In the past few years, Nova Scotia has fostered the development of video game and interactive media companies by offering a competitive digital media tax credit. Under Nova Scotia’s Digital Media Tax Credit Regulations, qualified companies were able to claim the lesser of:

  • 50% of eligible Nova Scotia labour (plus a regional credit of 10% if qualifying expenditures for productions are outside the Halifax Regional Municipality) or
  • 25% of total Nova Scotia expenditures (plus a regional credit of 5% of qualifying expenditures for productions outside the Halifax Regional Municipality).

Companies could also receive a credit on marketing and distribution expenditures to a maximum of $100,000 per product. These expenditures may be made outside the province. To be eligible for this tax credit, a company must be a taxable Canadian corporation with a permanent establishment in Nova Scotia, whose primary purpose is to develop interactive digital media products – an interactive digital media product must educate, inform or entertain and present information in at least two of text, sound or images.

As readers may know, the last few weeks of changes in the film tax credit available in Nova Scotia have created some confusion regarding the incentive regime under which animation companies in Nova Scotia will operate beginning on July 1, 2015. Animation companies have been clear that they need more support than will be provided under the revised film tax credit regime.

To their credit, these animation companies and the Government of Nova Scotia have negotiated a new stream of the digital media tax credit that fosters this specialized ecosystem and from July 1, 2015, incentives for animation companies will be provided under a new branch of the Digital Media Tax Credit. This new program was designed based on comparable regimes that currently exist in Ontario and British Columbia.

Under this new credit stream, animation companies (like all eligible companies under the Digital Medial Tax Credit rules) will benefit from the lower of:

  • 50% of eligible labour costs (which will be further described in coming regulations) or
  • 25% of total Nova Scotia production costs.

However, in addition, these companies will be able to access a bonus rebate of 17.5% on all animation labour costs (I note that the government release advises that there will be a maximum on salary levels eligible for consideration within the credit). An illustration of the new animation incentive calculation can be found here.

The finalization of the new regime should provide a few reasons for animators to feel relieved that they have almost successfully reached the end of this budget negotiation process. First, this novel tax credit stream would seem to be more advantageous than the revised film tax credit regime under which tax rebates per eligible company are less beneficial in the aggregate and the total fund is capped to the amount of the new Nova Scotia Film and Television Production Incentive Fund.

Second, initial analysis suggests that animation companies will receive around the same rebate this year as they were able to access under the film tax credit regime that existed in the 2014-2015 fiscal year (unless of course the definition of ‘eligible labour costs’ is slimmed down in the upcoming regulations which are due before July 1st).

Notwithstanding these good results, there are still some areas of confusion that will be need to be resolved in the upcoming week(s). The primary question that animators will want clarification on as they prepare to move forward under this system is whether the funds available under the altered regime are capped.

Premier Stephen McNeil has implied that the fund for this new steam of the Digital Media Tax Credit is capped at the $10 million mark (being the amount that the Government of Nova Scotia has set aside for the fund in this fiscal year). On the other hand, Finance Minister Diana Whalen told the media last week that the new program is tax credit not a set fund and will thus be available to all who meet the eligibility requirements (despite any depletion of the allocated funds).

This distinction is obviously key to animation companies as they were part of a group of companies that relied on approximately $24 million of funding under the film tax regime during the 2014-2015 fiscal year. The Government has indicated that beginning in the 2016-2017 fiscal year only $4 million will be budgeted for this animation specific program.

More to come – until then it seems that the show goes on.