An In-depth Look at the Canadian Gaming Industry and Certain Tax Implications - Part 1

The gaming industry has had a major impact on the Canadian economy. New technologies bring innovation and a demand for talent and new skills which leads to the creation of new companies and new job opportunities. The gaming industry is not limited to the innovation sector; it also provides hours of fun for society, promotes several large tournaments, and supports many professional gamers who all spend their days playing and streaming their live feeds.

The Canadian and the Quebec governments have implemented several different incentives to encourage the gaming industry. In addition, the video game industry must be aware of several other fiscal impacts in terms of their financing, GST/QST , and corporate tax implications. This is the first instalment of a four-part series covering the gaming industry and the fiscal environment it may encounter.

Scientific Research and Experimental Development (SR&ED) Tax Credits

Many types of businesses do research, and you may not even be aware that the activities of your business may qualify for SR&ED tax credits. Eligible activities may include (but are not limited to): 

• development of proprietary products, including inventions; 
•  improving product quality, reliability, or functionality;
• research to improve business performance;
• payments to third parties who conduct research for your business; and
• payments to employees who work on research projects in your business;

A qualifying Canadian-Controlled Private Corporation (CCPC) can earn a federal refundable investment tax credit (ITC) at an enhanced rate of 35% on qualified SR&ED expenditures of up to $3 million annually. A CCPC may also earn a non-refundable federal ITC at the basic rate of 15% on an amount over $3 million. However, a CCPC that also meets the definition of a qualifying corporation can earn a federal ITC at the basic rate of 15% on an amount over $3 million, 40% of which is refundable. Non-CCPCs can earn a non-refundable federal ITC at the basic rate of 15%. In any case the work must generally be performed in Canada to be entitled to the tax credit.

For Quebec purposes, the basic tax credit rate is 14% and can reach 30% if the taxpayer is a corporation that is not controlled directly or indirectly in any manner whatsoever by one or more persons not resident in Canada, and whose total adjusted assets for the previous taxation year (including the assets of the associated corporations) are $50 million or less. If the corporation’s total assets are between $50 million and $75 million, the 30% rate is reduced linearly. The increased rate applies only to the first $3 million of qualified expenditures. To be entitled to the provincial SR&ED tax credit, the work needs to be performed in Quebec.

Quebec Tax Credit for Corporations Specialized in the Production of Multimedia Titles (CTMM)

The CTMM is a refundable tax credit, meaning that the amount of the credit, less income taxes payable, will be refunded to the eligible corporation. Corporations have to obtain an initial qualification certificate from Investissement Quebec, and they also must apply for a production work certificate. If they want to claim the credit for multiple years, they need to renew the work certificate annually, however they only need to obtain the initial qualification once.

The amount of this tax credit is determined on the basis of the amount of the eligible labour expenditures incurred in the production of eligible multimedia titles. The rate ranges from 26.25% to 37.5%, depending on the category to which the eligible multimedia title produced by the corporation belongs. To be entitled to the provincial CTMM tax credit, the work needs to be performed in Quebec.

To be eligible, a title must satisfy the following conditions:

• it includes an appreciable quantity of three of the following four types of data in digital form: text, sound, fixed images and animated images. However, a title will be deemed to satisfy these 3 conditions if it is intended for customers with a disability. Video images alone cannot be considered to constitute an appreciable quantity of sound and animated images for the purpose of qualifying a multimedia title; and it is produced on electronic media and controlled by software that allows for interactivity.

In summary, the provincial and federal governments provide significant tax incentives for gaming companies to benefit from by trying to encourage them to innovate and create new products and to hire talented employees. Valid documentation must be obtained and kept if they are to be accepted by the taxation authorities.

For additional information on how your business might benefit from these incentives, please contact your Crowe BGK advisor.

About the Author:
Aaron Patrick Belcher, CPA, CGA, is a Tax Specialist at Crowe BGK

Connect with him: [email protected]