Proceedings of the Standing Senate Committee on
Transport and Communications
Issue No. 36 - Evidence - May 29, 2018
OTTAWA, Tuesday, May 29, 2018
The Standing Senate Committee on Transport and Communications met this day at 9:30 a.m. to study emerging issues related to its mandate and ministerial mandate letters.
Senator David Tkachuk (Chair) in the chair.
The Chair: We are meeting under our general order of reference to study the deductibility of foreign Internet advertising.
I would like welcome officials from the Government of Canada.
From Canada Revenue Agency, we have Costa Dimitrakopoulos, Director General, Income Tax Rulings Directorate, Legislative Policy and Regulatory Affairs Branch; Roxane Brazeau-Leblond, Director, Income Tax Rulings Directorate, Legislative Policy and Regulatory Affairs Branch.
From Canadian Heritage, we welcome Marc Lemay, Director General, Cultural Industries, Cultural Affairs; and Thomas Owen Ripley, Acting Director General, Broadcasting and Digital Communications Branch, Cultural Affairs.
And from the Department of Finance, we have Miodrag Jovanovic, Associate Assistant Deputy Minister (Analysis), Tax Policy Branch.
Thank you for coming to our meeting this morning. I invite the representatives from Canadian Heritage to start this representation.
Thomas Owen Ripley, Acting Director General, Broadcasting and Digital Communications Branch, Cultural Affairs, Canadian Heritage: I am the Acting Director General of Broadcasting and Digital Communications at Canadian Heritage. I am joined by Mr. Lemay.
On behalf of the department, I would like to thank you for inviting us to appear before the committee . We will begin with some general remarks about the department’s mandate, priorities and the various measures and mechanisms in place that make up its cultural policy toolkit.
At the outset, I should emphasize Canadian Heritage is not responsible for the interpretation or administration of the Income Tax Act, for federal tax policy or proposing amendments to the act. That is why we are joined this morning by our colleagues from Finance and Canada Revenue Agency.
With respect to subsection 19.1, which prohibits Canadian companies from deducting the expenses of advertising directed at the Canadian market but broadcast by a foreign broadcaster, the underlying policy rationale is to discourage Canadian advertisers from advertising on U.S. border stations, thereby keeping Canadian money invested in the Canadian broadcasting system.
The Department of Canadian Heritage has a mandate to promote creativity, arts and culture, heritage and celebration, sport, diversity and inclusion and official languages. To this end, it delivers approximately $1.2 billion in grants and contributions every year.
Marc Lemay, Director General, Cultural Industries, Cultural Affairs, Canadian Heritage: Among the many funding programs administered by Canadian Heritage is the Canada Periodical Fund. This fund has an annual funding envelope of $75 million that aims to enable Canadian print magazines, paid non-daily newspapers and digital periodicals to overcome market disadvantages. I would note that it does not support daily newspapers.
As my colleague Mr. Ripley mentioned, sections 19 and 19.01 of the Income Tax Act are among the tools in place to support print media in Canada. These provisions allow companies to deduct the costs of advertising only when placed in Canadian-owned and controlled print newspapers and, with slightly different conditions, in Canadian print magazines. The aim of these measures was to make it possible so that advertising in Canadian publications would be a more efficient option than advertising in similar foreign-owned publications. An additional effect of the provisions is that they have contributed to keeping print newspapers and magazines in Canadian hands by creating a business environment unfavourable to foreign acquisitions and investment.
Mr. Ripley: The department also oversees a portfolio of arm’s length organizations. This includes the Canadian Radio-television and Telecommunications Commission, or CRTC, the independent public authority charged with regulating and supervising the Canadian broadcasting system. Furthermore, Canadian Heritage has broad policy-making responsibilities with respect to its own mandate.
The general disruption across the cultural industries brought on by new technologies, evolving business models and changing user behaviours and expectations has raised a wide range of increasingly complex policy questions for policymakers, not least the nature and extent of government intervention that is necessary or appropriate.
The Creative Canada Policy Framework articulates a new vision for Canada’s creative industries. Among other things, this framework aims to position Canada’s creative industries to succeed in the digital economy, to foster creativity and to contribute to economic growth.
It is based on three pillars: First, investing in Canadian creators, cultural entrepreneurs and their stories, for example, by increasing the federal contribution to the Canada Media Fund; second, promoting discovery and distribution at home and globally, for example, by expanding market access and export opportunities through an investment of $125 million in Canada’s first Creative Export Strategy; and, third, strengthening the public broadcasting system and supporting local news, for example, by considering how to better align the Canada Periodical Fund, mentioned by my colleague, with the reading choices of Canadians.
Creative Canada also references the upcoming review of the Broadcasting Act and the Telecommunications Act, whereby the government will examine issues such as telecommunications and content creation in the digital age, net neutrality, cultural diversity and how to strengthen the future of Canadian media and Canadian content creation.
