Tax cuts, credits crucial to survival of Ontario digital media industry

After announcing its plan to cut business taxes and offer tax credits in , the Ontario government has reported success in creating high-tech jobs, and making the province a better place for innovative new companies.

Last week, Premier Dalton McGuinty visited Waterloo-based mobile software developer Polar Mobile. Since 2007, the company has quickly grown to become a leader in helping entertainment, sports and non-profit organizations reach new, mobile audiences. With this success it was able to double its staff over the past year to a total of 40 employees.

Polar Mobile and other Ontario businesses have benefited from the province’s recent tax relief plan that was introduced earlier this year. It effectively reduces overall business taxes by 28 per cent over three years, reduces small business income taxes by 18 per cent, and eliminates the small business deduction surtax entirely. Most notable for the tech sector, the government in its 2009 budget enhanced the Ontario Interactive Digital Media Tax Credit for labour, marketing and distribution expenses. The OIDMTC essentially provides interactive digital media developers who create interactive digital media content products in Ontario a refundable tax credit on 40 per cent of eligible expenditures.

Other Canadian provinces have taken similar steps. A British Columbia digital media tax credit, introduced earlier this year, offers a 17.5 per cent tax credit for BC labour to digital media firms (those producing content with two of three components: text, sound and images). Likewise, Manitoba offers 40 per cent of labour, and Quebec up to 37.5 per cent. Nova Scotia, meanwhile, offers 50 per cent of labour, and as much as 25 per cent of total productions costs.

According to the latest government figures, Ontario remains the top information communications technology sector in the country, with the $28.4 billion industry accounting for 48 per cent of Canada’s total.

The government’s great strides to make Ontario technology have not gone ignored. Overall, tax policy nor regulations across Canada created an unfavorable climate for venture capital, according to a recent survey from professional services firm Deloitte of Canadian venture capitalists. A mere 28 per cent cited tax rules as a major barrier.

The main fear for Canadian VCs, according to the survey, was that there lacks a critical mass of VCs. Further, the competition between Canadian VCs and emerging markets, as well as counterparts in the US and Europe, is fierce.

“This is an urgent situation and policy makers need to move quickly with measures that improve the odds of this vital sector here at home,” said John Ruffolo, who heads Deloitte Canada’s technology, media and telecom industry group. “We need to get more dollars into the hands of existing Canadian VCs, and encourage the creation of more domestic VCs.

“A reinvigorated Retail Venture Capital program (particularly in Ontario), angel and VC investing tax credits, and the expansion of government-sponsored fund of funds programs are the three main priorities. Some of these measures have been adopted in Quebec, and that province’s venture industry has seen growth in both the number of firms and the amount of capital available for innovation.”

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