Many people look at filing SRED claims for software development projects and have a hard time making their description work. They had a great idea for an advanced product, designed it, coded it, and shipped it. But was there really technological uncertainty or hurdles they needed to overcome which would qualify it for SRED, or did the project just apply infinite monkey theory?
The infinite monkey theorem states that a monkey hitting keys at random on a typewriter keyboard for an infinite amount of time will almost surely type a given text, such as the complete works of William Shakespeare. (Wikipedia.org)
Often, software developers know at the beginning of the project that they will make it work if they just keep typing. Eligibility in software projects often comes from the “itys”. These are factors like security, scalability, compatibility, speed, performance, etc. Sometimes the link to uncertainty just can’t be made, and the project falls out of the scope of SRED.
Fortunately, for software development projects, there may be alternative programs that are almost as generous as SRED, but give you credit for all of your software development. Why not look at OIDMTC, as an alternative… that just rolls off the tongue, doesn’t it?
Ontario Interactive Digital Media Tax Credit
The Ontario Interactive Digital Media Tax Credit (OIDMTC) is a refundable tax credit based on eligible Ontario labour expenditures and eligible marketing and distribution expenses claimed by corporations who develop interactive digital media products.
The OIDMTC is calculated as 40% of eligible Ontario labour expenditures and eligible marketing and distribution expenses incurred after March 26, 2009 by qualifying corporations, regardless of size of corporation, to create "non-specified" interactive digital media products in Ontario. For those qualifying corporations applying for an OIDMTC on “specified products”, products developed under a fee-for-service arrangement, the OIDMTC tax rate is 35% on qualifying expenditures incurred after March 26, 2009. There is no limit on the amount of eligible Ontario labour expenditures which may qualify and there are no per project or annual corporate limits on the amount of the OIDMTC which may be claimed. Eligible marketing and distribution expenses are capped at $100,000 per non-specified product.
Who is Eligible?
A qualifying corporation is a Canadian corporation (that is Canadian or foreign-owned), which develops an eligible product at a permanent establishment in Ontario operated by it, and files an Ontario tax return. A qualifying small corporation meets these criteria as well, and had during the preceding taxation year neither annual gross revenues in excess of $20 million nor total assets in excess of $10 million.
What Types of Products Are Eligible for the Tax Credit?
There are four types of products that can be claimed under the OIDMTC: non-specified products, specified products, eligible digital games developed by a qualifying digital game corporation, and eligible digital games developed by a specialized digital game corporation.
To be eligible for the OIDMTC a product must be an interactive digital media product whose primary purpose is to educate, inform, or entertain, and that achieves its primary purpose by presenting information using at least two of the following: (i) text, (ii) sound and (iii) images. Types of interactive digital media products that may be eligible for the tax credit include but are not restricted to games, educational and informational products. Operating system software is not eligible for the tax credit.
In addition, the following requirements must be satisfied for a product to be a non-specified product of the qualifying corporation: all or substantially all of the product was developed in Ontario by the qualifying corporation; the product was not developed under a fee-for-service arrangement; the product is not used primarily for interpersonal communication; the product is not used primarily to present or promote the qualifying corporation; and the product is not used primarily to present, promote or sell the products or services of the qualifying corporation.
Specified products are interactive digital media products that are developed under a fee-for-service arrangement, under the terms of an agreement between the qualifying corporation and an arm’s length purchaser corporation for the purpose of sale or license by the purchaser to one or more persons who deal at arm’s length with the purchaser. The qualifying corporation must develop all or substantially of the entire product in Ontario. The qualifying corporation must complete the development of the product after March 23, 2006.
What Expenditures Are Eligible?
The credit may be claimed with respect to qualifying Ontario expenditures, which include eligible labour expenditures and marketing and distribution expenditures (for non-specified products only). Eligible labour expenditures are 100% of salaries and wages for employees and 100% of remuneration incurred after March 26, 2009 and paid to arm’s length persons who are not employees. For specified and non-specified products, “persons” may include individuals, partnerships and corporations.
As can be seen, the OIDMTC credit can be almost as beneficial to the software development company as an SRED Credit. While not allowing for overhead on the labour component, the inclusion of $100K in marketing and distribution expenses may almost make up for this in a small software development company. For projects that have questionable SRED eligibility, it may make more sense to focus on the digital media credit.
While the program is fairly new, and does not have the formal rules, guidelines and history of the SRED program, it should be seriously considered by game, app developers, and general software development companies who have a hard time substantiating their SRED projects.
Till the next time...enjoy the playoffs, and Go Vancouver !
Author: Steve Borza