Additional details on these reviews will be announced in the near future. A wide range of perspectives will be considered as we assess whether or to what extent the act may need to be adapted to changing realities.
Mr. Lemay: Building on the Creative Canada Policy Framework, the government committed in Budget 2018 to provide $50 million over five years to support local journalism in underserved communities. More details on this initiative will be provided during the year.
In conclusion, we are pleased to be here to answer your questions. Thank you
Miodrag Jovanovic, Associate Assistant Deputy Minister (Analysis), Tax Policy Branch, Department of Finance Canada: Thank you, Mr. Chair, for the invitation to appear before the committee to discuss the deductibility of advertising on foreign digital platforms for income tax purposes.
I am the associate ADM of tax policy branch at the Department of Finance. I will start with some remarks on section 19, then raise some high-level policy considerations about extending these limitations and then highlight certain actions taken by the government in Budget 2018.
In general, under the Income Tax Act, businesses can deduct from their taxable income any reasonable expenses made to earn business income. Section 19 of the Act is an exception to those rules and sets out the non-deductibility of advertising expenses in foreign newspapers and periodicals. This measure was introduced in 1965 and was extended to broadcasters in 1976 with the introduction of section 19.01 of the act. Section 19.01 of the act was introduced in 1999 to permit, under certain conditions, a deduction for advertising expenses in foreign periodicals.
These limits with respect to the deductibility of advertising in foreign media are collectively referred to as “section 19.” Advertising expenses that do not fall within the scope of these rules are generally deductible for tax purposes.
Section 19 was introduced to help ensure that control of periodicals and newspapers remains in the hands of Canadians and to support the continued existence of a viable and original Canadian magazine industry. When this measure was first implemented in 1965, Canadian media faced competition from U.S. counterparts that offered comparable advertising services. In that context, where Canadian substitutes for U.S. advertising services were available, a marginal increase to the after-tax cost of advertising via U.S. media, as was accomplished through section 19, seems to have been effective in inducing Canadian businesses to substitute away from U.S. advertising platforms.
In 2015, roughly 390 corporations reported nondeductible advertising expenses, for a total impact on corporate income tax revenues of less than $500,000.
It is recognized advertising revenues are shifting towards platforms that businesses consider the most cost effective, platforms largely not Canadian, and these trends create revenue pressures on Canadian media.
The Friends of Canadian Broadcasting have suggested that in order to address this challenge, section 19 should be extended to online platforms. A key question is whether such an approach would be effective in changing firms’ behaviour in favour of advertising on Canadian platforms.
Estimates provided by the Friends of Canadian Broadcasting indicate that roughly 10 per cent of foreign Internet advertising expenditures would shift back to Canada and that their proposal would increase the tax burden on Canadian businesses by more than $1 billion. This suggests the measure would likely not change firms’ behaviour to a significant degree. As such, it seems it would mainly result in a tax increase on Canadian businesses. In this context, it is not clear that in itself the measure would represent a complete solution to the problem facing Canadian media.
The government recognizes the challenges facing the Canadian media industry and introduced a number of relevant measures in Budget 2018. The government committed to increasing its contribution to the Canada Media Fund in order to maintain funding at the 2016-17 level. The government also proposed to provide $50 million over five years, starting at 2018-19, to one or more independent non-governmental organizations that will support local journalism in underserved communities.
Additionally, as part of the $400 million investment in the Action Plan for Official Languages 2018-23, the government will provide support for French and English-minority community radio stations and newspapers.
Further, over the next year, the government will be exploring new models that enable private giving and philanthropic support for trusted professional non-profit journalism and local news.
This concludes my remarks. I will be happy to respond to any questions.
Costa Dimitrakopoulos, Director General, Income Tax Rulings Directorate, Legislative Policy and Regulatory Affairs Branch, Canada Revenue Agency: Good morning, Mr. Chair. My name is Costa Dimitrakopoulos, the Director General of the Income Tax Rulings Directorate with the Canada Revenue Agency. With me is Mr. Roxane Brazeau-Leblond, Director of our Business and Employment Division.
Thank you for inviting us to speak to you today. I will begin by providing an overview of the role of the Income Tax Rulings Directorate. I will then provide an explanation of the rules in the Income Tax Act that restrict the deduction of advertising expenses.
The Directorate’s role in the CRA is to interpret Canada’s income tax law, explain how it applies to given situations and issue rulings and interpretations.
While it is the CRA’s responsibility to administer the rules that are in the Income Tax Act, the Department of Finance is responsible for federal tax policy and proposing amendments to the act.
Turning now to the general rules on the deductibility of business expenses.
In order to qualify as a deductible business expense, an expense must be made or incurred by the taxpayer for the purpose of gaining or producing income from a business, must not be on account of capital, must not be a personal expense, and the amount of the expense must be reasonable in the circumstances.
