Corporations in Nova Scotia that produce digital media may be eligible for a tax credit. If your client is an eligible corporation that incurred labour, remuneration, or marketing expenses, it may be able to receive the Digital Media Tax Credit.
Tax Credit Calculation
The tax credit amount is the lesser of 50 percent of eligible Nova Scotia labour expenses or 25 percent of total expenditures made in Nova Scotia. In addition, there are regional bonuses that increase the total potential tax credit. Products developed outside the Halifax Regional Municipality yield a 10 percent bonus credit for labour, while a 5 percent regional bonus is added to total expenditures.
Credit Eligibility – Client
For your client to receive the Digital Media Tax Credit, it must be a taxable Canadian corporation that has a permanent establishment in Nova Scotia. This means your client has to have a fixed place of business in the province, assets in Nova Scotia to develop digital media, and personnel in Nova Scotia who can contract on behalf of your company.
Credit Eligibility – Digital Media
There are also restrictions on the type of product your client makes that qualify for the tax credit. The final product must be interactive for the intention to educate, inform, or entertain users. Your client must present information through two mediums; the approved mediums are text, sound, and images.
The federal government has outlined specific products that are not eligible for the credit. Your client isn’t allowed to take the Digital Media Tax Credit for the development of operating systems, application software, products for interpersonal communication, discriminatory products, or products primarily used for advertisements.
Credit Eligibility – Types of Expenditures
There are three types of expenditures your client may include in a calculation of the tax credit. First, the salaries and wages paid to employees who develop digital products are eligible expenses. Second, your client can also include up to 65 percent of eligible remuneration expenses. Eligible remuneration is the labour component of third parties. The third party must be paid at an arm’s length. Finally, your client can also include $100,000 of marketing and distribution expenditures.
How to Apply for the Credit
In addition to meeting the eligibility criteria above, your client must apply to the Taxation and Fiscal Policy Division of the Department of Finance. This division issues the certificate required to claim the tax credit. The certificate lists that your client’s products are eligible, your client is an eligible corporation, and the value of the tax credit by tax year. Your client must submit the application within 30 months of the end of the tax year the expenses were incurred. In addition to the application, help your client compile backup documents to substantiate the operations of its business. This information can include copies of invoices, audit reports, articles of incorporation, corporate charts, and title documentation.
How to Claim the Credit
On your client’s tax return, enter the amount of the credit earned in the current year on line 567 of Schedule 5 (Tax Calculation Supplementary). If your client only has one certificate, the certificate number is entered on line 838 on the same schedule. If there is more than one certificate, you have to complete Schedule 347 (Additional Certificate Numbers for the Nova Scotia Digital Media Tax Credit). Include a copy of all certificates along with your client’s tax return.
If your client produces digital media, pursue the Digital Media Tax Credit. Have your client submit an application to qualify for the tax break, and advise it to use the awarded certificate on its next tax return.