Tax incentives credited with creating a global powerhouse for gaming in Canada: UK study

Canada's video games sector slipped from third place globally to fifth place this year, but "its long term position in the top echelons of the world's great development territories seems assured". That's the conclusion of a comprehensive study released today in the UK which finds that generous tax incentives have lured world-class studios to Canada, although it warns that the creation of original intellectual property (IP) among independent studios continues to be a problem.Released by the by the National Endowment for Science, Technology & the Arts (NESTA), the 52-page report compares the UK's games development sector against Canada, France and Germany, with a particularly focus on government policies designed to stimulate the sector.The report paints a particularly bleak picture of the UK gaming industry - which it says faces important structural weaknesses tied to shortages in skills, high costs of development, lack of access to finance, limited capabilities in online development and limited government support. It says the situation in the UK has been worsened by international competition from countries, namely Canada, which has doubled in size in the last two years largely as a result of provincial tax incentives. Canada now houses some of the world's largest studios."Canada, particularly Quebec, is the clearest example of how large scale pump priming of a well-located, commercially viable games industry with public funds can improve a sector's global status. Canadian provincial subsidies have driven its industry rapidly into the top echelons of the global games development industry," states the report, entitled Raise the Game, The competitiveness of the UK's games development sector and the impact of governmental support in other countries.France, it seems, has also suffered at the hands of government policies in Canada, with Quebec being the main beneficiary. The report notes that France's studios "were decimated by Quebecois tax breaks", with many opting to purchase companies in Quebec and move operations there to take advantage of these incentives. France began investing heavily in its games companies - including the introduction of a new national games development tax credit - following an exodus of studios like Ubisoft to Quebec over the past decade. However, the report's authors doubt France's gaming sector will become a global leader anytime soon.Canada's rise as a global powerhouseCanada's rise as a global gaming powerhouse has been steep and rapid. In the late 1990s, the report notes, the country was home to a handful of major studios located in Vancouver, Edmonton and Toronto, sold just one-fifth of the games it sells today and employed less than 2000 developers. Today, the country is home to four major clusters: Edmonton/Calgary, Vancouver, Toronto and Montreal, with the world's two largest and fastest growing studios are located in Vancouver (Electronic Arts) and Montreal (Ubisoft).The number of people working in Canada's gaming sector has grown by 42% since 2006 to 10,500 employees with Canadian studios expected to spend nearly $746 million in 2008. The impact has been most pronounced in Quebec, whose fortunes began to turn in the late 1990s when it lured Ubisoft to Montreal. At the time the province employed about 500 in the sector. Today, Montreal boasts Canada's largest gaming cluster, employing over 5,300 and attracting nearly $1.9 billion in investment. The estimated cost to Quebec in terms of tax credits and grants is estimated to have been $622 million."In the past four years, Quebec's growth rates have accelerated as other companies started investing heavily in a territory that has now achieved critical mass. Quebec is expected to attract an additional £2bn ($3.75 billion) in inward investment over the next five years, at a cost of £660m ($1.24 billion) in tax breaks and grants," state the authors, Rick and Nick Gibson of Games Investor Consulting Limited.However, Canada is not without its challenges. Ironically, attractive tax incentives are eroding the country's indigenous industry. To benefit from these incentives, large US and French-owned companies in particular have raided Canada's independent sector, including studios such as Bioware, Relic, New Horizons Interactive, Radical and Beenox. Of the dwindling number of small-to-mid-sized Canadian-owned companies that remain, most rely on licensing rather than creating their own IP."The creation of original new games is a challenge in every western territory, and in this regard Canada's tax regime has not encouraged an increase in original IP creation, particularly in the independent sector. This may be due to a combination of factors including culture, the territory's relative immaturity as a development centre, the high proportion of the work force retained by publishers, the fact that the tax breaks do not target IP creation specifically as well as a global context that does not favour the development of original games on consoles and offline PCs," the authors note."The outcome of this structural imbalance," the report adds, "is that Canada does not retain the value of the games copyright created by studios located in the country," the report notes.Government support doesn't extend to direct fundingWhile Canada does a good job overall in offering tax credits to the gaming sector, direct federal funding is growing scarce. "A conservative government first elected in mid-2006 has been cutting government spending on a range of programmes. In 2008, it cut the Canada New Media Fund and the Trade Routes export assistance programme, amongst wider cuts to cultural support initiatives. No further rounds of the (Telefilm Great Canadian) games competition are expected."However, it lauds the provinces as being "second to none" in their support of the games industry. Both Quebec and Ontario provide labour tax credits of 30% or more, with Quebec also offering five-year income tax holidays to foreign specialists who relocate to the province.BC has the fewest incentives of the three provinces but that could be changing. The industry association, New Media BC, is lobbing the province to consider labour tax credits, and an expansion to the film and television tax credit to include games, especially in the development of new original IP. (See recent CNM interview with New Media BC president Ken Low). Other industry recommendations include changing the visual effects tax credit to include digital animation, audio effects and post-production activities, and introducing a new tax incentive for commercializing IP.

Tax incentives credited with creating a global powerhouse for gaming in Canada: UK study

News | 12/04/2008 7:57 pm EST

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