Accordingly, advertising expenses related to earning income are generally deductible provided these conditions are met. However, sections 19, 19.01 and 19.1 of the act may apply to limit or deny the deduction of advertising expenses directed primarily to a market in Canada, where such advertising takes place in an issue of a newspaper or periodical when certain Canadian content or Canadian ownership requirements are not met or a broadcast by a foreign broadcasting undertaking.
In interpreting the meaning of these words, our analysis begins with the definitions provided in the Income Tax Act or any other act that may be specified in the Income Tax Act. As a second step, we then consider the Interpretation Act.
The term “newspaper” is not defined in the act, but the act defines the term “periodical” as having the same meaning from the Foreign Publishers Advertising Services Act. It defines “periodical” as a printed publication that appears in consecutively numbered or dated issues, published under a common title, usually at regular intervals not more than once every week, excluding special issues and at least twice every year. It does not include a catalogue, a directory, a newsletter or a newspaper.
In interpreting the expression “broadcast by foreign broadcasting undertaking,” we first look to the Income Tax Act and then the Interpretation Act. The Income Tax Act defines “foreign broadcasting undertaking” as “a network operation or a broadcasting transmitting undertaking located outside Canada or on a ship or aircraft not registered in Canada.”
“Network” is also defined and “includes any operation involving two or more broadcasting undertakings whereby control over all or any part of the programs or program schedules of any of the broadcasting undertakings involved in the operation is delegated to a network operator.”
The Interpretation Act defines “broadcasting” as “any radiocommunication in which the transmissions are intended for direct reception by the general public.”
The Interpretation Act also defines “radiocommunication” as “any transmission, emission or reception of signs, signals, writing, images, sounds or intelligence of any nature by means of electromagnetic waves of frequencies lower than 3000 GHz propagated in space without artificial guide.”
Based on this analysis, we have issued interpretations confirming that the foreign advertising rules do not apply to limit the deductibility of advertising expenses directed primarily to a market in Canada on foreign Internet websites, social media sites or networks.
In other words, businesses are able to deduct otherwise deductible advertising expenses on foreign Internet websites, social media or networks.
These interpretations are based on the definition of “broadcasting” in the Interpretation Act as “radio communications,” and our view that websites and social media sites or networks are generally not considered to be newspapers, periodicals or foreign broadcasting undertakings as per their ordinary meanings or any Income Tax Act or Interpretation Act definitions.
We would be happy to answer any questions you may have.
Senator Cormier: My question is for the Department of Finance and the CRA. Although we’re talking about tax deductibility here, the question of taxation of the GAFAs — Google, Amazon, Facebook and Apple — it is still relevant, particularly in the context of the rebalancing of revenue to preserve local and community social media.
The European Commission and the French government recently announced that they intended to legislate to tax the advertising revenue of the Internet giants. While France is focusing on simple taxation based on total sales, the European Commission seems to want to base taxation on what it calls digital presence, that is, revenues generated by the volume of personal data collected, use and contribution frequencies and sales and purchases transacted through their sites.
Does the Canadian government have the resources to establish a taxation system similar to those proposed by France and the European Commission? How would taxation and the establishment of a tax deduction system differ in complexity and efficiency?
Mr. Jovanovic: That’s an interesting question. I think it’s important to distinguish the questions underlying this issue. It is also important to understand the current corporate tax system, which is essentially based on the notion of permanent establishment, which is a traditional concept. For example, when a company does business in another country and has employees and plants in that country, it clearly has a permanent establishment. The general concept of taxation is based on these notions.
A company that does business in another country and sells digital products does not necessarily have a physical presence. Consequently, some important questions arise with respect to income taxation. The key question is whether these permanent establishment concepts on which tax treaties are based still represent the best way to tax those businesses and to determine whether value is being created in the source country by those electronic transactions. If that is the case, one must determine the approach that should be used to tax properly, but also to ensure that the ultimate result is not double taxation of the business in question.
This therefore requires discussions at the international level, such as those currently being held at the OECD, for example. I think the OECD communiqués attest to the fact that the various OECD members have agreed to take time to analyze this question. The ideal solution is to come up with joint and coordinated options or new standards to prevent double taxation.
More discussions must therefore be planned. Canada is taking part in these discussions and has decided to take the time to analyze this very complex question so it can move forward in step with all member countries in order to reach a joint solution.
Senator Manning: My question is for Mr. Lemay or Mr. Ripley. In your statement, you made a comment with regard to the Canadian Heritage Canadian Periodical Fund. Your last comment was, “It should be noted that it does not support daily newspapers.” Why would that be the case?
Mr. Lemay: Only community newspapers and magazines are eligible under the program. This has always been the case. With the current budget envelope of the program, we support roughly 100 different publications and magazines. It is about 50-50 magazines and community newspapers. Daily newspapers would significantly enlarge the size of eligible recipients to the program.
The Chair: What qualifies as a community newspaper?
Mr. Lemay: It is non-daily newspapers with a paid circulation. That is the criteria you have to respect in order to be eligible for funding as a newspaper.
The Chair: Like a weekly?
Mr. Lemay: Exactly.
