INNOVATION and GROWTH in CANADA A Comprehensive Approach to Program Funding Ontario Interactive digital media tax credi

1. INNOVATION and GROWTH in CANADAA Comprehensive Approach to Program Funding Ontario Interactive digital media tax credit (OIDMTC) BDO Special Advisory Services Foundations for Success Series Paul Boucher 25 March 2013

2. Paul D. Boucher; B. Ind. Eng., P.Eng. Associate, Special Advisory Services pboucher@bdo.ca Direct: 905 272 7831 Paul Boucher leads BDO’s Special Advisory Services Manufacturing Industry Team and specializes in providing professional services assisting clients with a comprehensive approach to funding Innovation and Growth With a focus to maximize government grant and incentive opportunities for clients the team’s primary expertise is related to the Scientific Research and Experimental Development (SR&ED) investment tax credit program for Canadian companies. With over 25 years of automotive industry experience in manufacturing, engineering, product & process design and development, and operations management Paul specializes in dealing with companies in a variety of industries. He has led projects in the developing alternative energy sector including electric vehicle research, waste to energy , as well as other sustainable wind and solar energy initiatives. He has acquired international project and operations management experience in Canada, Japan, Korea, United Kingdom, and the United States. As a manufacturing and innovation subject matter expert Paul has been a regular contributor to many industry events, publications, workshops, and national policy initiatives. Paul has been involved in the full range of Innovation and Growth funding services assisting clients with opportunity assessments, claim preparation and review, reporting system development & training, claim support services, identifying & managing risk, and providing technical industry expertise. Paul received a Bachelor of Industrial Engineering from General Motors Institute (now Kettering University) in Flint, Michigan and received his Professional Engineering designation in the province of Ontario. He is an avid golfer and tennis player and enjoys travelling and experiencing the great outdoors with family and friends. BIOGRAPHY BDO_Innovation and Growth_2013

3. OIDMTC Overview • OIDMTC is a refundable tax credit intended to create eligible Interactive Digital Media products in Ontario • Credit based on Ontario labour expenditures and eligible marketing and distribution expenditures • NO limit on the amount of eligible labour expenditures which may qualify • NO per project or annual corporate limits on the amount of OIDMTC which may be claimed

4. OIDMTC

5. OIDMTC In this presentation… • Who is Eligible? • What Products Qualify? • What is an Eligible Product? • Non-Specified Products • Specified Products • Eligible Digital Games Developed by Qualifying Digital Game Corporation • Eligible Digital Games Developed by Specialized Digital Game Corporation • How much is the Credit? • Qualifying Expenditures • Administrative Process • Document’s Checklist

6. OIDMTC Who is Eligible? • A “Qualifying Corporation” must: • Be a Canadian Corporation • Develop an “eligible product” at a “permanent establishment” in Ontario • Not be “controlled directly or indirectly in any manner” by tax exempt entities • Not be a prescribed labour-sponsored venture capital corporation • A Corporation must be a “qualifying small corporation” if • Total assets at EOY <= $10 million AND Total Revenue <= $ 20 million

7. OIDMTC What Products Qualify? • What is an eligible product? • Must be an interactive digital media product that • Is a combination of application files and data files, all in a digital format, that are integrated and intended to be operated together and that have the following characteristics when they are being operated: • Their Primary purpose is to educate, inform or entertain the user • Present the information in at least two of the following forms: Text, Sound, and/or Image • Used by individuals • User can choose what information is to be presented and the form and sequence in which it is to be presented

8. OIDMTC What Products Qualify? (Cont...) • What is an eligible product? • 90% Developed By: • At least 90% of the product must be developed in Ontario by the Qualifying corporation • “Development” in the digital media industry refers to the stages of production up to (but not including) product launch and may include: • Concept development; AND • Product design, planning, production and testing • To be eligible, all stages of development must be undertaken by the qualifying corporation claiming the tax credit.

