Montréal, the largest city in Canada's province of Québec, is the world's fifth-largest video game center.1 Video gaming studios are choosing Montréal as their preferred location for North American operations because of, among other things, its specialized talent pool fostered by top-notch universities and technical schools with programs that cater to the industry's needs, as well as the presence of major players in related industries such as visual effects, virtual reality, and artificial intelligence. They are also attracted by generous tax incentives, and with the increased concentration of video gaming businesses in Montréal, cross-border investment and mergers and acquisitions activity has intensified.
This article will first discuss the principal tax incentives intended to develop Québec's video game industry and then provide an overview of tax and structuring considerations that frequently arise in transactions in the video game context.
Although the focus of this article is on Québec provincial tax incentives, it should be noted that Québec video gaming studios can benefit from various Canadian federal incentives as well.
Since Ubisoft's arrival in 1997, some of the world's largest video game producers have chosen Montréal for its vibrant creative and artistic energy. Major players in the industry with significant operations in Montréal include Electronic Arts and WB Games. The diverse ecosystem that has developed includes innovative start-ups that have given rise to financing and M&A activity. For example, in the past couple of years, Montréal-based video game studio Hypixel Studios was sold to Riot Games, a game developer and publisher best known for League of Legends.2 Also, Hasbro, through its subsidiary Wizards of the Coast, bought Montréal-based Tuque Games, which makes a Dungeons and Dragons triple-A game.3
Tax Incentives for the Video Game Industry
Multimedia Tax Credits
There are two tax credits available in Québec that are specifically intended, among other things, to foster the development of its video game industry. Both are refundable.4 As such, they are of particular interest to corporations that are not earning taxable income, which is often the case for start-ups in the design or development phase before game launch.
Both credits are calculated based on the video game company's salary expenditures, and the rate generally depends on whether the video games in question are to be commercialized and whether they are available in French (see table).
Québec 'Multimedia' Tax Credit Rates
For a multimedia title to be considered intended for commercialization, it must be available to the public (not restricted to a limited clientele), and genuine commercialization efforts (for example, marketing activities) must be made. According to the provincial investment promotion agency, Investissement Québec (Investment Québec), merely making a title available on a website is generally not considered sufficient. For a title to be considered to be available in French, the French version of the title must be at least equivalent to the versions produced in another language, and the consumer must be able to obtain the French version through the usual marketing channels from the first day it is marketed.
General Tax Credit
The first tax credit is the Tax Credit for the Production of Multimedia Titles. This is a refundable tax credit related to the production of individual multimedia titles. It can be claimed by a "qualified corporation," which is essentially a corporation that:
- has an establishment in Québec;
- carries on a "qualified business" in Québec; and
- has obtained an initial qualification certificate issued by Investment Québec.
In general, to be eligible, a multimedia title must:
- be produced by the corporation;
- include a substantial volume of three of the following four types of information in digital form: text, sound, still images, and animated images; and
- be published on an electronic medium and controlled by software allowing interactivity.5
A video game normally meets these criteria.
The tax credit amount is based on the corporation's qualified labor expenditure. This comprises the salaries or wages attributable to the multimedia title incurred and paid by the corporation to its eligible employees working in an establishment situated in Québec for their eligible production work, which includes:
- activities relating to the writing of the multimedia title's script;
- the development of its interactive structure;
- the acquisition and production of its constituent elements;
- its computer and online development;
- the system architecture;
- the title's community of users;
- the analysis of performance-related quantitative data for the purpose of optimizing the title's performance; and
- technological activities relating to its updating.
Activities relating to the acquisition of copyrights or to the mastering, media duplication, promotion, distribution, or dissemination of a multimedia title may not be recognized as eligible production work.
1 Investissement Québec, "The Video Game Explosion" (accessed Oct. 18, 2020).
2 Jacob Wolf, "Riot Games Grows With Addition of Hypixel Studios," ESPN, Apr. 16, 2020.
3 "Wizards of the Coast Acquires Tuque Games," Cision, Oct. 29, 2019
4 This means that they not only reduce income taxes payable, but also the amount of the credit minus income taxes payable will be "refunded" or paid to the recipient.
5 Some types of multimedia titles are not eligible, including titles designed to advertise a for-profit corporation, present its activities, or promote its products or services, as well as titles that "encourage violence, sexism, or discrimination."
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.