The Chair: You apply for what?
Mr. Lemay: For support. It is formula funding. It’s based on the volume of your paid circulation. This is the criteria that determines the amount of funding you will receive.
The Chair: Thank you.
I’m sorry, Senator Manning. I wanted to clarify what he meant.
Senator Manning: Would book publishing fall under any of these funds here?
Mr. Lemay: Yes. It is one of the programs we administer in the Cultural Industries Branch.
Senator Manning: Under what heading?
Mr. Lemay: It is a separate fund from the periodical fund. It supports book publishers.
Senator Manning: Building on the Creative Canada Policy Framework, the government committed in Budget 2018 to provide $50 million over five years to support local journalism in underserved communities. Details will be coming over the next year.
Can you give us some indication of what the plans are there? How will this $50 million be spent?
Mr. Lemay: As was stated in the budget, these funds will be delivered by one or more independent organizations to ensure the funds will be delivered in a way that supports independence of the press.
These funds will be targeted to enhancing coverage in underserved communities. By “underserved communities,” we refer to communities where news coverage is particularly limited.
That is what I can say at this point.
Senator Manning: Such as? Could you give me an example of that?
Mr. Lemay: It could be a remote community. I suspect that some official language minority communities could fit that definition.
The Chair: Don’t you have an official language fund already? Isn’t there French language funding already and all that stuff?
Mr. Lemay: There is some support under the Action Plan for Official Languages. We are working in collaboration with our colleagues from the Official Languages Branch at Canadian Heritage to ensure there will be no duplication between the two initiatives.
The Chair: I’m sorry, Senator Manning. This is very interesting.
Senator Manning: How would that be disbursed? What is the process? Give me an example of how that $50 million will be disbursed.
I live in a small rural community in Newfoundland and Labrador. It is different from years ago when we only had one television station; we have several now. How is that money disbursed out to give the opportunity for remote communities to be heard and hear what is going on in the rest of the world?
Mr. Lemay: At this point, I am not in a position to provide you with all the details of this initiative. We are working on developing the program structure for these funds. As I said, more details will be unveiled later in the year.
The Chair: Do you have a plan first?
Senator Manning: This is a case of the money coming first and the plan coming afterwards. It seems that is the case here. Here is an allotment of money. Now give us a plan to spend it.
Should it be the other way, do you think, the plan being in place and then you get the money? Perhaps I am incorrect. That is what it seems to be.
Mr. Lemay: We want to make sure this money will be used as effectively as possible. That it will target the right communities, those with limited news coverage. We want to make sure it will be delivered in an efficient manner. There is a series of criteria and parameters to be designed in order to ensure we achieve the most with this investment. That is what we are working on currently.
When decisions are made and ready to be communicated, the government will be able to provide more information about this initiative.
Senator Manning: Do you anticipate the $50 million will be spent?
Mr. Lemay: We certainly do.
Senator Manning: Okay. That is that one.
The Chair: You will have to hurry, Senator Manning.
Senator Manning: You keep interrupting me.
The Chair: Yes, I know. I am just adding to your time.
Senator Manning: What is the budget for the Canada Media Fund?
Mr. Ripley: It is a joint federal-private sector partnership. Canadian cable, satellite and IPTV companies are required, as part of their licensing process through the CRTC, to contribute to the fund. They have a 5 per cent levy. Some of that 5 per cent levy — in this case the majority of it — goes to the Canada Media Fund. The federal government contributes $134 million in stable funding every year.
As my colleague from Finance and I noted, there was a commitment in this last federal budget to give a federal contribution of up to $172 million more over five years. What we are seeing is as revenues of cable, satellite and IPTV companies start to decline slightly, there is less money flowing into the Canada Media Fund from the private sector partners.
Senator Manning: Five per cent is not what it was five years ago.
Mr. Ripley: Right. As their revenues decrease, obviously, the 5 per cent decreases.
The Chair: Isn’t that the reason why a lot of these cable companies exist, because they are supposed to promote Canadian content from the money that cable subscribers pay to them?
Mr. Ripley: You are correct. There are various mechanisms implemented through the regulatory framework administered by the CRTC that are designed to achieve the policy objectives set out in section 3 of the Broadcasting Act. There are what are called expenditure requirements put on broadcasters, not the cable, satellite and IPTV companies, but the over-the-air broadcasters like Global and Citytv. They have to spend a certain amount of money each year, as determined by the CRTC as part of their licensing, on Canadian content.
In addition, another one of the mechanisms when cable, satellite and IPTV companies get licensed by the CRTC — again, the CRTC has a number of different elements of their policy framework — one of the things they are required to do is contribute 5 per cent to Canadian production funds. Again, the majority of that 5 per cent goes to the Canada Media Fund.
I don’t have the precise figure on me in terms of the Canada Media Fund, but it is just over $350 million it administers in funding every year, $134 million of which currently comes to the federal government to be topped up, if necessary, pursuant to the last federal budget commitment.
