New media companies losing out on millions of dollars in tax credits: KPMG

Too many new media producers aren't taking advantage of lucrative federal research and provincial tax credits, a practise that a senior consultant at KPMG warns could affect the sustainability of some companies. "They're put off by all the bureaucracy," says Michael Olivier, who works at the international accounting firm's Toronto office. He notes that it takes significant time and effort to develop the array of reports, submissions and supporting documentation required by government. "And it's hard even for us to keep up with all the rules. But this funding is often critical to a company's survival." Successful new media companies such as Toronto-based Marblemedia and Bedlam Games have publicly stated the crucial role government programs have played in helping them develop and market new products, such as developing content that spins back to traditional television platforms, and combining video games, skill gaming and e-commerce. Media tax credits are designed to help innovative companies recoup their costs - not to provide upfront investment, explains Olivier. "But the use of media tax credits demonstrates a new media company has some business savvy, and makes it more attractive to investors," says Olivier The federal scientific research and experimental development (SR&ED) credit is one that's often underutilized, he says. New media companies involved in developing a product with technology challenges are eligible for this credit, which allows them to claim almost 60% of the money they spend on salaries and equipment. "For example, a company that develops games for mobile phones and has small form factors to deal with can apply," he says. "It doesn't even have to be successful technology - just the fact that they tried makes them eligible." The catch is they must write a detailed report substantiating the exploratory aspects of the technology. Olivier warns the Canada Revenue Agency (CRA) is interested in pure technology descriptions, not business cases, for these reports. "Companies can produce a good report, but it may get thrown out because the CRA doesn't like the format or misses the points where the SR&ED credit applies," he says. While the SR&ED credit can be applied to a range of specific product types which include games, e-learning and simulators, it doesn't apply at present to social media such as blogware or YouTube-type projects, he says. "The legislation was written over five years ago, and there are no plans to my knowledge to update it. But there are special grants available to fill in the holes between tax credits." Exploiting provincial tax credits Another category of media tax credit that's often underutilized is provided by provinces that want to develop their new media hubs, he says. Ontario, Quebec and B.C. provide digital media credits ranging from 20% to 30%, and last year, Nova Scotia introduced a 35% credit. These are typically based on the functionality of the product, for example, innovative interactivity or special effects. In some cases, companies can get marketing and distribution costs of up to $100,000 covered per product. These provincial credits can often complement the federal SR&ED credit. "For example, once a mobile game is released for commercial sale or leased by a cell phone carrier, companies can use the provincial credit to cover costs not claimed under the SR&ED," says Olivier But companies can't double dip. "In one case, a company received the Ontario interactivity credit at the 30% rate - but in doing so, it rendered itself ineligible for the higher SR&ED credit of 60%. In some cases, money received from one program can reduce the amounts received from another." There are some provincial services that can help new media companies attract investment, he says. Many provide product assessments that can be used as loan or grant collateral to attract partners and investors. "Half-way through development, companies can put in a claim for a preliminary assessment to the Ontario Media Development Corporation (OMDC). If it's a winning product, the OMDC will issue a letter that can be taken to investors to demonstrate they're on track. This has played an important role for many companies." Tax credits more flexible than grants Many provinces also offer grants for digital media development before or during development. However, unlike tax credits that are awarded to all companies that can support the claim, these are competitive awards. "A company with an eligible project can miss out on funding if another company has a better one," adds Olivier. Grants can also lock a project into a certain development path and timeline. "We find they're quite limiting sometimes," he says. "The money's there but it's not always a good fit." Tax credits are more flexible and there are no limits to the amounts that can be claimed beyond their maximum thresholds. "Even if you put a project on hold for six months to fight fires, the tax credit will apply on whatever work was done in a fiscal year." Companies that missed out on media credit claims can re-file a corporate tax return for about two years after a fiscal year-end to recoup their costs, he says. "So companies shouldn't leave this too long as the opportunity will disappear." Olivier points out that most major accounting firms provide companies a free initial consultation to assess their eligibility for media tax credits, and offer fee arrangements based on a percentage of the credit they can obtain. "So they have an incentive too to find the best mix of media tax credits to maximize their fees. But if they're not successful and the new media company's claim is rejected, then it doesn't have to pay any fees."

New media companies losing out on millions of dollars in tax credits: KPMG

Broadcast | February 29, 2008

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