Pre-Budget 2019 Submission to the House of Commons Standing Committee on Finance
FRIENDS recommends that the government revise the advertising tax deductibility provisions of the Income Tax Act to apply to all foreign media, including internet-delivered media.
That the government apply Section 19 of the Income Tax Act to internet advertising. This could be achieved in a variety of ways, including:
Revise the advertising tax deductibility provisions of the Income Tax Act to apply to all foreign media, including internet-delivered media,
Update the definition of ‘broadcasting’ in the Income Tax Act to align with the current Broadcasting Act and the CRTC’s policies regarding internet-delivered broadcasting,
Amend the Interpretation Act to replace its obsolete definition of ‘broadcasting’ (from the 1968 Broadcasting Act with the current Act’s technology-neutral definition, so that a single consistent definition applies in Canadian jurisprudence.
FRIENDS of Canadian Broadcasting is an independent watchdog for Canadian content on air, and online. We enjoy the support of 364,000 Canadians, whose after-tax gifts finance our work. FRIENDS is not affiliated with any broadcaster or political party.
Strong journalism secures our democracy, and Canadian storytelling asserts our culture and independence. Both are in mortal danger as the advertising revenue which once sustained them is increasingly diverted to American tech monopolists, a process facilitated by Canadian tax policy.
Canadian media are in free-fall. In May,, La Presse announced it could no longer survive without subsidies and donations. As you know, La Presse is Quebec’s largest daily, serving an addressable market of nearly seven million people. Its threatened demise after 134 years is the latest in a steady stream of media closures across Canada.
Close the Loophole!, a report commissioned by FRIENDS, documents the scope of the internet-advertising crisis facing Canadian media:
In 2017, Canadian advertisers spent an estimated $6.2 billion on digital ads.1 Eighty percent of that ($5 billion) flows to foreign media companies, principally Google, its subsidiary, YouTube, and to Facebook. Google’s Canadian revenues now exceed the combined total for all Canadian over-the-air TV stations.2 Meanwhile, Canadian newspapers, both print and digital, have seen advertising revenues decline by more than 50% since 2006. Our research projects that as many as 50% of television stations in small and medium Canadian markets could close by 2021.3
News Media Canada estimates that Canada has lost 16,000 journalism jobs over the past decade.4
Many Canadians do not yet know that the federal government contributes to this growing emergency by failing to apply long-standing tax law to ads placed with foreign internet media companies, including Google and Facebook. For five decades, ads placed with foreign media have not been tax deductible under the Income Tax Act. Section 19 provides a material incentive for advertisers to spend on Canadian outlets, whose journalism secures our democracy and whose story-telling nourishes our culture.
Yet the Government of Canada has failed to apply these provisions to internet-delivered media. As a result, a Canadian company advertising in the the *New York Times**5 *cannot deduct the cost of that ad, but if the same ad is placed on *nytimes.com*, advertisers can claim the deduction.
The net effect is to make advertising products sold by Google, Facebook, and other foreign digital media 26% cheaper, a taxpayer subsidy that results in Canadian governments foregoing $1.3 billion in tax revenue annually.6
We have been working on this file for twenty-four months, and since then, the principal beneficiaries of this subsidy have been in the news for the democracy-eroding consequences of their business models – world-wide.
Exempting foreign tech companies from Section 19 is crushing Canadian media. La Presse is the most recent example, but hundreds more papers and TV stations are near or past the point of no return. These outlets once brought news and entertainment to communities such as Brandon, Kenora and Guelph, that now go without. Meanwhile, TV stations are hanging on by their fingernails in communities such as Thunder Bay, Kamloops and Rivière-du-Loup.
Big tech’s conquest of Canadian media is not inevitable. The government can close the loophole that subsidises our media’s main competitors.
The government should act now before even more Canadian journalism and storytelling fade to black. The $10 million annual community journalism fund, proposed in the 2018 federal Budget, is a mere token gesture that addresses neither the symptoms nor the cause of the crisis facing our media.
Large outlets such as the Globe and Mail may survive in this new environment, but their focus is not local. Who will cover city council deliberations, MP and MLA announcements, the courthouse, or local events, sports and crime?
