Stretching your studio’s dollars, even without an Interactive Digital Media Tax Credit (IDMTC)
The video game industry is a fast-growing subsector, enjoying a 10% annual growth rate both worldwide and in Canada. This growth has been fueled by innovation, as the gaming industry went from text-only games on hulking computers to millions of polygons in your pocket -- all within only 40 years.
The gaming industry has a long history in Alberta, with large studios creating beloved franchises, and a quickly-growing number of smaller studios. But the industry here has ample room for growth and maturation, compared to more established markets in other provinces.
[Described/alt. text] Two monitors, one with code, are illuminated in front of a reddish-pink background.
As more players in Alberta seek to grow in a competitive environment, the SR&ED incentive program is a key factor that you should not overlook, for two primary reasons:
- SR&ED is one of the only federal incentives that a video game company can obtain reliably, year over year. This contrasts with competitive submission processes like the Canadian Media Fund. Provided you are eligible for SR&ED (which is likely), the program provides a great rate of return of up to 48% back on expenditures, often in the form of cash in hand. SR&ED can stretch your dollars further as you work on your mega-hit. You do not need to be earning revenue to benefit from SR&ED.
- Alberta’s decision to not enact an Interactive Digital Media Tax Credit (IDMTC) in the February 2022 provincial budget increases the relative importance of SR&ED and the provincial SR&ED credit (Innovation Employment Grant, or IEG). In the absence of an IDMTC, Albertan video game companies can recoup the costs of development work through the SR&ED program and IEG.
This white paper addresses what types of activities are eligible for SR&ED funding in video game development, what costs are typically claimed, QA efforts as SR&ED expenditures, and the interplay between SR&ED and other sources of funding.
...the video game industry also intersects with new and very technical fields (3D rendering, AR/VR, machine learning, etc.) which are fertile for SR&ED eligibility.
Technical criteria
Technical eligibility for SR&ED can be considered by asking why and how you undertook the project:
- Why?
- Did you hope to advance scientific knowledge or achieve technological advancement?
- How?
- Did you use a systematic investigation or search by means of experiment or analysis?
Eligibility in video game development
What areas are typical hallmarks for SR&ED eligibility in software? Challenges relating to performance, latency, or scalability often lead to experimentation to develop the best solution within a complex system. However, the video game industry also intersects with new and very technical fields (3D rendering, AR/VR, machine learning, etc.) which are also fertile for SR&ED eligibility.
Be mindful that creating novel things does not necessarily lead to SR&ED; the work must be done to surpass your internal knowledge (which includes publicly available methods) by attempting to find the best solution through testing and refining your hypotheses.
There are areas of seemingly routine work which appear to not qualify for SR&ED, according to a strict reading of CRA’s policies. However, there are often intricacies within a project which could reveal eligible work. Determining the project’s eligibility is ultimately made on a case-by-case basis and can be done at any step of the development. However, it’s important to identify which areas of your work are SR&ED-eligible as soon as possible. Copoint can help you make that determination.
Common pitfalls
Almost half of the SR&ED claims made in Canada are software projects! However, there are three common pitfalls which can sink your claim:
- The technological uncertainty isn’t clearly identified or is considered by CRA to be within the bounds of standard software engineering practices.
- The description of the steps undertaken suggest a trial-and-error approach instead of a systematic investigation.
- There is not enough contemporaneous documentation to support the claim.
The last aspect is particularly relevant to the video game industry: while version control commits and tickets constitute a source of documentation, they are typically too atomic and can miss meaningful information, such as time spent on an issue or the results of an experiment.
What costs can be claimed?
SR&ED claims for video game studios are primarily based on claiming the cost of Canadian wages (salaries) and 3rd party developers located in Canada. The wages and contractor costs claimed must be tied to efforts made on the SR&ED project.
One crucial consideration is that SR&ED is retroactive: you can claim costs that have been incurred by the company within the past fiscal year. Unfortunately, this means that SR&ED is not a means to create financing for a starting studio; it’s a method to stretch your studio’s dollars further by recouping some of your expenses, allowing you to reinvest in your game.
Wages are a foundational part of most video game SR&ED claims. The good news is that wages receive an overhead “multiplier.” When accounting for the overhead multiplier, taxpayers can recoup a SR&ED credit of up to 74% of the wages of people directly involved in the SR&ED-eligible activities. By contrast, contractors do not receive an overhead multiplier.
[Described/alt. text] Two individuals are seated playing a video game on two screens
Can QA be claimed?
Your QA department is vital to the success of your game, as they tirelessly play your game in a variety of settings and configurations to report bugs. A common mistake made by some claimants or SR&ED providers is to believe that QA is not an eligible SR&ED expenditure. We help our clients by identifying “data collection, testing […] where the work is commensurate with the needs and directly in support” of the SR&ED project, which is a claimable expenditure unlike "routine testing." Afterall, how can you evaluate if your solution to the problem really works (i.e. runs smoothly on all the platforms, even on a crowded multiplayer server, etc.) without your QA team? Nonetheless, it’s best to develop a concerted strategy delineating the time spent on testing the SR&ED vs routine testing; CRA will almost certainly ask about this in the event of a review.
Afterall, how can you evaluate if your solution to the problem really works (i.e. runs smoothly on all the platforms, even on a crowded multiplayer server, etc.) without your QA team?
Compatibility with other sources of funding
There are a variety of different models and sources of funding, including publisher advances or other government grants and funding, all of which need to be considered on a case-by-case basis to determine if they’ll affect your SR&ED claim. A taxpayer cannot “double dip” by claiming expenditures that were directly paid for by another external source. However, this area of a SR&ED claim is full of pitfalls and opportunities. We can assess your unique context to determine the best strategy.
Where do we go from here?
The Alberta government’s decision to not enact an IDMTC is unfortunate and means Alberta-based studios need to be on the lookout for funding opportunities to remain competitive. The SR&ED tax credit program and the corresponding provincial incentive (the Innovation Employment Grant, or IEG) are not to be overlooked, and provide a substantial financial opportunity to local video game developers. For privately owned Canadian studios in Alberta, the refund rate is 40-48% on expenditures, offering a significant return on investment, and companies need not be earning revenue to benefit.
Our team of Copoint advisors, including scientists, engineers, and accountants, are here to assist with your SR&ED questions and look forward to exploring a potential claim with you.
