Digital Media Tax Credit (DMTC)

Corporations may also be eligible to receive a credit on marketing and distribution expenditures to a maximum of $100,000 per product. These expenditures may be made outside the province.

Qualifying expenditures; Base tax credit rates: 50%; Regional bonus: 10%; Total potential tax credit: 60%

Total expenditures; Base tax credit rates: 25%; Regional bonus: 5%; Total potential tax credit: 30%

If the credit is calculated using “total expenditures” it will be reduced by the total amount of “government assistance”6 received by the applicant for the eligible product.

There are no annual or per product limits to the total amount of tax credit received by an eligible corporation, nor any restrictions regarding the number of applications by an eligible corporation.

Qualifying Expenditures The DMTC is equal to the sum of: 50 percent of “qualifying expenditures” incurred outside the eligible geographic area of the Province, and 60 percent of “qualifying expenditures” incurred in an eligible geographic area of the Province. A qualifying expenditure is defined as the sum of the following:

1. Eligible salaries9;
2. 65 percent of eligible remuneration10;
3. Marketing and distribution expenditures11 to a maximum of $100,000 per eligible

product.

In order for a “qualifying expenditure” to be reasonable in the circumstances, the dollar value of the labour expense must conform to industry standards, and the type of labour expense must be generally recognized as being essential to the development and production of the interactive digital media product. If the amount is unreasonable, only the amount in excess of what is reasonable is not eligible for the credit.

“Eligible salaries” are salaries and wages paid to employees of the eligible corporation.

Dividends are not considered salaries and wages. Employees must have been residents of Nova Scotia on the last day of the calendar year prior to the year in which the salary or wage was earned. That is, they must have been liable for personal income tax in Nova Scotia by virtue of being resident in Nova Scotia. There are no “deeming” provisions for non-residents of Nova “Eligible salaries” is defined in Section 9 of the Digital Media Tax Credit Regulations.

“Eligible remuneration” is defined in Section 10 of the Digital Media Tax Credit Regulations.

“Eligible marketing and distribution expenditures” is defined in Section 8 of the Digital Media Tax Credit Regulations.

Scotia. A corporation applying for the DMTC will be required to file a Declaration of Residency completed by each employee for whom eligible salaries are being claimed.

The eligible employee must normally report to a permanent establishment of the eligible corporation in Nova Scotia. In addition, salaries and wages must be reasonable in the circumstances, included in the cost of the eligible product, and directly attributable to the production of the eligible product.

Salaries and wages incurred in the eligible corporation’s taxation year must be paid in that taxation year or within 60 days of the end of the taxation year. If not, they may be claimed in the subsequent taxation year as long as they are paid in the subsequent taxation year or within 60 days of the end of the subsequent taxation year. No claim for salaries and wages is allowable if they are not paid within these time limits.

“Eligible remuneration” is the labour component of third party expenditures incurred by an eligible corporation and paid to arm’s length entities or individuals. The eligible remuneration must be reasonable in the circumstances, included in the cost of the eligible product, and directly attributable to the production of the eligible product. In addition, the eligible remuneration must be paid for services rendered at a permanent establishment in Nova Scotia. Payments for services performed outside Nova Scotia or to an entity or individual that does not have a permanent establishment in Nova Scotia will not qualify as eligible remuneration.

Eligible remuneration incurred in the eligible corporation’s taxation year must be paid in that taxation year or within 60 days of the end of the taxation year. If not, it may be claimed in the subsequent taxation year as long as it is paid in the subsequent taxation year or within 60 days of the end of the subsequent taxation year. No claim for eligible remuneration is allowable if it is not paid within these time limits.

Invoices from arm’s length entities or individuals must be accompanied by a breakdown of the labour (services) component performed in the Province. Invoices which do not provide this breakdown, or where the breakdown is not supported by a Statement of Eligible Remuneration, will not be included in calculating the amount of eligible remuneration.

“Marketing and distribution expenditures” are expenses incurred by an eligible corporation that are directly attributable to advertising, promoting or distributing the interactive digital media product. Marketing and distribution expenditures may be incurred and paid to individuals and entities that do not have a permanent establishment in Nova Scotia and for goods and services provided outside Nova Scotia.

Examples of expenditures that would fall within the definition of marketing and distribution are as follows:

1. Expenses associated with attending trade shows where the eligible product is being

promoted;

1. Advertising costs (including design) for promoting the eligible product in print and

other forms of media;

1. Market research and focus group testing;
2. Development of a visual identity for the eligible product (e.g., branding, logos,

promotional products, etc.);

1. Product displays, demonstrations and in-store promotions;
2. Provision of samples of the eligible product;
3. Direct mail and telemarketing expenses;
4. News releases and media kits;
5. Salaries related to the marketing and distributing of the product.

Marketing and distribution expenditures are capped at $100,000 per eligible product 14.

The marketing and distribution expenditures can be incurred from 24 months before the eligible product is completed to 12 months after the eligible product is completed. The expenditure must be paid in the taxation year in which it is incurred or no later than 60 days after the end of the taxation year.

Expenditures for food, beverages and entertainment related to the marketing and distribution of the eligible product are included at the rate of 50 percent of the expenditure.

The expenditure cannot be directly related to processing an order for an eligible product from a consumer or shipping an eligible product to a consumer.

Total Expenditures The DMTC is equal to the sum of: 25 percent of “total expenditures” incurred outside an eligible geographic area of the Province, plus 30 percent of “total expenditures” incurred inside an eligible geographic area of the Province. Total expenditures are defined as the sum of all salaries and wages paid to Nova Scotians, eligible remuneration, all “Outlays, Expenses, Losses or Replacement of Capital”15 expenses paid in Nova Scotia, marketing and distribution expenditures to a maximum of $100,000, less the value of government assistance. HST is not included in the calculation.

The value of government assistance 16 (grants, forgivable loans, financing, payroll rebates etc.) will be deducted before applying the applicable credit percentage to total expenditures. The DMTC is not considered government assistance for the purposes of this credit. Conditionally forgivable loans will be considered government assistance for the purposes of Section 2 of the Digital Media Tax Credit Regulations.

“Outlays, Expenses, Losses or Replacement of Capital” (OELR) is a catch all category that is intended to capture all costs that are directly related to the production of the eligible product, Subsection 7(1) of the Digital Media Tax Credit Regulations.

Subsection 7(1) of the Digital Media Tax Credit Regulations.

Canada Revenue Agency publication IT-273R2 will be used to determine what the value of government assistance is for the purposes of the DMTC.

Subsection 7(2) of the Digital Media Tax Credit Regulations. that were incurred in Nova Scotia and don’t fall within any of the other categories. This includes items such as rent, supplies, computers and software. Eligible OELR costs can be calculated one of two ways. The first method involves specifically identifying each eligible OELR expenditure.

Each item must be supported by invoices, contracts, etc and listed in the application form.

Alternatively, if an applicant chooses, the Department of Finance and Treasury Board will estimate eligible OELR expenses to be 65% of Eligible Salaries. Applicants are free to choose whichever method they prefer, however, once a choice is made it must be used in each application for the eligible product.