OTTAWA—The government can help struggling Canadian media outlets and pump up to $1 billion into public coffers every year by simply updating its 20-year-old interpretation of federal tax law, a new study argues.
Published Monday and funded by Friends of Canadian Broadcasting, the paper argues that advertisements purchased on foreign-owned websites should no longer be tax deductible under the federal Income Tax Act. This would close a loophole—created by the Canada Revenue Agency’s 1996 interpretation of that law—that encourages companies to buy digital ads on foreign-owned sites, such as YouTube and Facebook, instead of websites belonging to Canadian firms and media outlets, the study concludes.
“We were surprised to find—hang on a second, they’re still basing the tax policy on a 20-year-old interpretation,” said Peter Miller, a broadcasting and communications law expert who co-wrote the study.
“I actually believe it’s one of those things that people didn’t stop to think about it,” Miller said.
The study found that the overwhelming majority of Canadian spending on online advertising goes to foreign web platforms rather than domestic ones: up to 90 per cent of $5.6 billion spent in 2016.
To bring more of that money to Canadian-based media, the government could update its 1996 interpretation of Section 19 of the Income Tax Act, Miller and his co-author David Keeble argued in the study. That section only prevents tax deductions on Canadian-directed ads bought from foreign-owned newspapers and broadcasters. The restriction doesn’t apply to websites.
As Miller explained, this “loophole” acts as an incentive to advertise on foreign-owned sites, because a tax deduction is available for those purchases.
To address this, the study argues that foreign-owned websites that transmit video and online articles to Canadians—from CNN to Reddit to the New York Times—should be included in the interpretation of section 19 of the Income Tax Act, thereby preventing advertisements on those sites from being tax deductible.
Assuming this change could redirect 5 to 10 per cent of annual advertising spending to Canadian sites, this could bring between $250 and $450 million per year to this country’s media and online companies, the study estimates. It could also reap up to $1 billion in tax revenue for the government, the paper argues.
“Any way we cut it, we saw it as an interesting economic equation,” Miller said.
The study comes after months of hearings by a Parliamentary committee on the media and the transformation of the news industry in the Internet age. Last September, Torstar chairperson John Honderich testified before the committee, where he indicated Canada’s newspaper industry is in “crisis” because of changes to the business model spurred by the ascent of the Internet.
Ian Morrison, spokesperson for the Friends of Canadian Broadcasting, an advocacy group that raises public support for home-grown media, said the proposal in the study is better than direct government subsidies. It wouldn’t create a reliance on public funds, and would also bring revenue into the government, he said.
“Every Canadian media outlet would benefit if advertisers had an incentive to advertise on Canadian platforms,” Morrison said.
“The law is already there. It’s just a question of applying the law to the contemporary nature.”