One of the ironies of Stingray chief executive officer Eric Boyko's attack on Quebec's juicy tax credits for the video-game and information-technology sectors is that he goes to work everyday in a Montreal neighbourhood that would not exist without them.
Twenty years ago, the Cité du Multimédia located on the fringes of Old Montreal was barely a gleam in then-provincial finance minister Bernard Landry's eye. But his government's 1996 creation of a generous tax-credit program to lure technology companies to Quebec has since transformed a onetime ghost town of abandoned 19th-century buildings into a thriving modern neighbourhood bursting with hipster millennials.
In its original form, Mr. Landry's program required tech firms to physically locate jobs in the Cité in exchange for a refundable tax credit on the salaries of their employees. The program aimed to address Quebec's lagging employment in the IT sector at the onset of the Internet age. It outperformed all expectations, to the point that critics such as Mr. Boyko – whose music-streaming company does not qualify for the credit – blame it for inflating wages and distorting the skilled-labour market. Quebec accounts for more than half of the 21,000 jobs in Canada's video-game sector alone. In all, about 60,000 jobs paying well above the provincial average wage are tied to the tax credits.
"We need to rethink this strategy of subsidizing companies from California and [Europe] to come steal our engineers in Montreal," Mr. Boyko charged last week at Stingray's headquarters in the Cité du Multimédia, now home to a cross-section of multimedia and IT firms, condos and lunch spots serving up the kind of adventurous (and pricey) cuisine that cool tech types seem to prefer.
Companies no longer need to physically locate in the Cité to apply for the tax credit – there wouldn't be space for them all – and the program has been repeatedly expanded since its first iteration.
In its effort to eliminate the provincial deficit, Premier Philippe Couillard's Liberal government cut all business tax credits by 20 per cent in its 2014 budget. The outcry from the video-game and IT sectors was so loud that their tax credits were fully restored in the next budget.
Multimedia firms, such as video-game producers, can claim a refundable tax credit of up 37.5 per cent on salaries of up to $100,000. Firms developing e-commerce applications qualify for a partially refundable tax credit of up to 30 per cent. A 2014 study done for a government commission on provincial taxation found that both programs produced a return to taxpayers, with the government collecting about $1.40 in tax revenues for every $1 in tax credits handed out.
Still, Mr. Boyko's main criticism is that the credits principally benefit multinationals that can outbid local startups for skilled labour, of which there is a growing shortage in Quebec. That, he says, has contributed to the development of a branch-plant tech economy dominated by foreign firms that crowd out local entrepreneurs. He argues that the credits no longer lead to the creation of new jobs in Quebec, but rather to the displacement of jobs from one firm in the province to another.
The problem is that no government wants to dare test his hypothesis. Similar tax incentives are offered by jurisdictions around the world, including six other Canadian provinces, though Quebec's programs are generally considered the most lucrative. The Quebec tax commission concluded in its final 2015 report that eliminating the tax credits would be too risky.
"The businesses involved are extremely mobile," the commission stated, recommending that the government fully reinstate the tax credit it had just trimmed in its previous budget. "The great majority of large businesses in the video-game sector are foreign firms that can easily move."
While video game producers such as France's Ubisoft get most of the attention, firms in the IT and e-commerce sectors accounted for the lion's share of tax credits under the program in 2013. Foreign firms such as IBM, Oracle, Fujitsu and SAP, were indeed among the beneficiaries that year, according to the tax commission's study. But Montreal-based CGI Group appears to have been the biggest single beneficiary.
Mr. Leitao, meanwhile, appears to have learned his lesson. After reducing the incentives in 2014, he now defends them tooth and nail. "In addition to generating additional revenue for the state, the development of this industry has other spinoffs such as contributing to the dynamism of certain neighbourhoods and to Montreal's international profile," he said through a spokesperson.
Besides, one wonders whether Mr. Boyko would be singing a different tune were his music streaming company to qualify for the credits. Mr. Leitao has no doubt already taken note.