Animators who set up shop in Nova Scotia may be able to shave a bit of money off their tax liability and potentially even get a refund. The Digital Animation Tax Credit rewards animators for wages paid in Nova Scotia. If any of your clients make animated art, you may want to help them explore this credit.
Do you represent any taxable Canadian corporations based in Nova Scotia? Do any of them primarily focus on video or film production? As long as they aren’t prescribed labour-sponsored venture capital corporations, they meet the corporate criteria to qualify for this credit.
The digital animation must be at least 20 minutes long, and it must be available for viewing within 24 months of its completion. The animation cannot be designed for fundraising, industrial, or corporate purposes. For example, your clients probably don’t qualify for this credit if they produced an animated corporate training tool. Similarly, non-profit organizations can’t claim this credit for making a fundraising cartoon. On top of that, the animation cannot be related to video game productions, news programs, talk shows, sporting events, award shows, reality TV, or pornography.
Calculating the Credit
This credit is worth 50 percent of eligible labour costs, up to 25 percent of the total production costs. That means your clients can practically write off half of their payroll expenses, as long as the expenses meet a few basic criteria. Even better, as of 2018, your client can also claim an additional credit worth 17.5 percent of labour costs directly related to the animation process.
To illustrate, imagine a corporation has $1 million in total eligible production costs and $600,000 in eligible labour costs. Additionally, $400,000 of the labour costs are directly related to core animation activities. Based on $600,000 of labour expenditures, the credit is worth $300,000. However, the credit caps at 25 percent of total production expenses, and 25 percent of $1 million is $250,000. As a result, your client earns a base credit of $250,000. Then you need to calculate the 17.5 percent bonus credit. Based on $400,000 of wages, the bonus credit is $70,000. When you add this to the $250,000, your client’s total credit is $320,000.
Qualifying Labour Expenses
Eligible labour costs include salaries paid to the corporation’s direct employees as well as compensation paid to third-party service providers, but the payments must be to Nova Scotia residents. Remember, this credit is designed to simulate creative industries in this particular province.
The additional credit for core animation activities covers salaries related to creating storyboards, animating, designing, and modeling. Core activities also includes lighting, adding colour to the animation, and layering computer graphics. Finally, this category also encompasses voiceovers and narration, but it does not include labour costs related to audio effects added in post production, subtitles, and similar editing activities.
Applying for the Credit
How do your clients claim this massive credit? Well, the process is mostly electronic, and they need to start by submitting an application to the Department of Finance and Treasury. Then, once their animation is approved, you can help them claim the credit on their T-2 Corporate Income Tax Return.
This refundable tax credit can help to lower your client’s provincial and federal income tax due. If the credit exceeds the corporation’s tax liability, a refund is in the books. To increase your value as a corporate accountant, this is just one of the many deductions and credits that you should help your clients learn about and claim.