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Are tax breaks dooming Canada to second-class status?

By on July 7, 2010

The issue of tax breaks for the games industry is a live one.

Attractive tax breaks offered by Canada, France and many US states are drawing global publishers to build studios and recruit talent based on tax incentives, rather than broader commercial logic.

Britain, which does not offer tax breaks, is falling down the global rankings of games-producing companies from third to either fifth or sixth, depending on who you believe. TIGA, the games development trade body, has been a vociferous supporter of tax breaks for the games industry to “level the playing field”.

But is Canada actually benefiting so much? In the latest Develop 100 2010 survey of the world’s most successful game studios, one statistic leaped out at me:

“Within Canadian-made games, 82 per cent of product sold is by a publisher-owned studio, no surprise given the many studio investments in the region.”

Hold on. Are the tax breaks really doing what Canada wants? Are they creating a strong, domestic business with global exports and long-term potential? Or are they just creating a legion of indentured wage slaves who are only attractive to foreign investors because of the generous tax breaks?

What’s the long-term future of Canadian development?

I’m guessing that the purpose of the Canadian tax breaks are to build long-term value in the economy (not just keep people in jobs, which to my mind is the role of the market, not of government).

The question, then, is whether Canada’s economy will benefit from the repatriation of profits generated by its local development talent to the coffers of US, French and Japanese companies.

After all, a knowledge economy rests on Intellectual Property. And that IP is not being created for the benefit of Canadian companies but for their overseas paymasters.

Does this matter?

I think it does.

Ask any businessman whether he would be happy to compete on price alone, and he would look at you as if you were mad. Price is a poor differentiator, and a beggar-thy-neighbour one. As soon as high-quality development talent comes on stream in other countries that have lower costs-of-living or better tax breaks, Canada is in trouble. Unless it offers even bigger incentives.

For the long term, Canada needs to foster a spirit of entrepreneurialism and IP-generation that will stay in Canada. It needs to encourage its best and brightest to start new businesses, not to take attractive (and subsidised) jobs with global behemoths.

A quick test for you: can you name two global Canadian success stories in games in the last ten year? For these purposes, they need to be well-known to gamers, still independent, and have created intellectual property with a long-term future.

I’m struggling.  Maybe I don’t know enough about Canada.

Or maybe tax breaks have a hidden, and dangerous, cost.

About Nicholas Lovell

Nicholas is the founder of Gamesbrief, a blog dedicated to the business of games. It aims to be informative, authoritative and above all helpful to developers grappling with business strategy. He is the author of a growing list of books about making money in the games industry and other digital media, including How to Publish a Game and Design Rules for Free-to-Play Games, and Penguin-published title The Curve: