Ontario Interactive Digital Media Tax Credit Bulletin

March 16, 2017

Summary

The Ontario Interactive Digital Media Tax Credit (OIDMTC) is a refundable tax credit available to qualifying corporations for expenditures related to the creation, marketing and distribution of eligible interactive digital media products.  The credit is calculated as 40 per cent of eligible labour and marketing and distribution expenditures for qualifying corporations that develop and market their own products, and 35 per cent of eligible labour expenditures for qualifying corporations that develop products under a fee-for-service arrangement.  A 35 per cent refundable tax credit is also available to qualifying digital game corporations and specialized digital game corporations.

On April 23, 2015, the government announced proposed changes to eligibility for the OIDMTC to:

  • Focus the credit on entertainment products and on educational products for children under the age of 12;
  • Exclude certain products from OIDMTC support, such as search engines, real estate databases and news and public affairs products;
  • Strengthen the rule that excludes promotional products;
  • Improve certification by replacing the former development requirement with a rule based on the labour costs of the company developing the product.

A regulation implementing the proposed eligibility changes was filed on March 14, 2017.  This Bulletin provides an overview of OIDMTC eligibility requirements impacted by the regulation.  For further details, applicants should consult the regulation.

Note that these new eligibility requirements do not apply to the tax credit available to qualifying digital game corporations and specialized digital game corporations. 

OIDMTC Eligibility Requirements

1. Primary Purpose Requirement

The primary purpose requirement has been amended to provide that the OIDMTC is available only for products with a primary purpose to:

  • Entertain the user; or
  • Educate users under the age of 12.  

A product can only have one primary purpose. 

Primary purpose of entertaining the user

In order for a product to have the primary purpose of entertaining the user, the product should be designed for recreation.  A product with the primary purpose of informing or educating the user is not considered to have the primary purpose of entertaining.  For example, news products are not considered to have the primary purpose of entertaining the user, even if the user engages with the product during leisure time. 

A product that is a digital game is considered to have the primary purpose of entertaining the user.

Primary purpose of educating users under the age of 12

In order for a product to have the primary purpose of educating users under the age of 12, the product should be designed as a tool for teaching children under the age of 12.  This could include, for example, a product that is designed to teach the letters of the alphabet.  A product that is designed primarily to educate youths and adults is not considered to have the primary purpose of educating users under the age of 12.

Implementation

The changes to the primary purpose requirement apply to expenditures incurred after April 23, 2015. Expenditures that are incurred on or before April 23, 2015 in respect of previously eligible products are not affected. 

2. Excluded Products

Certain products no longer qualify for the OIDMTC.  These include:

  • Products that provide any content that is news, current events or public affairs programming, opinion, commentary, advice or weather or market reports.  Some examples of excluded products include a website or app for a newspaper, magazine or blog.  Products with non-qualifying content would be excluded, even if the content is only available online.
  • Products produced primarily for industrial, corporate or institutional purposes, including vocational training products and other types of job training products.  This would include any product that is designed to provide job training to employees or to inform or educate employees.
  • Products that are primarily reference materials.  This would generally include any product that is designed to be used as a resource for finding information, such as a user guide for equipment or software, a dictionary or a map.
  • Products that primarily aggregate content from various internet sources and consolidate it in one place.
  • Products that are primarily used to filter and organize specific content from the internet.
  • Products that are internet search engines.
  • Products that are blogs.
  • Products that are primarily databases.  This includes any product the primary purpose of which is to facilitate searching and retrieval of stored information, such as a real estate database or a recipe database.

In addition to the excluded products listed above, a product that is a website is also excluded unless the website primarily hosts:

  • One or more digital games;
  • Content related to a film, television or internet production that is hosted under a licence agreement in respect of a copyright that relates to the film, television or internet production, provided the website does not exhibit more than 10 per cent of any film, television or internet production (that meets the definition of film, television or internet production below);
  • One or more virtual or augmented reality experiences;
  • Content that is designed to educate users who are under the age of 12; or
  • Any combination of the above.

Exceptions to the websites exclusion:

Digital game

A website that primarily hosts one or more digital games is an eligible product for the purpose of the OIDMTC, provided the product meets all of the other eligibility criteria.  A product that is a digital game includes the following characteristics:

  • Is played by one or more users;
  • Sets out goals and rules for game play; and
  • Challenges the user and has an uncertain outcome.

Film, television or internet production

A film, television or internet production must be produced for

  • Commercial release in theatres;
  • Broadcasting on television; or
  • Broadcasting over the internet where the end user is required to pay a purchase, licence or subscription fee.

A film, television or internet production does not include the following productions:

  • News, current events or public affairs programming, or a programme that includes weather or market reports;
  • A talk show;
  • A production in respect of a game, questionnaire or contest (other than a production directed primarily at minors);
  • A sports event or activity;
  • A gala presentation or an awards show;
  • A production that solicits funds;
  • Reality television;
  • Pornography;
  • Advertising;
  • A production produced primarily for industrial, corporate or institutional purposes; or
  • A production, other than a documentary, all or substantially all of which consists of stock footage.

