If you have clients who make interactive digital media products in Nova Scotia, you should make sure they know about the Digital Media Tax Credit. Designed to encourage media production and the hiring of locals in this province, this credit can help your clients offset their tax liability. Because it’s a refundable credit, it can potentially put money in their pockets.
To qualify, your client must be a taxable Canadian corporation permanently established in Nova Scotia. Prescribed labour-sponsored venture capital corporations are not eligible. For this credit, the corporation does not need to hold the copyright to the product.
The product can be for individuals or businesses. It must be interactive and can be for educational, informational, or entertainment purposes. For example, video games, educational software, and animated simulators may all qualify for this credit. Your clients cannot claim this credit for application software, products designed primarily for interpersonal communication, or operating systems.
Additionally, the products cannot be pornographic or discriminatory. If the product is designed to advertise a company, the reviewing body determines eligibility on a case-by-case basis. Animation productions can also apply for the Digital Media Tax Credit, and they may also qualify for an animation bonus.
Calculating the Credit
The Digital Media Tax Credit is worth 50 percent of Nova Scotia labour expenditures, but it cannot exceed 25 percent of the production’s total expenditures. To explain, imagine a corporation paid $500,000 in qualifying labour expenditures. The 50 percent credit is provisionally worth $250,000, but you also have to ensure this amount does not exceed 25 percent of the total expenditures in Nova Scotia. To continue, if the corporation spent $900,000 total, 25 percent of that amount is $225,000. In this situation, your client can only claim $225,000 as a tax credit.
If the work takes place outside of the Halifax Regional Municipality, your clients can receive a 10 percent bonus credit. In this situation, the credit is worth the lesser of 60 percent of eligible labour expenditures or 30 percent of total expenditures. For example, if your client pays $500,000 in qualifying labour expenditures in Nova Scotia and outside of Halifax, it can potentially claim a $300,000 tax credit.
If your clients meet the above criteria, they can submit an application to the Nova Scotia Department of Finance and Treasury Board. The application is fairly involved, and you may want to help your clients through the process. Because the credit is tied to labour expenditures, your clients need to include proof of how much they paid their employees as well as declarations of residency forms for their employees. They also need to include articles of incorporation for their company, details about their shareholders, and information about associated corporations. Of course, they also have to submit a copy of the interactive digital media product for review.
Although this is a provincial credit, it can help to offset federal income tax because it is so large. To help your clients lower their tax liability, let them know about this credit and consider helping them to apply.