Proposed Ontario tax credits a bonanza for digital game developers

The Ontario government is giving local digital entertainment industry a boost by offering greater tax incentives to encourage companies use more indigenous talent.

“Exciting developments are coming down the pipe as we head towards 2010,” said Jennifer Blitz, director for tax credits and financing programs for the Ontario Media Development Corporation (OMDC) at the recent GameOn – Finance 2009, a forum for the interactive game industry held in Toronto.

The Corporation is an agency of the Ontario Ministry of Culture.


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OMDC has strict Canadian cultural content requirements for the film and television, print publication and the music industries.

In addition Can-con — as it applies to the Canadian digital media sector — requires a certain percentage of content carried by these brands be at least partly written, produced, presented, or otherwise contributed to by persons from Canada.  

Blitz clarified that a game developer or publisher “does not necessarily have to show a maple leaf, the beaver, or the Canadian flag on their final product to avail of funding or tax credits.”   

OMDC, she said, is working to further increase tax incentives for the Ontario interactive digital media community by proposing several key changes to existing programs.

For instance, proposed changes to the 2009 budget could have a significant impact on the Ontario Interactive Digital Media Tax Credit.

This refundable tax credit can be claimed on interactive digital media products by qualifying firms.

With the proposed changes, certified game developers, who incur at least $1 million of Ontario labour expenditure per year developing eligible interactive digital media games, can claim a 35 per cent tax credit on Ontario salaries and wages retroactive to March 27, 2009.

Based on the OMDC’s calculations, certified game developers typically would have 80 per cent of Ontario payroll or 90 per cent of annual revenues attributable to interactive digital media game development activities.

Before the 2009 Ontario budget, companies claiming annual gross revenues of less than $20 million or total assets of less than $10 million during the preceding taxation year were eligible to claim the credit at the rate of 30 per cent. Larger corporations were entitled to claim it at a lower 25 per cent rate.

Blitz, however, emphasized that the changes still have to be made into law.

Who is eligible?

Qualifying organizations are Canadian corporations (that are Canadian or foreign owned). They have to develop an eligible product at a permanent establishment in Ontario and file an Ontario tax return.

Gross revenues must not exceed $20 million and total assets must not be more than $10 million in the preceding taxation year.

Companies interested in the incentives, Blitz said, need to ensure they offer interactive digital media products whose primary purpose is to educate, inform or entertain. The products need to achieve their primary purpose through at least two of the following: text; sound; and images.

“These criteria ensure that we are not providing tax credits to advertising material.”  

What this means for the industry

The proposed changes will provide a  much needed breather to game development start-ups and encourage companies to hire local talent, according to Ian Kelso, president and CEO of Interactive Ontario.

Interactive Ontario is  a Toronto-based non-profit trade organization promoting the growth of Ontario’s interactive digital media industry.

“By tying tax incentives to local labour, Canadian companies and their foreign partners will be encouraged to hire local game developers and designers,” Kelso said.

Companies in the industry typically encounter funding challenges at three crucial stages: during the prototype development, production, go-to-market phases.

“Many small and start-up companies believe the prototype building stage has received much less attention from funders and government,” Kelso said.

Beefing up tax incentives in this area will greatly reduce budgetary pressures on companies, he said.

He also said letting companies claim yearly tax refunds rather than just claiming incentives when game has been completed makes good sense.

“Game developers need to payout wages and cover expenses throughout the development cycle. You can’t put off expenses until your game is in the market.”  

Attracting foreign investment

Ontario is well placed to attract more foreign players in the digital gaming industry, according to Sandra Pupatello, Ontario minister of Economic Development and Trade.   

 “It you take into account that the Spiderman franchise made more money selling games than movie tickets, producers are now well aware that the money isn’t in films alone,” Pupatello said.

Ontario much to offer by way of local tech talent and industry background in both the film and interactive media sectors, she said. “We have what it takes to match or [surpass] the likes of Hollywood or Bollywood and also have a growing interactive digital media community.”

The mix plays well with Canada latest and biggest games developer and investor Ubisoft Canada Inc.

The Montreal-based game developer is set to open its fourth Canadian studio in Toronto. Ubisoft Toronto is expected to create 800 jobs over the next 10 years.

“We have big plans for Toronto within our convergence strategy, said Yannis Mallat, CEO of Ubisoft Montreal and producer of the popular Assassin’s Creed franchise.

The idea is to benefit from the marketing potential of both film and video games, said Mallat who also spoke at the GameOn forum.

As part of this vision, he said, Ubisoft acquired Hybride Technologies Inc., in 2008 the animation and digital video effects studio, which was behind the film hits Sin City and 300.

Don’t fear the big boys!

Mallat said Ubisoft is now partnering with director James Cameron on the Avatar game and film project as well as the Assassin’s Creed 2 live action short films.

“Ubisoft is moving towards 360 content publishing, where you’ll see products share exposure on movie screens, TV screens, game consoles and even e-books and mobile devices.”  

Should local game outfits be scared of big players such as Ubisoft?

Not at all, said Trevor Fencott, CEO of Toronto-based Bedlam Games Inc.

Fencott’s company is working on Scratch: The Ultimate DJ, a game that will be available on Playstation 3 and Xbox 360 in sometime next year.

A lawyer by training but now a veteran in the Toronto game development scene, Fencott says games will provide virtual and tactile DJing experience to users the way Rock Band and Guitar Hero did to air guitar players.

“Ubisoft’s presence will only provide further incentive for local talents to stay in Ontario and for young students to take up digital media arts,” he said.

Competition will offer young developers a much more varied source of developing experience, the Bedlam chief said.

Fencott doesn’t believe that foreign big name game outfits elbow out local companies. He likens the gaming industry to the software sector. “Microsoft does not eliminate the need for open source software.”

In the same way, he said, there are players who want games developed by big companies and others that go for games made by small independent outfits.  

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