We knew that our video game industry, mostly made up of foreign subsidiaries, was stuffed with subsidies, but we didn’t really know how much.
A study published on Monday paints a financial picture of this sector that has been a favorite of Quebec governments for 25 years. And note that in the end, the tax sweets granted to them exceed – by far – all the taxes and social charges they are required to pay in Quebec.
The study was conducted by Michaël Robert-Angers and Luc Godbout, from the Chair in Taxation and Public Finance at the University of Sherbrooke. The authors obtained finer data on the industry, its profit margins and its wages.
Overall, all 200 companies in the sector received $340 million in subsidies from the Government of Quebec in 2022. The subsidy takes the form of a credit that can reach 37.5% of eligible salaries, up to a maximum of $37,500.
If these companies ended up paying net taxes, all things considered, that would be a potentially beneficial deal. But the subsidies are such that they even exceed the payment of social charges.
In 2019, for example, these companies made a net gain of 174 million with candies from the Government of Quebec, after deductions of all social charges (Rental Plan, Health Services Fund, etc.).
That’s a lot of money. Especially since today, unlike when the measure was introduced in 1996, Quebec has almost no unemployment and instead faces a major labor shortage, in particular in the software industry.
Why subsidize employees for the benefit of foreign firms when you know that other companies in Quebec are snapping up this kind of profile?
Of the 200 companies, 15 receive three quarters of the tax credits of 340 million. All 15 are foreign subsidiaries, including the largest, Ubisoft.
And these subsidiaries, note the authors, declare a profit margin of 11% in Quebec, against 18% for the same type of local business. This low relative margin suggests that foreign companies manage to minimize their taxes here by playing with their transfer price between their head office abroad and their subsidiaries in Quebec.
Despite these findings, the Research Chair does not recommend the abolition of tax credits for this industry, which has some 15,000 employees in Quebec and contributes $1.3 billion to Quebec’s gross domestic product.
According to the researchers, without credits, companies would leave Quebec. And it is not clear that a video game expert will want to work in a more traditional field of software in Quebec, even if there is a strong shortage. Companies that leave therefore risk attracting the most qualified employees with them, which could be harmful for Quebec, they believe.
The competition is not far away, especially in Vancouver and Toronto, where there are also generous tax credits. Thanks to its generous policies, Quebec retains 42% of Canadian jobs in this sector, ahead of British Columbia (27%) and Ontario (22%).
In light of these findings, the Chair proposes to reduce tax assistance to foreign companies that only have a service center here without intellectual property.
Why target the intellectual property of video games? Because it is likely to increase profits, spin-offs and taxes paid.
In concrete terms, the Chair would cut centers without intellectual property the equivalent of 10% of the tax credit on salaries of 37.5%, which would reduce it to 33.75%.
Another measure: it would reduce the amounts of tax credits as much as the difference between the taxes paid on the basis of the profit margins of local companies (18%) compared to foreign subsidiaries (11%). The difference would be calculated in dollars (not a percentage) and could result in fewer employees qualifying for the foreign affiliate credit, down the road.
The authors also propose to increase assistance for the marketing of video games from companies that have their intellectual property here, for example games accessible on cell phones. Such assistance could amount to $100,000 per title.
Finally, they would extend the allocation of the tax credit to local subcontractors, among others, who are often disadvantaged by the eligibility criteria.
In Ontario, it should be noted, companies in the industry have a higher credit (40% instead of 35%) when they hold intellectual property.
What do I think of it ? I know, the average salary in the sector is very advantageous, at $75,900 (1). I know, our tax measures have made Montreal the 5e world center of video game development, behind Tokyo, London, San Francisco and Austin. And I know the industry continues to grow right now, especially in mobile games, where marketing becomes crucial.
The fact remains that I find it difficult to understand what net advantages Quebec derives from these enormous subsidies in the context of the labor shortage that we are experiencing.
1– This average salary includes positions other than the video game programmer presented in the table above. The same average in Canada is $78,600.