The video game industry in Canada is booming, as seen in the refined quality of games over the last few years and the significant investments this sector has attracted. Video game developers and producers receive financial assistance in the form of government subsidies by way of a tax credit that covers 37.5% of manpower costs. However, it may take months until you receive your tax credits and this delay can have serious consequences on your business. The need for financing becomes critical to maintain your competitive edge and optimize the quality of video games. Among other things, the financing of tax credits makes it possible to:
Increase your working capital throughout the video game development process;
Expand your workforce and recruit qualified game developers and employees;
Speed up video game commercialization.
To increase your chances of success, it is vital that you select a financial partner who understands your needs and your challenges as well as the issues of your industry; in other words, a partner who is aware of the impact of this delay and who is able to finance your tax credits promptly and easily (within 10 to 15 days).
Very few businesses are aware of this fact, but sometimes financial institutions such as R&D Capital will bridge a CMF (Canada Media Fund) loan. The tax credits financing institution and thus becomes a complementary source of financial support for the subsidies granted by the CMF. The following brief case study explains this additional support feature.
A video game company eligible for a CMF (development or production) grant might receive a $500,000 tax credits financing. However, the company must inject 25% of the value of the project, which, in this case, amounts to $125,000. This financing would serve to recruit additional staff or to move the project forward.
YET, HOW DO YOU PLEDGE THE INITIAL 25% TO THE CMF IF YOU DO NOT HAVE THE FUNDS?
Here is your answer: When the time comes to seek funds for a given project, a company may call upon a financial institution to fund up to 75% of its tax credits (SR&ED, Multimedia) for previous years. Funding is then granted in the form of a line of credit on which the company may draw cash requirements to fulfil its commitment to the CMF.
In the end, tax credits are highly important in the video games industry given that the government and the CMF subsidize a sizeable portion of this sector’s activities. This is why financing of tax credits is critical for a company that is expected to front the first 25% of a project; it helps the company invest the initial capital.
Contact one of our business consultants at 514-798-0493 for further information.