Xenophile may leave Ontario for B.C.
By Ahmad Hathout
PATRICK CROWE HAS sent a series of panicked letters to the digital media industry, colleagues and to Ontario’s Finance Minister Rod Phillips.
The president of Xenophile Media, an award-winning digital media and game studio in Toronto, has a serious problem: His company’s operations have stalled since 2016, he’s over half a million dollars in debt, he owes about $100,000 to his company’s contractors, and his home is about to be liquidated.
Crowe (pictured above) and Xenophile are preparing to move to British Columbia if Ontario does not apply tax credits under the Ontario Interactive Digital Media Tax Credit (OIDMTC) for work it produced between 2012 and 2016. That’s because in 2015 the province changed the rules: in order to qualify for tax credits, at least 25% of a company’s workforce must be full-time employees.
Because all of Xenophile’s workers are contractors, as work is on a project-by-project basis, his company was denied the credits.
“The end result is that Xenophile, an engine for innovation and training which employed a total of more than 1,300 people in good jobs for the preceding decade has been forced to close,” a letter recently sent to many in the industry from Xenophile said.
The company also sent a letter to Phillips in December 2019 asking for the 25% rule to be grandfathered for Xenophile’s last projects, but it has yet to receive a response.
The company, which had on its payroll high-profile Canadians like writer Margaret Atwood, borrowed money from the bank starting in 2012 against how much tax credits it would theoretically receive for productions under the OIDMTC program. Because of the denial of credits, Crowe said the only thing he can borrow against now is his home.
Without the tax credits, Crowe told Cartt.ca that both he and his partner will attempt to restart Xenophile in British Columbia, a jurisdiction with roughly half the digital tax credits in Ontario but no full-time employee threshold to obtain them.
The rationale for the change in the Ontario digital tax credit is to “ensure that government financial support provided through the tax credit program is provided to companies for the development of products that create a significant number of job opportunities for Ontarians, including direct employment opportunities,” Denelle Balfour, spokeswoman for Ontario’s Minister of Heritage, Sport, Tourism and Culture Industries (MHSTCI), said in an email.
Last year’s Ontario government budget bill reduced the amount that game companies would need to spend on productions to get credits, to
$500,000 from $1 million, but the 25% employee threshold remains.
Scott Blodgett, spokesman for Ontario’s minister of finance, said “as this is a tax matter, the Ministry of Finance cannot answer any questions where the response could breach confidential taxpayer information.”
The circumstances surrounding Xenophile’s troubles illustrate interprovincial competitiveness when it comes to attracting creative talent. Canada’s largest provinces often talk about attracting and keeping creative industries in their jurisdictions because they create many jobs and boost the economy.
The United Conservative Party of Alberta, before being elected to lead the province, ran on a platform that included transforming the traditional grants given to production companies into tax credits. In January, Alberta unveiled its new film and TV tax credit program.
Manitoba, Quebec, Nova Scotia, Prince Edward Island and Newfoundland and Labrador also have their own digital tax credits. NBCUniversal has lobbied at least the Alberta and Ontario governments about favourable tax rules on productions.
Earlier this year, Ontario unveiled an advisory panel on how it can sustain its film, television and animation industries. In response to a question from Cartt.ca about whether the panel would consider concerns surrounding the 25% rule, Balfour said the government is currently reviewing recommendations by the panel to help the industry get through the Covid-19 pandemic.
“There is a risk that we will lose companies to other jurisdictions if Ontario doesn’t modernize the OIDMTC.” – Interactive Ontario
However, Interactive Ontario said in an email to Cartt.ca the industry and the organization has been “actively advocating to modernize the OIDMTC so Ontario can effectively compete with other jurisdictions… There is a risk that we will lose companies to other jurisdictions if Ontario doesn’t modernize the OIDMTC.”
“Interactive Ontario and the industry are advocating” for the elimination of the 25% rule “in order to encourage collaboration and innovation, as well as stimulate growth,” spokeswoman Stephanie Greenall said in the email, adding it’s one of the “steps” needed to modernize the OIDMTC.
Late last month, the organization released a document outlining some of the changes it would like to see in the OIDMTC. It has also appeared before the Standing Committee on Finance and Economic Affairs to advocate for its position.
About the 25% rule, it said it “forces companies to structure their projects based on bureaucratic rules (red tape) rather than what makes sense business-wise. There are no similar rules in jurisdictions like Quebec, where the IDM (interactive digital media) industry is thriving.”
That position also included eliminating a rule that 80% of labour costs to create a product “must be for work performed in Ontario” because it would prevent collaboration with other companies. While Interactive Ontario said it applauded the reduction to $500,000 from $1 million in company expenditures on digital game productions, it said that isn’t nearly as competitive as Quebec, which does not have such thresholds for credits. It is asking for a reduction down to $50,000, which would help Ontario capture a portion of the mammoth gaming market.
“Our Ontario companies are currently being courted by another jurisdiction that is offering them to open virtual offices of remote staff in their province to leverage their tax credit and access to local talent,” IO told the finance and economic affairs committee in a hearing without naming the jurisdiction. “It is a clever move that illustrates how competitive jurisdictions are becoming, using their IDM tax credit to attract investment, and create high-paying jobs.”
“The digital tax credits are basically reserved for well-established players while denying access to the businesses that need it the most: start ups and small players incubating the next big disruptor, effectively driving innovation out of Ontario.” – Patrick Crowe, Xenophile
Before the Covid-19 pandemic, the industry appeared to be doing well. Ontario’s Minister of MHSTCI Lisa MacLeod announced earlier this year that the film and television industry generated a record $2.16 billion for the province’s economy.
After speaking with industry players, Crowe said he believes his company is the only one impacted to this extent. He reasoned that while Xenophile is a relatively small studio, it shoots for grander projects. Founded in 2004, Xenophile has worked with the BBC, Disney and with research partners and coproducers in the U.K., U.S., Germany, Sweden and Brazil, Crowe said, “bringing millions of dollars of investment to Canada and Ontario specifically and pioneering the first ever interactive coproduction with Australia.”
Among the company’s awards are two Emmys and five nominations, two Geminis, three Canadian New Media Awards, two Webbys, one SXSW Interactive Award and the first ever Rose d’Or for Cross Platform.
“The fact that the 80/25 rule remains in place today is counter-productive,” Crowe said in an email to this publication. “Instead of providing an incentive to build capacity as intended, the OIDMTC is being used as a reward. The digital tax credits are basically reserved for well-established players while denying access to the businesses that need it the most: start ups and small players incubating the next big disruptor, effectively driving innovation out of Ontario.
“A nascent Facebook or Club Penguin running on the sweat equity of its founders with modest financial backing would not qualify for support under the current tax credit rules in Ontario.”
