Newfoundland and Labrador Interactive Digital Media (IDM) Tax Credit – Guidelines

These guidelines have been prepared to assist companies applying for the Newfoundland and Labrador Interactive Digital Media (IDM) tax credit.

Please note that the IDM tax credit legislation (section 46.3 of the Income Tax Act, 2000 and the Interactive Digital Media Tax Credit Regulations) takes precedence where a conflict arises between the legislation and these guidelines.

Overview

The NL IDM tax credit is a refundable tax credit, which means that the amount of the credit minus any federal or provincial taxes payable will be paid to the qualifying corporation. The IDM tax credit is based on eligible salaries and eligible remuneration incurred by an eligible corporation during the period of January 1, 2015 to December 31, 2024 inclusive, for the development of eligible interactive digital media products.

Who is eligible?

To be eligible for the IDM credit, a corporation developing an interactive digital media product must be an eligible corporation. To be an eligible corporation, one must satisfy all of the following requirements:

  1. It primarily carries on the business of interactive digital media development;
  2. It has a permanent establishment in the province of NL;
  3. It is incorporated under the Corporations Act or an Act of the Parliament of Canada or another Canadian province;
  4. All or part of its income is not exempt from taxation under Part I of the federal Income Tax Act; and
  5. It holds a valid registration certificate under the IDM program.

Normally, an eligible corporation has a permanent establishment in the province if it has a fixed place of business in the province. This will be determined in accordance with Regulation 400(2) of the Income Tax Act (Canada). The Department of Finance will evaluate the existence of a permanent establishment based on the facts of the situation.

How much is the credit?

If you develop an interactive digital media product in NL, your company may receive a 40% tax credit on qualifying expenditures, which consist of eligible salaries plus 65% of eligible remuneration paid. The credit value is limited to $40,000 per eligible employee per year and $2 million per company, or group of associated companies, in respect of all taxation years ending in a calendar year.

For most projects, the credit may be claimed in respect of the year in which the expense was incurred. For projects being developed primarily for government, the credit may be claimed for the taxation year during which the project was completed. Applications for the credit must be received within 18 months of the end of the taxation year in respect of which the credit will be claimed.

What is an eligible product?

To be eligible for the IDM tax credit, the product’s primary purpose must be to educate, inform or entertain. This must be achieved by presenting information in at least two of the following formats: 1) text, 2) sound, and 3) images.

Additionally, the product must meet the following requirements:

  • Use: intended to be used interactively by individuals.
  • Communication: not used primarily for interpersonal communication.
  • Non-promotional: not used to market or promote an entity, product or idea.

Examples of products that are likely to be considered eligible products would include video games, educational software, and training simulators.

Certain types of products are excluded from the credit including:

  • Any product that is likely to receive an “AO” rating by the Entertainment Software Rating Board;
  • Any product which enables gambling activities with real currency;
  • Content aggregators;
  • Search engines;
  • Products primarily providing content that is news, public affairs, opinion, commentary, advice, blogs or current affairs including weather or financial market reporting;
  • Websites unless the website primarily contains or hosts digital games, virtual or augmented reality experiences or educational products.

What expenditures qualify for the credit?

The IDM tax credit is calculated at 40% of qualifying expenditures. Qualifying expenditures must be incurred on or after January 1, 2015 and are:

  • Eligible salaries and
  • 65% of eligible remuneration.

Eligible salaries are those salaries paid to eligible employees of the corporation who actively participate in the creative development of an IDM product. Eligible salaries does not include profit sharing arrangements, stock options, signing bonuses, employment incentives or any portion of a salary which is subsidized by a government. Eligible employees must have been resident in the province on the last day of the previous calendar year during which his or her salary was earned, or resident in the province on the last day of the calendar year in which his or her salary was earned.

Eligible remuneration is an amount paid to another company for services employed in the development of an IDM product that would, if the company had directly hired the individual providing the service, qualify as eligible salaries.

Eligible salaries and remuneration would not include expenditures paid in respect of marketing, human resources, administrative support, or management services.

In the event that an eligible corporation incurs eligible salaries in the provision of services to an arm’s length corporation, and those services can be considered eligible remuneration for the purposes of the second company, in the absence of evidence of an agreement between the two companies with respect to the claiming of the credit as remuneration, the company incurring the salary cost will be eligible to claim the salaries. The second company will not be able to claim eligible remuneration in respect of those salaries.

