DAVE Good Contact for Tax Credits

As we previously wrote in our column of August, 2004, tax credits play a key role in financing most Canadian productions. Depending on the production, credits of either 16% (for non-Canadian controlled productions) or 25% (for Canadian-controlled productions) of the film's Canadian labour costs may be available. And those are just the federal credits. British Columbia, like most other provinces, offers corresponding credits (11% and 20%, respectively) of B.C. labour expenses, which can be combined with the federal credits. Many financiers fund productions against these credits, which are first applied to the producer's payable taxes, and then paid to the producer after the taxes are filed.
A relative newcomer to the provincial tax credit scene is DAVE - the Digital Animation or Visual Effects tax credit. It provides refundable tax credits on a producer's digital animation or visual effects activities. To be eligible for the tax credits, the activities must first qualify for either the basic Film and Television tax credit or the Production Services tax credit. Activities such as designing, modeling, rendering, animating, compositing and visual effects photography may all be included in the qualification for the DAVE tax credit. Audio effects, in-camera effects, credit rolls and subtitles are all excluded activities.

Once you are over the initial hurdle of qualifying for either the basic Film and Television tax credit or the Production Services tax credit, you must then negotiate two further steps. The first is the "Primarily Digital" test. Take a look at each visual effect as a whole. The question to ask is: Is it created primarily (i.e. more than 50%) with digital technology? Look at all of labour going into that particular visual effect. Some of the labour may be mechanical and some may be digital. At least half (50%) of all the labour going into creating the visual effect must be digital. The labour does not have to have been expended in British Columbia to qualify for the tax credit. How you measure the 50% is up to you. You can calculate it using the total cost of the labour or you can calculate it using the number of hours of labour spent in creating the effect. You may use any other method if you think it is reasonable and you can back it up. If the digital labour is over 50% of the total labour going into the visual effect, the entire labour expenditure for that visual effect is included in computing the DAVE tax credit.

The second step is the Directly Attributable test. All of the labour expenditures included in your DAVE calculation must be directly attributable to DAVE activities. To include the full salary of an individual in calculating for DAVE, that individual must have spent 100% of their time on DAVE activities. For example, computer animators, their assistants, or the individual that hired the computer animators would qualify as 100% labour directly attributable to DAVE. If an individual spends only part of their time on DAVE activities, you must determine the percentage of time that individual spends on DAVE activities and allocate that percentage of their salary to the DAVE calculation.
Keeping track of the Primarily Digital and Directly Attributable expenditures is easiest if done regularly. Throughout your production, allocate your costs on a day to day basis. When paying an invoice to a visual effects company, ask the company to give you a breakdown of the labour costs. When applying for the tax credit, you do not need to attach invoices, simply attach a schedule of the costs. However, if you are the unlucky subject of an audit by the CRA, they will want to see your invoices so keep them around just in case. You can also give CRA the schedule you had attached to your application.

Further information on DAVE and the other tax credits may be obtained from the websites of BC Film or the Ministry of Small Business and Revenue.
Sarah Tarry.