How Ottawa Subsidizes Junk News
A loophole in the Income Tax Act gives Canadian businesses $1.6 billion per year as a reward for buying advertising from foreign digital platforms like Google and Facebook.
80% of the Canadian population lives within 200km of the US border, putting them in range of American TV and radio signals. Because they carried big-budget programming from the big US networks, Canadian advertisers often chose to place their ads with these American stations who would broadcast back into Canada, at the direct expense of Canadian media.
Recognizing that this practice would wipe out Canadian media, government imposed tax penalties for businesses who chose to reach their Canadian audience by advertising in US media. This applied to all media available at the time, including TV, radio, newspapers, and magazines.
But because of a technicality in the Income Tax Act, these penalties don’t apply to foreign digital ads. Buy an ad from the Canadian edition of the New York Times, and you pay the tax penalty. Buy an ad from nytimes.com, and there is no penalty. The result is $1.6 billion of corporate income tax not collected
Google and Facebook control almost 80% of the digital ad market, so they are by far the biggest beneficiaries of this loophole. The biggest losers are Canadian media, who are going bankrupt, and Canadian citizens, who depend on professional journalism to keep democracy alive.
Were it left to me to decide whether we should have a government without newspapers or newspapers without a government, I should not hesitate a moment to prefer the latter.
With an estimated 10% of all Canadian advertising expenditures heading to the US, Parliament amends the Income Tax Act to limit the deductibility of these expenses, with the intention of creating financial incentives for advertisers to buy Canadian.
Canadian dealers of Craftmatic products challenge Section 19 of the Income Tax Act in court. They lose.
The internet advertising loophole is born. Parliament passes a new Broadcasting Act that defines "broadcasting" in a technologically-neutral way that incorporates services like YouTube and Spotify. However, the Income Tax Act was never updated accordingly, so the tax penalties that apply to ads placed with other foreign broadcasters are not applied online.
The Canada Revenue Agency rules that internet advertising should be exempt from Section 19, arguing that "a website is not a newspaper, periodical, or broadcasting undertaking." This ruling continues to apply, despite the fact that Canada's broadcasting regulator, the CRTC has repeatedly ruled that online broadcasting is in fact broadcasting.
Section 19 amended to include ads placed in foreign magazines and periodicals.
The government's budget provides a $595 million dollar package of tax credits for print media, to be applied over a five-year period. The proposed measures do nothing to address the root cause of the problem: a grave imbalance in the advertising market that favours American platforms over Canadian media.
Google and Facebook's share of the Canadian digital advertising market.
The cost of the looophole to taxpayers in 2108. Most of that money goes to Google, YouTube, and Facebook.
Average price reduction for foreign digital ads as a result of the loophole.
Canadian media outlets have closed since 2009.
Canadian journalists have been laid off since 2006, nearly 1/3 of all journalists in the country.
Shouldn't businesses be able to advertise wherever they want?
Nobody is proposing to stop businesses from advertising with the likes of Google and Facebook. But that doesn’t mean we need to reward them for doing so.
Section 19 of the Income Act says that foreign advertising expenses should not be deductible business expenses. By selectively ignoring the spirit of the law, Ottawa gives companies a special tax break when they buy ads from the likes of Google and Facebook. In 2018, those rewards cost Canadians $1.6 billion.
Isn't the government giving the media $595 million?
Budget 2019 introduced three new tax measures to support print media:
- A tax credit for journalists' salaries
- A digital subscriptions tax credit
- Allowing donations to certain media organizations to be tax deductible.
There are four main problems with this approach.
- It's nowhere close to enough. The loophole sends $1.6 billion to a handful US platforms. The government is proposing to spend just $119 million per year, spread across all Canadian print media. We estimate that closing the loophole would repatriate about $500 million per year, at no expense to the taxpayers. You do the math.
- It doesn't include broadcasting or startups. The new measures apply to print media only, and they also exclude small news startups.
- The free-ride for Google and Facebook continues. This does nothing to solve the underlying problem.
- Ethics. The government's approach requires bureaucrats to define who should qualify and who should not. This puts the government in a very difficult ethical position.
Who else supports this policy?
Among the groups and bodies that have recommended similar changes are:
- The Commons Heritage Committee
- The Senate Transport and Communications Committee
- The Public Policy Forum
- News Media Canada
What does this have to do with fake news?
It's important to remember that Google and Facebook aren't just business competitors to Canadian media: they're also responsible for spreading massive quantities of misinformation, propaganda, and hate. The internet advertising tax loophole sends our tax dollars to these very companies, making each of us in part responsible.