Educational products for users under the age of 12

A website that primarily hosts content designed to educate users under the age of 12 is an eligible product for the purpose of the OIDMTC, provided the product meets all of the other eligibility criteria.  

Product that hosts virtual or augmented reality experiences

A website that primarily hosts one or more virtual reality or augmented reality experiences is an eligible product for the purpose of the OIDMTC, provided the product meets all of the other eligibility criteria.

Similar content products

If a majority of the content of a particular product is available on a website that is excluded, then the particular product is also excluded.  For example, if a product is an app and the same content is available through a website that is excluded, the app is also an excluded product.  

Implementation

These product exclusions apply in respect of expenditures incurred after April 23, 2015.  Expenditures that are incurred on or before April 23, 2015 in respect of previously eligible products are not affected.

3. Promotional Products

In order to qualify for the OIDMTC, a product must not be used primarily to present or promote the developer, or the purchaser in the case of a specified product.  As well, a product must not be used primarily to present, promote or sell the products or services of the developer, or the purchaser in the case of a specified product.

The rule that excludes products that are primarily used for promotion has been strengthened by deeming products with no revenue generating stream to be excluded promotional products.  

In the case of a product that is a specified product, the product must result in a revenue stream to the purchaser.  In the case of a product that is not a specified product, the product must result in a revenue stream to the developer.

For the purposes of this rule, a revenue stream is the generation of revenue through:

  • The sale of the product;
  • Fees for the use of the product, including licence fees and subscription fees;
  • In-product purchases;
  • Third-party advertising; or
  • The sale or licence of another product developed by the developer that can reasonably be considered an extension or upgrade of the product.

An in-product purchase, also called an in-game or in-app purchase, occurs when the user can purchase an enhancement to the product.

Third party advertising relates to marketing and promotion of a corporation or person, or products or services of a corporation or person, that is not related to the product developer or the purchaser.

Implementation

The requirement to have a revenue generating stream applies to expenditures incurred after April 23, 2015.  Expenditures that are incurred on or before April 23, 2015 in respect of previously eligible products are not affected.  

4. Development Requirement

The OIDMTC has been amended to replace the requirement that “all or substantially all” of the product be developed in Ontario by the company claiming the credit with a new quantitative rule based on the labour costs of developing a product.  The new quantitative rule has two concurrent tests that have to be met: an 80 per cent test and a 25 per cent test.

Simplified formulas for the 80 per cent test and the 25 per cent test are provided below.  For further details, applicants should consult the regulation.

The 80 per cent test generally requires that the following formula is 80 per cent or greater:

A

B

Where:

A is the total amount of eligible labour expenditures attributable to services rendered personally in Ontario:

  • By employees of the applicant;
  • By certain individuals providing services to the applicant as part of sole proprietorships that do not have any employees;
  • By certain individuals providing services to the applicant through corporations that do not have employees other than the individual.

B is the total amount of labour expenditures that are attributable to services rendered that are directly attributable to the development of the eligible product.

The 25 per cent test generally requires that the following formula is 25 per cent or greater:

C

D

Where:

C is the total amount of eligible labour expenditures attributable to services rendered personally in Ontario by employees of the applicant.

D is the total amount of labour expenditures that are attributable to services rendered that are directly attributable to the development of the eligible product.

Expenditures are not eligible for the OIDMTC if they are claimed for other credits.  Similarly, certain types of assistance reduce the amount of expenditures that are eligible for the OIDMTC.  However, for the purposes of determining the amounts for A and C in the formulas, the amount of an applicant’s eligible labour expenditure will not be reduced as a result of receiving assistance or claiming other credits.  For example, an expenditure in respect of which an applicant receives the scientific research and development credit could be an eligible labour expenditure for the purposes of the formulas. Expenditures will continue to be ineligible for the OIDMTC if they are claimed for other credits, even if they are treated as being eligible for the purposes of the formulas.

The amounts determined for B and D would include, for example, expenditures attributable to services rendered:

  • By an employee of the applicant, whether or not the services are rendered in Ontario;
  • As part of a sole proprietorship, whether or not the proprietorship has employees; and
  • By a corporation, whether or not the corporation has employees.

The amounts determined for A, B, C and D only include expenditures incurred during the 37-month period ending at the end of the month in which development of the eligible product is completed.

The new rule does not change the definition of expenditures that are eligible for the credit.

Implementation

To expedite certification, the new development requirement applies to all products in respect of which a determination of eligibility has not been made on or before April 23, 2015, including those awaiting certification on April 24, 2015.  However, only the 80 per cent test applies to products for which certification was applied for before April 24, 2015.  Both the 80 per cent test and the 25 per cent test need to be met for products that apply for certification on or after April 24, 2015.