The Deductibility of Foreign Internet Advertising
Jan 26, 2017
Peter Miller, P. Eng., LL.B.
David Keeble, B.A., B. Mus.
The thesis of this paper1 is that advertising purchased on foreign internet-delivered media that act as broadcast and newspaper services2 should not continue to be deemed a deductible expense under the Canadian Income TaxAct (ITA).
Starting in the 1960s, the federal government introduced a number of amendments to the Income Tax Act (section
19) to eliminate or limit the deductibility of advertising expenses on foreign newspapers, periodicals and broadcasters, hence providing a material incentive for advertisers to choose Canadian alternatives. The purpose of these provisions of the ITA is socioeconomic - to protect Canadian media from unfair competition from foreign media, preserve Canadian jobs and voices, and keep Canadian media Canadian.
As it stands, the Canada Revenue Agency (CRA) allows full tax deductibility of advertising expenses on foreign internet-delivered media. CRA’s interpretation of the ITA in this respect has not been updated since 1996, and it is based on (a) case law prior to that date (some of it from as early as 1935) and (b) definitions of “newspaper” and “broadcasting” that do not reflect developments in these on-line media since 1996.
This paper takes the position that it is time to consider new developments and definitions, and work from a new interpretation reflecting current internet realities. Such realities include, first, the legal inference that much if not most internet advertising by Canadians is on media that are, by reasonable current definition, foreign broadcast and newspaper services and, second, the policy consequence of the direct and demonstrable negative impact this diversion of advertising revenue is having on Canadian owned-and-controlled broadcasters and print media.
A new interpretation need not require amendment to the Income Tax Act.
The basic legal reasoning of the paper is:
- The Income Tax Act states that “no deduction shall be made for … an advertisement directed primarily to amarketin Canada and broadcast by a foreign broadcasting undertaking”, defined therein as “a networkoperation or broadcasting transmitting undertaking located outside Canada”.
- The CRTC’s original New Media Exemption Order (1999) (now called the Exemption Order for Digital MediaBroadcasting Undertakings) established that most internet-delivered media are broadcasting undertakings, specifically, “digital media broadcasting undertakings” (DMBU), based on the definition of “broadcasting” in the Broadcasting Act.
- Some services are excluded – e.g. those whose content is “still images consisting predominantlyofalphanumeric text” – but most of the significant advertising carriers are DMBUs.
- The 1999 CRTC decision also ruled that delivering content over the internet is “transmission” within the meaning of the Broadcasting Act, and therefore it follows that “broadcastingtransmitting undertaking”, the term used in the ITA, is included in the term DMBU.
- Therefore, foreign DMBUs are “foreign broadcasting undertakings” for the purposes of the IncomeTaxAct, and advertisements placed with foreign DMBUs directed primarily to a market in Canada are not deductible expenses.
- The Income Tax Act (ITA) also establishes that advertising in foreign newspapers is not deductible. The CRA’s reference definition of “newspaper” (it is not defined in the ITA) does not deal explicitly with the question of internet delivery.
- Accordingly, the need for a new interpretation of the definition of newspaper and periodical is proposed here, reflecting the current reality that these media are delivered over the internet as well as through physical means. A new interpretation is justified and necessary because:
- CRA’s current interpretation of “newspaper” under the ITA is also not based on definitions derived from legislation, but rather on Webster’s Dictionary as it was in 1996.
- CRA’s interpretation also applies only to “web sites” as they existed in 1996, not to the current reality of media delivery.
- Most advertisers have already substituted placement on internet media for the physical forms, showing that they are functionally the same.
The basic policy reasoning of the paper is:
- The original policy rationale behind the advertising tax deductibility provisions of the ITA remains equally as relevant, if not more relevant, with regard to internet media.
- As was the case with border TV and radio stations and foreign newspapers targeting Canadians, foreign internet media operate in Canada with minimal investment in Canadian jobs, infrastructure, and Canadian content. While foreign services may provide access to Canadian creators, allowing tax deductibility for spending on such entities results in unfair competition with Canadian equivalents and lost revenues and jobs, as well as losses of Canadian programming and news.
- In the two decades since CRA’s current interpretation of the ITA, internet advertising has risen from an inconsequential volume and percentage of overall Canadian advertising to more than $4.6 billion in 2015 – or well over a third of all Canadian advertising revenues. Almost 90% of Canadian internet advertising accrues to foreign-owned internet sites and platforms, with a significant majority of revenues going to top US-owned internet platforms such as Google, YouTube and Facebook.
- When broadcast advertising deductibility rules were introduced in 1976 through Bill-C-58 (section 19.1 of the ITA), US Border TV stations were estimated to be drawing $10 million annually from total Canadian television advertising spending of $100 million at the time.
- If this 10% loss was considered a serious problem in 1976, today’s one-third loss should be considered a national media crisis.
- The economic challenges currently facing Canadian broadcasters and newspapers, and the consequential cuts to local news coverage, in particular, suggest that Canadian local media is indeed in crisis.
- There is a direct correlation between losses in Canadian media advertising revenue and gains in foreign- based internet media advertising revenue. Enforcing current advertising tax deductibility provisions of the ITA with respect to foreign-based internet media would help reverse this trend.
- In addition, at a time of limited growth in the Canadian economy, there would be a net fiscal benefit in terms of increased tax revenues, to the extent that Canadian advertisers continued to advertise on foreign-based internet media, despite the lack of a tax deduction.
The suggested re-interpretation of the advertising tax deductibility provisions of the ITA would result in on the order of 50% - 80% of current internet advertising expenditures being deemed non-deductible.
Conservatively estimating that 10% of these now non-deductible foreign internet advertising expenditures shift back to Canadian media, this would represent an influx of $250 to $450 million annually in incremental advertising revenue for a Canadian media sector that is under serious threat.
For the Canadian government, re-interpreting S.19 of the ITA as suggested would also bring demonstrable fiscal benefits.
As at 2016, as much as $4.4 billion in advertising expenditures would no longer be tax deductible – representing a potential gain in corporate tax payable of $1.15 billion. A massive policy problem (the loss of local media & and news) could be solved in a way that actually saved government money.
A policy decision to amend the advertising tax deductibility provisions of the ITA to apply to all foreign internet media, whether deemed broadcast, print or not, may also be worthy of consideration. Were such a decision to be made by government, the incremental benefit to Canadian media could represent on the order of $500 million annually, and the fiscal benefit as much as $1.3 billion.
1 The Authors acknowledge with appreciation the financial support of Friends of Canadian Broadcasting in the preparation of this Paper.
2 Specific examples are discussed below.
Jan 23, 2017 — News Release — Simple move would support local media and raise government revenues
A 20th-century CRA opinion is the only barrier to infusing hundreds of millions of advertising dollars into hard-pressed Canadian media outlets and generating up to $1B annually in new federal revenues at the same time, according to a report released today by the watchdog group Friends of Canadian Broadcasting.