Ontario video game makers call for tax credit reforms

Ontario video game developers are welcoming a new report’s recommendation for an improved tax credit system – even if there is some skepticism the government will act quickly to make it happen.

The province is fertile ground for a burgeoning digital gaming industry and some commitments from the government are needed to make it happen, according a report funded by the Ontario government.

Key pre-requisites for growing Ontario’s video games development sector, it says, include a better tax credit system that provides more reliable funding.

The government paid for the study through the Ontario Media Development Corporation because it wants to see if it can compete in the gaming aspect of the technology sector, says study co-author Joel Finlayson, partner with SECOR Consulting Team Ltd.

The report is titled Ontario 2012: Stimulating Growth in Ontario’s Digital Game Industry.

“Gaming is a particularly attractive area because it brings together artistic skills with technical ability,” he says, “and there are already a number of developers working in Ontario in this large and rapidly growing industry.”

The worldwide digital game market generated revenues of $32 billion in 2006, the report says. It will continue to grow at a rate of 10 per cent a year for the next five years, a measure that outpaces traditional media industries.

Of that multi-billion global market, Ontario has a relatively small slice of the video gaming pie with just $70 million in revenue in 2006. The sector employs 850 developers and consists of mid-sized console developers and small PC game developers.

To boost the sector and enable it to be competitive on the international scene, the report suggests that Ontario increase the tax credit offered to game developers and make it more accessible.

The current tax credit of up to 30 per cent for developers who own their intellectual property rights has been overtaken by other provinces’ rates of 35 per cent in Nova Scotia and 45 per cent in Manitoba.

“I’m not in favour of getting into a tax credit war with other jurisdictions and having them try to one-up each other,” says Mike Schmalz, president of Digital Extremes, a London, Ont.-based game development studio. Founded in 1993, the studio is the creator of the popular Unreal Tournament first-person shooter series for PC and Microsoft’s Xbox.

Award-winning first person shooter series Unreal Tournament is developed in London, Ont.

More important than increasing the amount of the tax credit is having one that’s easy to use, Schmalz says. For example, video game companies are given a lesser tax credit of 25 per cent if they don’t own the intellectual property rights (IP) to their games – but selling IP to publishers is part of the business model for gaming start-ups.

“Having a tax credit that does what it is intended to do will be very useful,” he says. “Our ultimate goal is a level playing field in Canada, so we don’t see our resources being trained in province and moving out of Ontario to go to other provinces, or even worse, to the U.S.”

That’s not the only tax credit problem for game developers in Ontario, says study co-author Lisa Woznica, associate principal of SECOR Consulting Team. Developers need a longer production window to claim tax credits than the three years currently allowed. Developers are currently allowed to claim three years of production expenses on a project.

“It’s still a pretty short window to produce a game, which is different from a film or television product,” she says.

The Ontario Media Development Corporation (OMDC) recently raised that period from two years of production time, says George McNeely, communications manager with the crown corporation.

OMDC is an Ontario Ministry of Culture agency whose mandate is to that facilitate economic development opportunities for Ontario’s cultural media industries.

The government also increased tax credits for game developers in May – from 20 per cent to 25 per cent for companies with $20 million in revenue or more. Smaller companies can claim 30 per cent.

Developers should also be able to claim tax credits for every fiscal year instead of waiting until a project is complete, the report recommends. Developers could also receive a tax credit certification for a project at its start based on their budget, and could use that as collateral in collecting loans to fund their video games.

“That would help even smaller start-up companies to get into the business and get the developers on board,” says Paul Gold, spokesperson with Gormley, Ont.-based Digital Leisure Inc. The company has 10 full-time employees and some freelancers that it relies upon to create titles like Dragon’s Lair for Playstation 2.

Dragon’s Lair is a video game developed by Digital Leisure.

The recommendations would shift funding provided through tax credits from a windfall collected at the end of a project to a sustainable source of funding, Gold says. But he is skeptical the government will move quickly to put the new measures in place.

“These programs tend to come along and there is always some sort of problem,” he says. “Months or even years can go by before we see these tax credits.”

The province knows there is a small window of opportunity to become competitive in the digital gaming market, Woznica says. Other regions – such as Quebec and Texas – are also looking to become leaders in the sector.

But study co-author Finlayson wonders if the government will respond fast enough to be competitive.

“The skeptic in me expects the government may drag its feet,” he says. “I’d like to think it will happen quickly.”

The report also recommends that:

  • The government should create a public-private fund designed to attract more venture capitalists into investing in Ontario game developers.
  • The OMDC act as a one-stop-shop between game developers and all government services.
  • The province should provide $1 million of support annually for next-generation console developers, to assist them in building prototypes of a game to demonstrate with publishers.
  • The already-existing “Next Generation of Jobs Fund” of $1.15 billion be used over the next five years to invest in a number of companies as a way to entice international entrants into the Ontario gaming market, and possibly a large multi-national publisher.

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