9. OIDMTC What Products Qualify? (Con’t...) • What is an eligible product? • New Policy on Streaming Content: • Products that are made up of more than 50% of streaming video or audio content may be eligible for the OIDMTC as long as the user has the following: • A choice of information to be presented; AND • The sequence and form in which it is presented • Example: There is more than one video clip or audio clip to choose from and/or there is other content that the user can access in the form of text or image included in the product

10. OIDMTC What Products Qualify? (Cont...) • NOT used primarily for interpersonal communication. • NOT used primarily to present or promote the qualifying corporation. • NOT used primarily to present, promote, or sell the products or services of the qualifying corporation Non-Specified Product: • Must be an eligible product and all or substantially all of the product was developed in Ontario by the qualifying corporation • The product MUST be developed for sale or licensing to one or more arm’s length parties who have NOT previously entered into an arrangement with the qualifying corporation for the development of the product.

11. OIDMTC What Products Qualify? (Cont...) Specified Product: • Is an interactive digital media product NOT used primarily for interpersonal communication • All or substantially all of the product is developed and completed in Ontario by the qualifying corporation after March 23, 2006. • Is not used primarily to present, or promote the qualifying corporation, or the purchaser. • Developed under terms of agreement: • Is developed by the qualifying corporation under the terms of an agreement between the qualifying corporation and a purchaser that is a corporation that deals at arm’s length with the qualifying corporation AND • Is developed under the agreement for the purpose of sale or license by the purchaser to one or more persons, each of whom deals at arm’s length with the purchaser.

12. OIDMTC What Products Qualify? (Cont...) Specified Product: • Fee-for-service types of work that are done in Ontario are eligible. • Products such as cellular telephones, email software and social networking products which are used primarily for communication between people are NOT eligible • Products such as websites whose primary purpose is to present, promote, or sell a corporation or its products or services are NOT eligible for tax credit.

13. OIDMTC What Products Qualify? (Cont...) Eligible Digital Game Developed by a Qualifying Digital Game Corporation: • Must be an interactive digital media product. • Is a digital game in the opinion of Ontario Media Development Corporation (OMDC). • Is developed in whole or in part by the qualifying digital game corporation under the terms of an agreement between the qualifying digital game corporation and a purchaser that is a corporation. • Is developed for the purpose of sale or license by the purchaser to one or more persons, each of whom deals at arm’s length with the purchaser. • The qualifying labor expenditure incurred by the qualifying digital game corporation within any period of 36 months that ends in the taxation year is notless than $1 million. • The corporation has not previously claimed a OIDMTC in respect of eligible digital game

14. OIDMTC What Products Qualify? (Cont...) Eligible Digital Game Developed by a Qualifying Digital Game Corporation: • The product is not used primarily: • For interpersonal communication • To present or promote the qualifying digital game corporation, or the purchaser, or • To present, promote or sell the products or services of the qualifying digital game corporation, or the purchaser • The product is one for which public financial support would not be contrary to public policy in the opinion of OMDC.

15. OIDMTC What Products Qualify? (Cont...) Eligible Digital Game Developed by a Specialized Digital Game Corporation: • The product is NOT used primarily: • For interpersonal communication • To present or promote the qualifying digital game corporation, or the purchaser, or • To present, promote or sell the products or services of the qualifying digital game corporation, or the purchaser • The product is one for which public financial support would not be contrary to public policy in the opinion of OMDC.

16. OIDMTC What Products Qualify? (Cont...) Eligible Digital Game Developed by a Specialized Digital Game Corporation: • Qualifying corporation must incur $1 million in eligible Ontario Labor expenditures in respect of eligible digital activities directly attribute to the development of eligible digital games. • Applicants can aggregate the cost across eligible activities for multiple digital games to reach the minimum of $1 million in labor expenditures in the year. • A specialized digital game corporation must have either 80% of total salaries and wages paid for services rendered in Ontario, in the taxation year, that are directly attribute to the development of digital games OR • The corporation’s total gross revenue for the year that is directly attributable to the development of eligible digital games CANNOT be LESS than 90% of the corporation’s total gross revenue for the year.

