail, follow from the much-discussed Jenkins Report, such as potentially limiting refunds to labour-based expenditures. However, the goal of the SR&ED will remain to support innovation in Canada.

Employers must file their 2011 T4 information return(s) before January 1, 2015. No HCSB will be allowed based on an information return filed after this date.

To follow are the most recent updates (by province) in the digital media sector. 

Quebec Tax Credit for Production of Multimedia Titles

Quebec currently has the most generous incentives for digital media.  To follow are the current offerings by the Quebec government:

- 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.

Ontario Interactive Digital Media Tax Credit (OIDMTC)

OIDMTC offers up to 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.   Non-specified projects are refundable for 40%, versus 35% for specified products.  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. 

BC Interactive Digital Media Tax Credit (BCIDMTC)

The BC Interactive Digital Media Tax Credit (IDMTC) program provides a refundable 17.5% tax credit on eligible salary and wages incurred by eligible corporations to develop interactive digital media products in British Columbia after August 31, 2010 and before September 1, 2015.

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.

Nova Scotia Digital Media Tax Credit

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.

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.

Manitoba Interactive Digital Media Tax Credit

This tax credit provides a refundable corporate income tax credit equal to 40% of Manitoba labour costs on eligible projects up to $500,000.

Prince Edward Island’s Video Game Labour Rebate Program

This program provides a 30% rebate on direct payroll costs, payable on a quarterly basis.

Further Information

To find out more about how your company could benefit from digital tax credits, contact Northbridge Consultants.