Canadian companies that are in the space of Interactive Digital Media product development are not fully aware that they could easily be eligible for both Scientific Research and Experimental Development tax credit (SR&ED) and provincial Digital Media Tax Credits (DMTC). These two programs work somewhat differently and seem confusing when considered together. Indeed, eligible expenses, filing processes and timelines are most dissimilar in each program. However, it is in fact logical and quite feasible to make claims under both programs. The industries where this situation would apply frequently are mobile game developers and IT companies that build digital media products.
In the process of a digital media product/application, there may be advancement of a technology before the development of the skin and bones of a digital product. The advancement is covered under SR&ED and skin and bones (also included therein is the marketing costs) are covered under DMTC.
So, as you can see, SR&ED and DMTC occur at different stages of the product development process. To develop an eligible product, at least three phases are involved:
- Planning and market research, leading to a technological challenge;
- Technology development; and
- Product development.
SR&ED tax credit occurs in the second phase for evaluating the technological uncertainty involved in the work and using scientific processes to solve the problem. Digital Media Tax Credit occurs in the third phase and is more focused on the creation, marketing and/or distribution of certain interactive digital media products.
Here are some tips you should remember when applying for the SR&ED and DMTC program together:
- Don’t double-dip among credits
A dollar spent by a company cannot be claimed twice by using two different programs. This dollar is spent either advancing the technology or developing the product. Make sure that the work hours and eligible expenditures are clearly recorded and separated as such for each program to make a legal and valid claim under each program.
- Claim your eligible expenses under the right program
The SR&ED program provides funds for the advancement of technology while DMTC is more focused on commercialization. SR&ED has a higher tax recovery rate (up to 68% in Ontario) than the DMTC programs (up to 40% in Ontario), but some development expenditures may not be classified as R&D expenses. Any development work, such as marketing and distribution expenses, that wasn’t claimed on SR&ED, can likely be claimed for DMTC.
- Filing deadlines – DMTC v. SR&ED
SR&ED is claimed annually, while most provincial DMTC programs are claimed in the tax year following the product completion date. For DMTC, there is usually a longer look-back period, allowing you to claim products that you think are off the table. For example, Ontario Interactive Digital Media Tax Credit allows you to claim your eligible labour expenditure incurred in the 3-year period prior to the completion of the product.
- Find an expert to guide you through the process
Both SR&ED and DMTC programs are invaluable resources for your company to get the additional funding you need. However, it can be extremely tricky to apply for both credits. Get an expert to assist you in determining your eligibility and maximizing your return on investment through government programs that your company is entitled to – it is well worth the effort.
Contact us at 1-888-418-7733 (SRED) or firstname.lastname@example.org. We will guide you through every step of the way until you get paid.