The Chair: All these media and cable companies are basically located in Toronto. There aren’t any in Vancouver or Calgary. They are all in Toronto.
Mr. Ripley: That is not quite accurate. There are a number of cable companies. I think the biggest ones come to mind. For example, you are probably thinking of Rogers, right, but we have —
The Chair: TSN, Sportsnet and all of those, they’re all Toronto.
Mr. Ripley: Those wouldn’t be considered cable companies. Those would actually be programming —
The Chair: I meant cable networks, sorry.
Mr. Ripley: The channels on cable?
The Chair: Yes.
Mr. Ripley: Right. When a cable company like Rogers, Shaw or Videotron puts together their cable package, they include certain things. There will be channels that are over-the-air stations included in that cable package. Then there are what are called discretionary services — specialty services and channels like TSN or CNN that are foreign and they can include in those cable packages. The CRTC maintains a list, essentially, of eligible services that can be included as part of those packages.
The Chair: They’re not really discretionary; there are some that are discretionary but really you have to buy the package. Some are not discretionary because the customer can’t veer from that package.
Mr. Ripley: As you know, one of the things the CRTC has done —
The Chair: Like CBC Newsworld, for example.
Mr. Ripley: There’s a core mandatory distribution or core list of channels the CRTC mandates that cable packages have to carry but beyond that, it is up to the cable companies and the satellite companies and IPTC companies to create packages that will best resonate with their customers.
As you may know, the CRTC in recent years has required those companies to offer a skinny basic package, a minimum package at a reasonable rate to address issues around access and pricing of those packages.
The Chair: It’s a very interesting topic. I could spend all day on it, but I won’t.
Senator Boisvenu: Welcome to our guests. Mr. Lemay, you say on page 2 of your brief that $75 million is earmarked for paid non-daily newspapers. I’m trying to understand the logic here. Does that exclude unpaid weeklies in the regions?
Mr. Lemay: Yes, unpaid newspapers are not eligible for the program. The program nevertheless supports nearly 400 community newspapers, many of them weeklies, which are paid. These newspapers are located in urban centres and in rural or remote regions.
Senator Boisvenu: What is your definition of the term “paid”?
Mr. Lemay: Paid circulation, either subscriptions or charges to purchase a copy.
Senator Boisvenu: The neighbourhood paper that I receive in the Ad-Bag every week and that informs me about community activities is not included.
Mr. Lemay: That’s correct.
Senator Boisvenu: Again in your brief, you mention on page 4 a $50 million fund created in 2018 to support local journalism in underserved communities. What is your definition of an underserved community?
Mr. Lemay: These are communities where news coverage is very limited. They may include remote communities and communities where, for example, there are no community newspapers or local radio stations.
Senator Boisvenu: We’re ultimately talking about isolated regions.
Mr. Lemay: It could be that. Of course, you don’t have this kind of issue in major urban centres such as Montreal, Toronto and Vancouver.
Senator Boisvenu: Consequently, if my neighbourhood daily isn’t eligible for your $75 million fund because it is unpaid, and if I live in the south of Montreal, a relatively well-served region, that weekly may receive no funding from you.
Mr. Lemay: Not if it’s an unpaid daily or weekly, no; it’s not eligible.
Of course, a $50 million investment is a major investment, but that doesn’t make it possible to meet all the needs of the newspaper industry. Priority goes to the communities and regions of the country where media coverage is very limited, even virtually non-existent.
Senator Boisvenu: Was the last move by La Presse, which is owned by Power Corporation and which decided to become a non-profit organization, done for tax purposes or to improve its circulation?
Mr. Lemay: La Presse people would be in a better position to answer that question. In the interviews they gave, they said they had hoped that would enable them to access philanthropic donations through not-for-profit businesses.
Senator Boisvenu: Not just to grants.
Mr. Lemay: Absolutely.
Senator Boisvenu: Mr. Jovanovic, you say on page 2 of your brief that section 19.01 was introduced in 1999 to permit, under certain conditions, a deduction for advertising expenses and foreign periodicals. Does that include Facebook?
Mr. Jovanovic: No, it’s to cover periodicals that essentially have Canadian content but are distributed outside the country so they can qualify for a partial or total deduction.
Senator Boisvenu: I’d like you to give us more details about your position on the Friends of Canadian Broadcasting, whose representatives appeared last week seeking a revision of the Income Tax Act to tax businesses that advertise outside the country. You doubt this measure would be effective. Can you provide us with more details?
Mr. Jovanovic: The point raised is really to highlight the objective pursued and the result of the proposal. From what we understand, the proposal would have the effect of increasing the firm’s costs, and the result would in fact be a tax increase, particularly if there are few substitutions. In the circumstances, raising taxes in this way doesn’t solve the primary problem for broadcasters. The point raised is to highlight this key issue of the proposal.
Senator Boisvenu: The government’s facing a dilemma in that its tax revenues are falling, while, at the same time, it has to invest money, because media readership is nose-diving. There’s a major dilemma here.
