Claiming IDM and SR&ED tax credits: Can Canadian Business Owners use Both?

Canada’s provincial and federal government tax incentives play a vital role in supporting the digital sector. Among various incentives available across the provinces, the Interactive Digital Media Tax Credit (IDMTC) is one of the most significant tax offerings in 2024. As the name suggests, the IDMTC is specifically designed to support businesses developing interactive digital projects such as mobile apps, video games, and software.

Taking advantage of the IDMTC (and similar tax incentive programs) is critical for fostering creativity, driving growth and encouraging innovation. However, many Canadian business owners aren’t sure whether they can make use of both the IDM tax credit and another popular tax incentive offered by the Government of Canada – the Scientific Research and Experimental Development program, or SR&ED.

Can you use both IDM and SR&ED? When it comes to using federal SR&ED and IDMTC programs together, the answer is most definitely yes. We will explore the differences between the two programs, as well as highlight how Easly can help you maximize these benefits below.

Understanding the Interactive Digital Media Tax Credit

The IDM tax credit is an initiative offered across specific provinces, including British Columbia, Alberta, and Ontario. It is designed to support the development of interactive digital media products in Canada, including various digital creations such as video games, educational software, mobile apps, and virtual reality experiences.

Each province sets its own guidelines for the IDMTC, including how it defines ‘interactive digital media.’ In general, qualifying projects are designed to present digital information in a way that educates and informs the user. For example, a video game or educational software would qualify, but an instant messaging service might not. Some provinces (like British Columbia) have additional restrictions on certain activities, including gambling with currency. The best place to check whether your business will qualify is in your province’s guidelines.

Through the Interactive Digital Media Tax Credit, companies receive a refundable tax credit based upon qualifying labour expenditures. These expenditures include activities like design, animation, and project management. However, it’s important to be aware that eligible activities, eligible projects, and accrual amounts will vary from province to province. Information on your province’s guidelines can be found using the Government of Canada’s search tool or your provincial government website. As of 2024, the IDMTC is offered in Alberta, BC, Manitoba, Ontario, Nova Scotia, Newfoundland, and Quebec.

Ultimately, this tax credit program aims to stimulate innovation within Canada’s digital sector, attracting not only investments but also talent. Although the IDMTC differs slightly between provinces, the general idea is to promote digital business and economic growth. Keep this goal in mind when submitting your application, as knowing the purpose of your project (and how it fits with the government’s purpose behind offering the tax incentive) will help make sure your application is successful.

The SR&ED Program: an Overview

The SR&ED program’s main purpose is to encourage research and development (R&D) across various industries, including digital innovation. This federal program provides tax incentives to companies engaging in activities to advance scientific and technological knowledge in Canada. The SR&ED program offers companies refundable and non-refundable tax credits, depending on company size, location, and the nature of its activities.

Federal SR&ED tax credits are distinct from their provincial counterparts. While some provinces may offer SR&ED credits of their own, the federal SR&ED program offers between 15-35% as a non-refundable tax credit to qualifying businesses and on qualifying expenses. To see the various SR&ED credits offered across the provinces and territories, check out this resource.

Interested in finding out how much your company could receive in SR&ED tax credits? Check out Easly’s SR&ED calculator!

Choosing Between IDMTC and SR&ED

Do you have to choose? Many business owners get confused between the provincial SR&ED tax credits (which cannot be combined with IDMTC) and the federal SR&ED program (which can). However, most companies can claim provincial credits like IDMTC with federal SR&ED.

The decision whether to claim IDMTC or provincial SR&ED depends on several factors, such as the nature of your project, its goals, the province where you’re located, and the type of innovation you’re pursuing. For instance, if your project primarily focuses on the development of interactive digital media products like video games or educational apps, your business may choose to take advantage of the IDM tax credit plus federal SR&ED. Here, the IDM tax credit will likely provide greater financial support specifically tailored to your industry than the provincial SR&ED credit or adjacent tax incentives.

Conversely, if your project involves broader innovation activities, such as technological advancements, process improvements, or scientific research, the provincial SR&ED program may be a more appropriate source of funds.

However, don’t be fooled: you can definitely claim the IDMTC and federal SR&ED together. Passing up provincial SR&ED credits doesn’t mean passing up these credits at the federal level. For example, a BC-based company developing an educational video game that has expenditures that qualify for both SR&ED and IDM can claim the 35% non-refundable SR&ED tax credit federally. Provincially, the company can claim expenditures under IDMTC, which in BC is 17.5%, rather than the provincial SR&ED credit, which is only 10%. This would maximize the size of the company’s tax credit refund. It’s important to note that claiming expenditures under BC IDM disqualifies them from earning provincial SR&ED credits.

Expert guidance is crucial to determine which projects should be claimed under each program to maximize your returns. Ultimately, if you qualify for the IDM tax credit, you likely are eligible for federal SR&ED as well, meaning it is worth claiming both. This way, your company can maximize your funding and continue its innovation efforts.

Maximize Cash Flow with Easly!

While both the Interactive Digital Media Tax Credit and SR&ED programs have their merits in fostering innovation within Canada, they share a common limitation: funds are disbursed only after being claimed on an annual basis. For many growing businesses, startups, and established enterprises, the waiting period before you receive your refund can be challenging. This is where Easly can help.

At Easly, we offer businesses a unique solution that allows them to access their earned Investment Tax Credits (ITCs) from the SR&ED and IDM programs on demand. With our Capital-as-a-Service (CaaS) platform, you can receive an advance on your SR&ED and IDM credits earned to date at any point through the year! That way, you can overcome cash flow hurdles and continue developing your innovative projects.

Empower Your Digital Ventures Today

Whether you choose the IDM program, the SR&ED program, or a combination of both, these incentives can provide the financial support you need to thrive in the digital space. Contact us today to discover how Easly can help you with the right financial strategy and support to empower your digital ventures.