Tax credits for innovation and digital media in Ontario
The government creates certain tax credits to help foster the growth of businesses within Canada and internationally, and to promote growth and employment opportunities locally. These credits are earmarked to reimburse companies that invest in innovations which result in new or improved business or production processes, and/or develop new technological advancements.
However, there are still many SMEs that don’t realize they qualify for such credits. Not claiming (or severely underestimating a claim) means potentially missing out on major reimbursements from the government. Aside from the fact that your competition could already be claiming these lucrative credits, don’t overlook the substantial boost these credits could give to your business’ working capital, cash flow and valuation.
The Ontario Interactive Digital Media Tax Credit (OIDMTC) – How does it work?
The Ontario Interactive Digital Media Tax Credit (OIDMTC) is a refundable tax credit available to corporations for the creation, marketing and/or distribution of certain interactive digital media products. The OIDMTC is not limited to companies operating in the digital media sphere. In fact, there are numerous options available for claiming this tax credit in other sectors.
For OIDMTC purposes, there are two different types of products that qualify: a non-specified product and a specified product.
A non-specified product – Available to corporations that develop and market their own product. A non-specified product can be the development of an app or similar product that hasn’t yet been sold.
- The credit is calculated at 40% of labour expenditures, plus up to $100,000 in marketing and distribution expenses.
A specified product – Available to corporations that develop products under a fee-for-service arrangement (i.e. you develop a product, because someone has asked you to build or develop it).
- The credit is calculated at 35% of labour expenditures. Notably, under this category, no marketing costs would be covered because you already have a buyer.
How do you qualify?
Qualified companies can be incorporated provincially or federally and must file an Ontario corporate tax return. As this is the Ontario tax credit, companies must maintain a permanent establishment in Ontario. The labour expenditure must also be Ontario based. After all, this credit’s intention is to support the growth of local businesses and employment in Ontario!
Note that to qualify successfully, an eligible product must meet the 80/25 rule:
- More than 80% of the product or content had to be developed in Ontario
- Of that 80%, more than 25% of the development labour to create the product must be attributable to eligible Ontario wages of employees of your company.
A qualifying corporation can claim 100% of its eligible labour and 50% – 100% of its eligible third-party labour. ‘Eligible labour’ are those incurred in the three years prior to the completion of the product, as long as the employees were working on the specific project. ‘Eligible marketing and distribution’ expenses are those incurred in the 24-month period prior to the completion of the product, and those incurred in the 12 months following the completion of the product.
OIDMTC claims can only be made when the product is ready to be released. At that point, the company would amend its prior years’ tax returns, as long as the years are not statute barred. In most cases, this means you can go back as much as three or possibly four years to amend a claim.
Be aware of a few other factors when putting together your claim. A claim may fail if:
- The product developed is self-promoting.
- There is lack of documentation, especially time records, when an employee is not employed 100% on a qualified project.
The success of an OIDMTC claim highly depends on how precisely the claim is documented and presented in the application. Be sure to maintain contemporaneous documentation that is well-documented and properly archived, and ensure the application is addressing all the key criteria that is required to be present. To that, the professionals at Richter know what it takes to submit a successful claim, and have the tools to assist you in maintaining proper documentation. While this can be time-consuming, you may choose to allow us to put this claim together for you and your team, and save you the trouble.
The primary purpose of a product in this credit is to either: educate, inform, or entertain a user, and achieve this purpose by using two of text, sound, and/or image capabilities. The product would therefore be “interactive digital media.” However, since April 23, 2015, expenses are eligible only if the product is for entertainment or, if the product is for education, if it specifically targets children under the age of 12.
The product is usually ineligible if it is intended primarily for interpersonal communication (i.e. Facebook, etc.) or to present or promote your business, products, services or customer’s product. However, products that are developed for sale or license may qualify.
Examples of acceptable products include:
- Digital media games
- Interactive training courseware
- Mobile/tablet applications
- Online magazine
- Interactive television
- Interactive websites
How we can help you
To ensure you’re getting the credit you deserve, it’s important to seek the help of a professional. We can help determine if you qualify as well as prepare the actual claim, assess the suitability of your existing accounting system for capturing project information and participate in the review of your claim in a CRA review meeting, should it be requested. At Richter, our expert partners work on claims like these with a variety of different businesses, and our fees are only contingent upon the success of your claim.
Like all other government credits, the OIDMTC can be extremely beneficial, and make investing in your business all the more enticing. So aside from helping promote work within Ontario, these tax credits can be the incentive to grow your business, create more jobs, and boost your bottom line with cash in hand.