Mr. Jovanovic: I’m not convinced we were talking about deductions.
Senator Boisvenu: What we’ve seen over time is a sharp decline in the taxation of advertising as a result of social media, where people advertise for Canadian clienteles, but outside Canada. Consequently, revenue is plummeting for Canada, but, at the same time, we have to inject a lot of money in these periodicals because they are declining as well. There’s a major dilemma here.
Mr. Jovanovic: I don’t know whether we can conclude that this new market dynamic — whereby new opportunities are being created for businesses, and marketing and advertising are being targeted more effectively by social media and Google, and thus it is now possible to have better tools, often at lower cost — is ultimately resulting in less revenue for the government.
Senator Boisvenu: The problem is the same. I buy a product that, in many instances, is made outside the country, via Canadian corporate advertising. That product is shipped to me without tax. Something’s wrong here in that these Canadian businesses advertise products on social networks such as Facebook and therefore pay no tax on their advertising. Then I buy that product, which is shipped to me in Canada without tax. We’re being doubly penalized.
Mr. Jovanovic: If we’re talking about value-added tax, we’re being penalized in any case.
Senator Boisvenu: I’m going to buy a pair of glasses in the United States. I’m going to receive it without tax. The business that sells it, that does the advertising, hasn’t paid any tax. Canada is penalized both ways.
Mr. Jovanovic: I think your question goes back to the question raised by Senator Cormier. Is our present tax system, which is based on the notion of permanent establishment, still the ideal system for the new economy?
Senator Boisvenu: We’re really lagging behind. Thank you.
Senator Dawson: Let’s go back to section 19, which is the fundamental question. We’ve seen the massive arrival of Facebook, Google and other companies, which weren’t anticipated when the act was passed, and we have to plead guilty because we’re the ones who develop and pass the laws, and we therefore have to live with our mistakes. So we have to modernize the act. We’re told, for example, that Quebec has lost $109 million in revenue. The broadcasting people explained that to us. They say the act hasn’t adjusted to the fact that Canadians’ television, radio and newspaper habits have radically changed. I don’t exactly remember the percentage they cited to us, but perhaps as much as 65 per cent of revenue from traditional advertising investments is spent outside the country and enjoys a loophole under section 19, as a result of which, since they’re made outside the country, they’re not subject to the traditional protection. If you advertise in the New York Times, you have restrictions; if you do it in the New York Times online, you don’t.
Sectoral representatives have to deal with this situation. They say they’ve been telling you about this for 18 months but that no progress has been made. In Quebec, with the French fact, we may have an additional protection in this respect. I understand we have certain advantages, but sectoral representatives tell me they are nevertheless losing $109 million.
My second question is related to what Senator Boisvenu said about La Presse. Mr. Lemay, you state in your brief, “It should be noted that it” — meaning the fund — “does not support daily newspapers.” You added the word “currently,” and we can find it in the transcript.
I understand that, yes, things are changing, and I hope they will change because, in the current state of affairs, they should change. However, La Presse is a good example: by declaring itself a non-profit organization, that media player wants to earn that kind of revenue. Representatives of La Presse are appearing before the National Assembly today to discuss this matter. Perhaps we could take this opportunity to invite them to our committee as part of our study so we can learn their intentions. It’s not that we didn’t want to say they were right — I’m a fan of La Presse — but I think it’s a question of fairness. They tell us, “We’ve been telling them for 18 months, and they haven’t answered us, and we think this is hurting the Canadian industry.”
Mr. Jovanovic: I’m going to try to break down what you just said. There are different questions here. There is the question of what the impact of the increasingly significant presence of foreign platforms is on governments’ revenues and whether the added value created in the country should be taxed. When Facebook and Google arrive, there is an exchange of information. Is value created to the point where a taxation nexus is established, and should it be taxed? At that point, what is the best way to do it? This is a key question that is being debated within the OECD and elsewhere.
The second question is whether there is a solution, to the extent that these foreign platforms are generating revenue from Canadian media, and Canadian media revenues are consequently declining, thus causing problems. I think it’s important to analyze all that because it’s not obvious that there is a single solution for all these issues.
Senator Dawson: I think it’s important that the government acknowledge the problem, and I’d like to hear it, say it wants to do so.
Sector representatives tell me they’ve been seeing their sector unravel for 18 months. Hundreds of millions of dollars that were traditionally invested in the Canadian media will be transferred and invested in media that did not exist when the act was drafted, and I’m not blaming you for that. However, we can’t keep on saying, “We’ll see.” We have to start somewhere. It’s a question of survival. When an organization like La Presse has to become a not-for-profit organization, danger is definitely lurking. I understand that you aren’t politically responsible, and we’ll definitely have a chance to discuss the matter with them, but it seems quite clear to me that we have to modernize some of our laws to acknowledge the existence of Facebook, Google and others.
