Ontario Interactive Digital Media Tax Credit (OIDMTC) – Guidance from a Canadian Tax Lawyer

What is the Ontario interactive digital media tax credit (OIDMTC)?

The Ontario interactive digital media tax credit is a refundable tax credit based on qualifying expenditures incurred for eligible products and eligible digital games by a qualifying corporation during a tax year.

What are eligible products for the Ontario interactive digital media tax

There are four types of products that can be claimed under the OIDMTC:

1. Non-specified products,
2. Specified products,
3. Eligible digital games developed by a qualifying digital game corporation, and
4. Eligible digital games developed by a specialized digital game corporation.

This credit focuses on entertainment products and educational products for children under the age of 12, and it excludes certain products such as search engines, real estate databases or news and public affairs products. However, this exclusion does not apply to large digital corporations, which include two types of corporations: qualifying digital game corporations and specialized digital game corporations. Film and television websites that are bought or licensed by a broadcaster and embedded in the broadcaster’s website are now eligible for the OIDMTC.

An eligible product must also meet the following conditions:

• 80% of total labour costs for eligible products have to be attributable to qualifying wages and qualifying remuneration paid to individuals or to corporations that carry on a personal services business, and
• 25% of total labour costs for eligible products have to be attributable to qualifying wages of employees of the qualifying corporation.

However, the above-mentioned 80/25 requirements do not apply to large digital game corporations.

What are qualifying expenditures

For qualifying corporations in Canada, if they develop and market their own eligible products (non-specified products), they can claim a credit equal to 50% of expenditures, which include marketing and distribution expenditures paid within 60 days of the end of the tax year, for a maximum of $100,000 per eligible product for all tax years. If a qualifying corporation develops eligible products under a fee-for-service arrangement (specified products), the corporation may claim a credit of 35% of expenditures.

For qualifying digital game corporations, if they incur a minimum of $1 million of eligible Ontario labour expenditures over a 3-year period for fee-for-service work done in Ontario for an eligible digital game, they may claim a 35% credit. Qualifying digital game corporations are not required to be at arm’s length with the purchaser corporation.

For specified digital game corporations, if they incur at least $500,000 ($1 million for tax years starting before April 12, 2019) of Ontario labour expenses each year in developing eligible digital games, they can claim a 35% credit. Generally speaking, a specialized digital game corporation generally would have at least 80% of Ontario payroll or 90% of annual gross revenues directly attributable to developing digital games. Specialized digital game corporations are entitled to file an annual OIDMTC application and are not required to contract with an arm’s length purchaser.

Who are the eligible corporations?

A corporation must meet the following conditions in order to be eligible for the OIDMTC:

• must be a Canadian corporation;
• have completed development on or developed an eligible interactive digital media product at a permanent establishment in Ontario,
• not be exempt from tax under Part III of the Ontario Taxation Act for the taxation year
• not be controlled directly or indirectly, in any way, at any time in the tax year, by one or more corporations, all or part of whose taxable income was exempt from tax section 57 of the Corporations Tax Act (Ontario) or Part III of Taxation Act (Ontario)
• not be a prescribed labour-sponsored venture capital corporation at any time in the tax year.

There are additional requirements for large digital game corporations:

• it must be a corporation that carries on, through a permanent establishment in Ontario, a business that includes developing digital games;
• it can not be a corporation the primary activity of which is to provide the services of a single individual and all the issued and outstanding shares of the capital stock of which are owned by that individual

Pro tax tips – A certificate of eligibility is required to claim OIDMTC

Before claiming the credit, you must apply to Ontario Creates online for a certificate of eligibility. Only one certificate of eligibility is issued for all the eligible products or digital games for the tax year. Note that a corporation cannot claim the OIDMTC if it claims the Ontario computer animation and special effects tax credit, the Ontario film and television tax credit or the Ontario production services tax credit. If you have questions about your eligibility regarding the OIDMTC, speak to our experienced Canadian tax lawyers for more details.

FAQ

What corporations are eligible for OIDMTC?

A qualifying corporation is a Canadian corporation (Canadian or foreign-owned), which develops an eligible product at a permanent establishment in Ontario operated by it, and files an Ontario tax return. Large digital corporations, such as qualifying digital game corporations and specialized digital game corporations, are also eligible and they are not subject to the 80/25 rules.

What types of products are eligible for the OIDMTC?

There are four types of products that can be claimed under the OIDMTC: non-specified products, specified products, eligible digital games developed by a qualifying digital game corporation, and eligible digital games developed by a specialized digital game corporation. Types of interactive digital media products that may be eligible for the tax credit include, but are not restricted to, digital games, mobile applications and e-learning products for children. Operating system software is not eligible for the tax credit.