Who will report on harassment scandals in Newfoundland, or data breaches in Nova Scotia? Who will report on contentious electoral reforms on PEI, or keep citizens up-to-date on flooding in New Brunswick? Who will report on the state of mental health services in Manitoba? Who will establish a bureau in Regina or Lethbridge or Kelowna?
Google and Facebook won’t. They may be the main beneficiaries of the advertising shift, but they don’t employ journalists in Canada.
In fact, one of the reasons Google and Facebook are so profitable is that they don’t have to pay for the content they surround with ads. Much of that content comes from credible news organizations, that pay journalists, but no longer benefit from the ad revenue their journalism creates.
If we don’t act now, there may be no one left to tell our stories – no one left to hold governments accountable or promote Canadian culture on air and online.
Even if the likes of Facebook and Google were saintly, the need for action would be no less pressing. Someone might view this crisis as the market rejecting an inferior product, but readership and confidence remain strong. News Media Canada reports that 88% of Canadian adults read the news in a given week, in a variety of formats.7 A 2017 Nanos Research poll FRIENDS commissioned identified that 84% of Canadians trust Canadian radio news, 83% trust newspapers, and 80% trust broadcast TV. Only 17% trust Facebook.8
Readership isn’t the problem. The digital shift hits home because it increases the likelihood that a gatekeeper such as Facebook will take a lion’s share of advertising revenue, while creating no content whatsoever.9
The solution is straightforward: apply Section 19 of the Income Tax Act to internet advertising. If Canadian businesses cannot deduct the cost of ads in the New York Times, why should nytimes.com be treated differently?
We urge you to use your power of recommendation to call on the government to act.
Our report projects conservatively that closing the internet advertising loophole would repatriate up to $440 million of ad spending per year, while boosting federal and provincial revenues by $1.3 billion.
The report identifies three different ways to close the loophole:
Revise the advertising tax deductibility provisions of the Income Tax Act to apply to all foreign media, including internet-delivered media,
Update the definition of ‘broadcasting’ in the Income Tax Act to align the current Broadcasting Act and the CRTC’s policies regarding internet-delivered broadcasting,
Amend the Interpretation Act to replace its obsolete definition of ‘broadcasting’ (from the 1968 Broadcasting Act with the current Act’s technology-neutral definition, so that a single consistent definition applies in Canadian jurisprudence.
Note that this is not asking government to tell business where to advertise. This proposal would simply level the playing field by applying existing law to the digital domain. This market-based approach will avoid the danger of direct government subsidy for journalism that could be abused to reward friendly coverage and penalize dissent.
Closing this loophole will not end Google and Facebook’s dominance of public speech in Canada. But it will support credible Canadian journalism, which is needed now, more than ever. It will also ensure that Canadians no longer subsidize Google, Facebook, and their democracy-eroding business models.
Canada cannot survive without its own stories. Our democracy can’t survive without credible journalism.
1 Interactive Advertising Bureau of Canada projection.
https://iabcanada.com/content/uploads/2017/07/IABCanadaRevenueSurveyFinal2017.pdf
2 Close the Loophole!, page 10 https://www.friends.ca/files/PDF/focb128-foreign-advertising-eng.pdf
3 Near Term Prospects for Local TV in Canada, Nordicity & Miller, November 5, 2015. The CRTC’s subsequent stop-gap decision to redirect BDU contributions to local TV news may have pushed back this projected outcome.
https://www.friends.ca/files/PDF/nordicity-miller-report-on-future-of-local-tv-final.pdf
5 To reach a Canadian audience.
6 This is a public subsidy to advertisers that buy space from Google, Facebook, andYouTube, and other foreign digital companies ($750M federal and $550 provincial).
7 https://nmc-mic.ca/ad-resources/newspapers-247/
8 https://www.friends.ca/poll/14632
9 The International News Media Association reports that fifty-eight percent of millennials read a daily newspaper, and though all generations are just as likely to read news digitally, Millennials are more likely to access news through an intermediary. https://www.inma.org/blogs/value-content/post.cfm/research-cross-platform-engagement-fuels-growth-in-newspaper-readership