In an effort to assist the creation of interactive digital media, the Canada Revenue Agency offers a tax credit for the development of specific products. If your client develops eligible media products, it may be entitled to tax benefits.
Tax Credit Computation
The Interactive Digital Media Tax Credit is calculated as 40 percent of qualifying expenditures. This refundable tax credit covers expenses including salaries and 65 percent of remuneration costs. The expenses must have been incurred in developing interactive digital media. You’ll want to inform your clients that this tax credit has a sunset clause; the credit is only valid for products produced between Jan. 1, 2015, and Dec. 31, 2019. The program will be reevaluated prior to expiration on whether to extend the eligibility dates. The credit is capped at $40,000 per employee per year and $2 million per company. This cap may be reduced based on government assistance received for the project.
Eligibility Requirements – Client
For your client to receive the Newfoundland and Labrador Interactive Digital Media Tax Credit, its business must primarily carry out the development of digital media. Your client must also have a permanent establishment in the Newfoundland and Labrador province. It must also be a taxable Canadian corporation that holds a valid registration certificate through the Interactive Digital Media program.
Eligibility Requirements – Product
The federal government has also put stipulations on what products qualify for the tax credit. To receive the benefit, the product’s primary purpose must be to educate, inform, or entertain. It must be presented in at least two formats of text, sound, or images. In addition, the product must be used interactively by customers. The digital media can’t be used mainly for interpersonal communication, and it can’t be used to market an entity, product, or idea.
There is a list of specific products explicitly restricted from being eligible for the tax credit. Any item receiving or likely to receive an Adult Only rating by the Entertainment Software Rating Board is ineligible. Digital media including search engines, content aggregators, and goods that enable gambling are disqualified as well. Any product providing content on the news, current affairs, blogs, commentary, advice, weather, or financial reporting is also excluded. Websites are not eligible unless they’re primarily used to host digital games, virtual reality experiences, or educational products.
Prior to receiving the credit, your client must apply as an eligible corporation. An optional step is to register through the Newfoundland and Labrador Film Development Corporation. Although this initial registration isn’t required, it’ll give your client a good idea whether its digital media is eligible for the tax credit.
To actually receive the tax credit, your client has to apply to the Minister of Finance for a tax certificate and register within the first six months following the tax year in question. Assuming your client is deemed as an eligible corporation, the minister will distribute a tax credit receipt to be used on your client’s T2 return.
If your clients develop interactive digital media, let them know they may be eligible for a refundable tax credit. As long as they operate out of Newfoundland and Labrador, incur eligible expenses, develop eligible products, and submit an application, they may receive a tax benefit up to 40 percent of certain expenses.