NL — Interactive Digital Media Tax Credit

The Newfoundland and Labrador Interactive Digital Media (IDM) tax credit is a refundable tax credit provided to eligible corporations to support the development of interactive digital media products by offering a 40% tax credit on qualifying expenditures. This initiative is aimed at fostering innovation and economic growth within the interactive digital media industry in Newfoundland and Labrador.

The Newfoundland and Labrador Interactive Digital Media (IDM) tax credit is designed to stimulate the development of interactive digital media by providing financial support to corporations engaged in this field. This refundable tax credit targets the augmentation of the province’s digital economy, enabling companies to enhance their creative outputs while reducing their financial burden. The tax credit is applicable for the period from January 1, 2015, to December 31, 2024.

To qualify for the tax credit, a corporation must satisfy several stringent eligibility requirements. First and foremost, the corporation must primarily engage in the business of interactive digital media development and have a permanent establishment in Newfoundland and Labrador. Additionally, it must be incorporated under the Corporations Act, an Act of the Parliament of Canada, or another Canadian province and must not be exempt from taxation under Part I of the federal Income Tax Act. The corporation must also hold a valid registration certificate under the IDM program. The determination of a permanent establishment will follow the guidelines outlined in Regulation 400(2) of the Income Tax Act (Canada), evaluated by the Department of Finance.

Eligible corporations can claim a 40% tax credit on qualifying expenditures, which encompass eligible salaries and 65% of eligible remuneration paid. The credit is capped at $40,000 per eligible employee annually and $2 million per corporation, or group of associated companies, for all taxation years concluding in a calendar year. For typical projects, the tax credit can be claimed in the year the expense was incurred. However, for projects developed primarily for government entities, the credit can only be claimed in the taxation year when the project reaches completion. Applications for this tax credit must be submitted within 18 months from the end of the applicable taxation year.

For a product to qualify for the tax credit, its primary purpose must be to educate, inform, or entertain by presenting information in at least two formats: text, sound, or images. Additionally, the product must be intended for interactive use by individuals, should not be focused on interpersonal communication, and must not be used for promotional activities. Products that typically qualify include video games, educational software, and training simulators. However, certain types of products are excluded from eligibility. These include products likely to receive an "AO" rating by the Entertainment Software Rating Board, gambling-related products, content aggregators, search engines, and websites unless primarily hosting digital games, virtual or augmented reality experiences, or educational products.

The IDM tax credit is calculated based on 40% of qualifying expenditures, which include eligible salaries and 65% of eligible remuneration. Eligible salaries pertain to those paid to employees actively contributing to the creative development of an IDM product. These salaries do not include profit-sharing arrangements, stock options, signing bonuses, employment incentives, or government-subsidized portions of salaries. Eligible remuneration refers to amounts paid to other companies for services used in developing an IDM product, provided that, had the corporation directly hired the individual for service, it would qualify as eligible salaries. Expenditures incurred for marketing, human resources, administrative support, or management services are not considered qualifying expenditures.

An IDM product must be interactive, meaning it facilitates communication between an individual and a computer, enabling users to participate actively rather than merely observe. Three characteristics determine if a product is interactive: feedback, control, and adaptation. - **Feedback:** The program responds to the user, such as an educational software commenting on test results or suggesting areas of improvement. - **Control:** The user can influence the sequence and form of information presented, making choices and implementing strategies. - **Adaptation:** The product adapts to the user’s needs, offering various scenarios based on user ability, incorporating decision trees, or facilitating information searches. The presence of these characteristics alone may not ensure the product’s eligibility. The overall degree to which these features are integrated is crucial in qualifying as an interactive product.

The application process is divided into two parts: obtaining a Registration Certificate and then a Tax Credit Certificate. **Part I – Registration Certificate:** The evaluation for registration under the IDM program is handled by the Tax Administration Division of the Department of Finance. It is advisable for applications to be processed through the Newfoundland and Labrador Film Development Corporation to receive preliminary feedback and enhance the application’s chances of approval. Despite recommendations from the Film Development Corporation, the Minister of Finance has the final say on approvals. **Part II – Tax Credit Certificate:** Applications for the Tax Credit Certificate must be submitted to the Minister of Finance within 18 months of the taxation year’s end. The application must follow the required format and be signed by an authorized company officer. Once all requirements are met, the minister will issue the tax credit receipt, which the company can then claim on the appropriate line of the T2 return for that year.

When a company is entitled to government assistance for any project, the tax credit claim is limited to the amount by which the project’s development cost exceeds the government assistance received. Government assistance, in this context, includes non-repayable financial help from governmental entities, municipalities, or public authorities, excluding the IDM tax credit. For government projects, the credit for qualifying expenditures incurred before November 8, 2019, is limited by the cost-development offset and only paid upon project completion. Applications must be submitted within 18 months of the project’s completion year.

The minister retains the right to suspend or revoke a certificate if the corporation is found non-compliant with applicable legislation or involved in fraudulent activities. Additionally, if an eligible product is not completed within 36 months of project initiation or changes in circumstances affect eligibility, the certificate may be revoked. For further information, corporations can consult the Interactive Digital Media Tax Credit Regulations under the Income Tax Act, 2000, and contact the Tax Administration Division of the Department of Finance.