17. OIDMTC Rates for Non-Specified and Specified Products

18. OIDMTC Rates and Eligibility Periods

19. OIDMTC Eligible Labour Expenditure Breakdown

20. OIDMTC Marketing & Distribution (M&D) Expenses • Only applicable for Non-Specified products • Qualifying expenditures include up to $100,000 of “M&D” expenses • Expenses can be included in the 24 months before OR in the 12 months after the completion of the product • M&D expenditures must meet ALL of the following conditions: • directly attributable to advertising or promoting the eligible product or distributing the eligible product to customers or potential customers • The expenditure is paid no later than 60 days after the end of the taxation year

21. OIDMTC Marketing & Distribution (M&D) Expenses (cont…) • M&D expenditures must meet ALL of the following conditions (cont…): • directly attributable to advertising or promoting the eligible product or distributing the eligible product to customers or potential customers • If the qualifying corporation sells the eligible product directly to a consumer of the eligible product, the expenditure is not directly related to processing an order by a consumer or shipping an eligible product to a consumer • If the expenditure relates to an amount paid or payable for meals or entertainment, only 50%of the amount is included in the M&D expenditure incurred by a qualifying corporation in a taxation year.

22. OIDMTC Marketing & Distribution (M&D) Expenses (cont…) • Eligible M&D Expenses might include the cost of: • Attending trade shows where the product is being promoted • Consultant fees for PR and marketing/portion of wages and salaries of employee(s) attributable to specific product marketing and distribution • Advertising the product in print and electronic media (including design and preparation) • Preparing the product for display or demonstration • Product market research/ focus group testing • Product visual identity: logos, branding, merchandising/promotional products e.g. mugs, shirts • In-store promotions (shelf space), product samples • Direct Mail Marketing/Telemarketing • Media kits/news releases (media lists)

23. OIDMTC Administrative Process • Issuance of Certificates of Eligibility (COE) • OMDC is responsible for issuing COE • COE sets out the following: • The eligibility of an applicant corporation; • The eligibility of applicant products; and • Estimated amount of OIDMTC. • Filing a Corporate Tax Return • To claim OIDMTC a corporation must file its Federal corporate tax return (T2) with Schedule T2SCH560 and the COE with the CRA. • The amount of the credit may be reduced by any Ontario taxes owing by the qualifying corporation.

24. OIDMTC Administrative Process (Cont…) • Applying for a Certificate of Eligibility • Who Applies to the OMDC? - The qualifying corporation submits a completed OIDMTC application to the OMDC via the OMDC Online Application Portal for all eligible products for the corporation’s taxation year. • Application Fee = 0.1% of the total final qualifying expenditure. Minimum fee is $100 and Maximum fee is $2,000.

25. OIDMTC Document’s Checklist • Incorporation document for the qualifying corporation, including amendments • Corporate chart for qualifying corporation • Consolidated annual financial statements of the qualifying corporation for the current tax year and preceding 3 tax years • Documentation of ownership rights to the product, for e.g. licensing agreements, right agreements, domain name registration, fee-for service agreements, co-production agreements, distribution agreements, Documentation should clearly indicate ownership right to the completed product.

26. OIDMTC Document’s Checklist (Cont…) • Complete detailed production schedule and time line (i.e. Gantt Chart) • Business and Marketing Plan including a description of the target audience/market or revenue model • List of names and roles (with brief description)-Please include address • Marketing and distribution expenses • T-4 for other employees

27. SR&ED & OIDMTC Paul Boucher, P.Eng Associate Special Advisory Services, SR&ED Manufacturing Industry Leader pboucher@bdo.ca, 905-272-7831 SR&ED & OIDMTC Roopesh Dash, MSA (Tax), MBA Tax Manager Special Advisory Services rdash@bdo.ca, 905-615-6206 Contact Information