Watchdog recommends CRA close online ad ‘loophole’

A new report commissioned by the Friends of Canadian Broadcasting estimates that if the CRA were to change a law from 1996, approximately $500 million annually could be brought into the Canadian media industry.
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Friends of Canadian Broadcasting, an independent watchdog organization for Canada’s news and broadcasting industries, is calling on the Canada Revenue Agency to close what it says is a tax loophole in order to keep more advertising dollars in the country.

The result, said Ian Morrison, spokesperson and manager of ongoing operations for the group, could mean a potential solution to the ongoing revenue problem at many of Canada’s struggling news publications.

Morrison says the loophole allows Canadian advertisers buying ad space on foreign-owned digital platforms — such as the New York Times digital edition, CNN‘s web properties or even platforms like Google Search, YouTube and Facebook — and still being able to deduct that spending on their taxes in the same way they would when spent domestically.

“We started to realize this last year,” said Morrison, whose group commissioned communications lawyer and engineer Peter Miller to draft a 44-page report that was released Jan. 23. “It was the kind of thing that is like a leak from a pipe — it starts dripping just a little bit and you don’t notice.”

The policy was established as an amendment to the Income Tax Act in 1996 when it determined that foreign websites could not be considered the same as foreign newspapers.

Since then, said Morrison, the purpose and function of the internet has changed drastically.

“At the time, the idea [that advertising online was not the same as a newspaper] was a reasonable one,” he said. “But the internet has really evolved since then. Much of what is put out on the internet today is technically defined as a newspaper, or is effectively emitting television signals.” He mentioned YouTube, which he said functions essentially as a TV channel for some users.

Provisions were first introduced by the CRA in the 1960′s to not allow tax deduction on print or television ad spend outside of Canada in order to give Canadian advertisers more incentive to spend at home, rules which still apply today. Morrison said that the group is asking the CRA to ask that similar laws be applied with regards to the internet.

In the case of something like The New York Times, said Morrison, it would be more cut-and-dry. However, he said, something like Facebook or Google advertising might only end up being considered 50% deductible since the platforms are not purely news platforms but rather aggregators and social destinations.

Citing data from IAB Canada, Morrison pointed out that the late 2000s represented a schism for Canadian ad spend — while online advertising sat at $526 million in 2005, it grew to a projected $5.6 billion in 2016. The country’s digital ad spend surpassed that of print news spend in 2009 and that of TV advertising in 2013.

Research cited in Miller’s paper, also from IAB Canada, estimated that 86% of online ad spend from 2015 (just over $4.5 billion) was spent in foreign advertising, usually in the United States. Google and Facebook alone represented 66.5% of advertising revenue in 2015.

By not allowing advertisers to receive tax deductions on such advertising, Miller’s report determined that it could bring more revenue to the federal government (to the tune of $1.3 billion annually) and approximately $500 million to the Canadian media industry.

But the principle of the matter is also important, said Morrison. “It would level the playing field,” he said, referring to legacy publications that are struggling to keep up amid changing times.

Many in the industry have already taken their concerns to provincial and federal governments. Last fall, Torstar chair John Honderich delivered a speech to MPs on the Canadian Heritage committee urging them to take action and find ways to assist media companies. A similar sentiment was expressed by a group of publishers of Quebec newspapers who have asked the provincial government for assistance in navigating the current media landscape.

Postmedia president and CEO Paul Godfrey also issued a plea to the federal government to do more to help newspapers survive.

The standing committee on Canadian Heritage is expected to deliver a report on the media industry sometime this winter. However, a representative from the committee did not respond to MiC’s requests for comment at press time.

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