Senator Gagné: My question is for the witnesses from Canadian Heritage. Does Canadian Heritage invest money in digital advertising? And what percentage of its spending is allocated to American businesses?
Mr. Ripley: There are two aspects here. In politics and government, the Department of Public Services and Procurement manages advertising policy. Across the department, various activities are carried out, and they vary with needs. For example, as you know, every department uses social media to promote events and so on. I don’t have the figures for the Department of Canadian Heritage to hand, but we can get back to the committee with a more specific response if you wish. At the federal level, the question should be put to Public Services and Procurement Canada.
Senator Gagné: Investments are nevertheless made in businesses, and spending is allocated to American businesses.
Mr. Ripley: I would say that, yes, at some level, as in the private sector, where the government chooses to invest where it’s most cost-effective.
Senator Gagné: I come from Manitoba, and I’m a member of Manitoba’s francophone community. I’m very concerned about the future of our media. We have a weekly that has gone digital; it publishes on paper and online. I don’t think any business has found the perfect business model. For example, how can small, regional and francophone minority media concerns generate advertising revenues if they’re on an equal tax footing with Facebook and Google?
Mr. Ripley: As is the case with Facebook at Google, one of the digital distribution issues is that those media players are not content creators. However, as you know, this is increasingly how people get access to that content. I would add that there are indeed tax issues, but, if we’re honest, there’s also a business model issue. Yes, there has historically been a link between advertising and the creative industries, and it remains intact. However, what we have seen with social media advertising is that the relationship is breaking down. I have the figures in front of me, and I imagine our broadcasting friends have also presented data. In 2013, there was $3.4 billion worth of advertising on the Internet, and that rose to $5.4 billion in 2016. Advertising oriented toward the creative industries still exists, but there’s clearly a kind of connection between Internet advertising and this historic relationship with the creative industries.
Senator Gagné: We have nevertheless seen that the government’s advertising spending in the traditional media has declined and that local community newspapers have been dramatically affected by that change. Furthermore, the government is now announcing $10 million a year, but distributed across Canada, as a result of which the figures per player concerned are quite limited. The only encouraging point is that Budget 2018 refers to the media twice. That’s good news at least. Thank you.
Senator Galvez: We heard the witness last week from the Friends of Canadian Broadcasting with a lot of interest.
After hearing Mr. Jovanovic and Mr. Dimitrakopoulos, I must be honest and say I’m very disappointed because everyone is aware of a big problem here. We all know Facebook and Twitter, and these media are not providing content; they are providing a platform for diffusion. They are selling a service. They are collecting millions of dollars that are impacting the national media. I don’t want to say the national media doesn’t have its own guilt and problems.
We are listening to very old definitions of broadcasting, dates from so far away, and you are saying the OECD is doing things at a turtle’s pace and we are waiting there to see what happens. I am a professor and it sounds like procrastination. I’m sad to hear that. Where is your initiative? What are you doing to get ahead? France is doing things. The European community is doing things. We are sitting and waiting.
If I was a corporation, I would say time is money. What is your opinion of what we should be doing? What should be happening in the next year concerning proposed legislation to come out of this problem of all this money that is going away?
I won’t talk about tax havens because I will be talking about that later in the Senate today. It’s a drain and money is going away.
The Chair: Do you have a question, senator?
Senator Galvez: Yes.
The Chair: Please go ahead.
Senator Galvez: What is your opinion on what should happen?
The Chair: These aren’t policymakers, Senator. These are bureaucrats.
Senator Galvez: I know that, but they have brains.
Mr. Jovanovic: The issue is clearly recognized. On one hand, with respect to newspapers, local media, professional journalism, the government has started with some action in Budget 2018 with respect to the broader work on determining whether we need to rethink our taxation framework with respect to these entities. Again, work is ongoing. It’s an extremely complex issue. No easy solutions come to mind. It requires a lot of collaboration with other countries because you don’t want to come in and suddenly add taxes on business entities that would not be, then, recognized elsewhere and end up with significant distortion in the market. You have to look at the other side of it. Smaller businesses in Canada benefit significantly from these new tools.
Senator Galvez: That is the problem. When is the solution coming?
Mr. Jovanovic: My point is this is not ignored. However, solutions are not easy to find and it requires time and a closer examination of the issues. This is happening now.
The Chair: Anyone can comment on this: There is the definition of “broadcaster.” What we have in Facebook and Google are direct marketers, much like mail and telemarketing. They’re going to an audience which would benefit from the advertiser advertising to them. While if you go on television or a newspaper, you’re buying mass advertising to everybody, which is a bit problematic. That’s why small businesses are benefiting from being able to advertise on all these media because you can go to Facebook and just advertise in Saskatchewan or just in Saskatoon or a portion of Saskatoon or a portion of a particular group. They’re not broadcasters. They’re a distribution system for information, whether it’s personal as in Facebook, or whether it is Google, which is universal.
I don’t know if you can beat that problem. Is there anybody in the government talking about any of this stuff, or are they just sort of waiting?
