Speaking to Channel 4 news, the minister Margaret Hodge said: "We're looking at what they [Canada] have done. We're not sure what they have done sticks by the WTO rules on competition and will have to think about challenging what they are doing if they are, in our lawyer's views, breaching those rules."
In Canada's Quebec region games companies such as Ubisoft and EA have negotiated to get up to 40 per cent of their studio staff salaries refunded via tax rebates. Eidos opened a studio there early this year also.
The Canadian high commission said it was confident it was abiding to WTO law and that it would discuss the matter with teh UK Government. But the country's generous tax environment has frustrated many in the industry, especially those developers in the UK and other countries unable to compete on cost. In the UK the matter is compounded by the stronger Pound conversion rates.
Last week, industry execs were told by Hodge that tax breaks for UK studios were "unlikely", but that her team were looking into it, and provided conflicting comments about their viability delivered during the London Games Festival. She also said the UK industry was split over whether they wanted them introduced - so possible WTO legal action and attempt to kibosh Canada's comfortable credits might be a compromise.
At the same time the French government has been trying to implement similar tax credits as well in order to compete with Canada and Quebec specifically - a bill passed by the country's parliament is currently pending EC judgement as it may conflict with EC State AId rules.
If the move fails, it will almost certainly rule out any similar action, however a Government source has revealed that Department of Culture, Media and Sport is closely watching the France's proposed tax credits, telling Channel 4 that UK authority will move to copy it should the French act make it past the European Commission.