What is meant by “used interactively”?

The words “used interactively” describe the communication between an individual and a computer. The communication can range from a technical interaction on a primary level (menus, cursors, etc.) to verbal exchanges with a computer. An IDM product must enable the user to become a participant, not simply a reader or spectator.

What are the characteristics of a product that is intended to be used interactively by individuals?

Three characteristics of the product will be evaluated to determine if it is intended to be used interactively by individuals: feedback, control and adaptation. The degree to which these characteristics are incorporated into the product will serve as an important guide in the evaluation of eligibility.

  • Feedback: Feedback is the response given by the program to the user. For example, interactive educational software would comment on the user’s test results, give the right answer, point out a weakness or suggest that the user review a particular chapter.
  • Control: The user can choose the form and sequence in which information is presented and can influence and affect the way in which the program unfolds. For example, the user can make choices, implement a strategy, move objects, use logical reasoning, reconstitute a whole or modify or create an image.
  • Adaptation: A product adapts to the user’s needs if the program’s action depends on a number of situations that have been provided for within the program. The program could offer several scenarios, but the specific action will take into account the user’s level of ability. It could also incorporate decision trees or databases leading to a search for information and subsequent processing of it.

The mere presence of any or all three characteristics will not necessarily meet the “used interactively” test. It is intended that these characteristics would comprise a significant component of the product. The greater the degree to which these characteristics are exhibited by the operation of the product, the increased likelihood the product will meet the requirement to be used interactively.

How do you apply for the credit?

The application process is a two part process.

 

Part I – Registration Certificate

 

Tax Administration Division of the Department of Finance is responsible for the evaluation of applications for registration under the IDM program in respect of each IDM project.

It is recommended that applications be made through the NL Film Development Corporation to give the applicant corporation an opportunity to receive a preliminary indication on whether the project is likely eligible for the credit. This process will likely also identify any areas where an application can be enhanced to increase the likelihood of approval from the Department of Finance and potentially reducing overall processing times.

Notwithstanding any recommendation of the NL Film Development Corporation, the Minister of Finance has final say with respect to approval of a project.

 

Part II – Tax Credit Certificate

 

A company must apply to the Minister of Finance for a tax credit certificate within 18 months of the end of each taxation year. An application shall be made in the required form and shall be signed by an authorized officer of the company.

If all requirements are met, the minister will then issue the tax credit receipt and the company will claim the credit on the appropriate line on the T2 return for that year as identified on the receipt.

Government Assistance

In the event that a company is entitled to government assistance with respect to any project, regardless of the ultimate consumer, the tax credit which may be claimed for that project is limited to the amount by which the cost to develop the project exceeds any government assistance to which the company is entitled (i.e. the credit plus government assistance cannot exceed the cost to develop the product).

Government assistance is any financial assistance a company receives or is entitled to receive from a government, municipality or other public authority which is not repayable to that entity, except a tax credit paid under this program. Such assistance would include grants, forgivable loans, deduction from tax, or investment allowances.

Government Projects

Where an eligible project is undertaken for a government, a municipality or an agent of either a government or a municipality, the value of the tax credit in respect of qualifying expenditures incurred before November 8, 2019 will be limited to the amount by which the cost to develop the project exceeds the sale or licensing proceeds and government assistance received in respect of that project (i.e. the credit plus proceeds from the sale of the product to government plus government assistance cannot exceed the cost to develop the product).

In addition, the credit in respect of qualifying expenditures incurred before November 8, 2019 will not be paid until such time as the project is completed. The application for the tax credit for that project must be received within 18 months of the end of the taxation year during which the product was completed.

Government Recourse

The minister may, at any time, suspend or revoke a certificate of registration or a tax credit certificate if, in his or her opinion, the eligible corporation has not complied with the legislation, or there has been fraud on the part of the company in obtaining or maintaining the certificate. The minister may also revoke a certificate if the eligible corporation has not completed an eligible product 36 months after beginning the project, or if there has been a change in circumstances relating to the eligible product or eligible project that affects its continued eligibility.

Additional Information

Interactive Digital Media Tax Credit Regulations under the Income Tax Act, 2000.

For more information, please contact the Tax Administration Division of the Department of Finance