Mr. Ripley: We’re very seized with the issue on the cultural policy side. We are very cognizant of digital disruption. This is why the government has announced a review of the Broadcasting Act and the Telecommunications Act. The system that has served us well for decades, in terms of establishing commitments by those companies that commission and distribute content, is under pressure and starting to break down. We all know the viewing habits of Canadians now include things like Netflix and Amazon Prime and over-the-top services in addition to their local broadcasting station, in addition to CBC and Radio-Canada services.
From our perspective, that Broadcasting Act review will be a forum and we fully expect stakeholders to be raising these issues. I think we need to acknowledge there is a tension in terms of the habits and practices of Canadians. We need to think about how we will continue to achieve the same policy objectives we want to achieve, which is investment in Canadian content and access to that content in a system where we have these global Internet companies playing in Canada.
The Chair: I would say Netflix and the cable industry is probably the most private enterprise. In other words, I can choose to buy Netflix or not to buy Netflix. With cable I can only choose certain things and other stuff I’m forced to take and pay for because of the rules of the CRTC. The reason I have to pay for it, they say, is to contribute to Canadian broadcasting. If I watch the women’s channel or the Indigenous channel, I watch a bunch of Hollywood movies, not Canadian content. Don’t you think you have to rework all of that? If you want to sell cable, you have to sell your network. If you can’t sell your network, you shouldn’t be in business.
Mr. Ripley: I would say the private sector companies are also very seized with Netflix because it is obviously a competitor to the type of service you mention. We are seeing Canadians increasingly choosing to cut or shave their services.
The Chair: I don’t blame them.
Mr. Ripley: Obviously, that is putting competitive pressure on our cable and satellite companies to react. Again, it’s more a business model question for them. From a policy question, we do have the question that will inevitably come up in the review of the Broadcasting Act. As you say, what is the role of the private sector, whether it’s Netflix or Canada’s cable and satellite companies, to contribute towards the policy objectives we want to achieve, which are Canadian content creation and access to that content on those platforms?
The Chair: This topic may be for another time. I want to get to the question of why we’re here, which is deductibility of advertising.
Facebook, isn’t that really a question of copyright? They’re taking information and news is published and redistributed and charging money for it free of charge. That’s a good business model, as far as I’m concerned.
Mr. Ripley: Generally speaking, they’re linking to the content. The act of referring to content is not currently protected by copyright in Canada. There have been jurisdictions in the EU which have experimented with trying to create a right for a newspaper publisher or editor. There is experimentation in that space.
The act of posting an article or something that links to the CBC page, that’s not an act that’s currently protected by copyright.
Generally speaking, on social media that is what you are doing. It is not that you have the actual copying of material but rather, “Hey, I found this interesting article interesting. You should read it, click here.” And it takes you to the CBC orThe Globe and Mail page.
The Chair: The more clicks you get, that is good for the person who is publishing. They should be able to make money off the fact that this distribution is getting people to read their article or watch their video, or something. Do you know what I am getting at? It increases their distribution. That is what the Internet is. It is a highway to distribute stuff.
Mr. Ripley: Right. There are digital revenues being made by Canadian creative industries in the digital space. What we see when we crunch the numbers is it doesn’t make up for the amount they are losing in the conventional space. What they used to get in terms of, say, their print publication or their local broadcast, the amount they are making online doesn’t cover that gap. There is a financial squeeze many corporations are facing.
The Chair: That problem, though, is not just Canadian. It is American, too, and European. In other words, there are fewer people reading newspapers in the traditional sense but getting their information somewhere else. The New York Times is losing money and lots of newspapers in the States have closed. This is not a Canadian problem. This is a world problem. I don’t know how you will address it. I say good luck to you.
Senator Cormier: As is the case for everything else, there’s currently a sense of urgency at all levels.
My question is for the representatives of the Department of Canadian Heritage. We’ve looked at the Creative Canada Policy Framework. We see that there is a long-term statutory review strategy. What can you tell us about the short-term plan to offset the loss of advertising revenues that is causing newspapers to disappear in the smaller regions. There are some major issues. We hear the department telling us about long-term strategies, but what initiative is in place for the very short term to enable these media players to make the transition and rethink their business models? I’m thinking in particular of what, in the parliamentary vocabulary, are called the “official language minority communities.”
Mr. Lemay: In the very short term, funding is provided under the Action Plan for Official Languages. We’re talking about $14.5 million for community media in the official language minority communities. There’s the $50 million initiative announced in budget 2018, the purpose of which is to support the creation of local news and access to local news in underserved communities. We’re working hard to modernize the Canada Periodical Fund, the commercial innovation component of which supports magazines aiming to change their business models and test new online approaches.
Assistance is already offered under the Canada Periodical Fund in addition to that paid every year to the publishers of periodicals, whether it be community magazines or newspapers, out of funding granted based on the paid sales formula.
Mr. Ripley: I would add that the CRTC has taken action in the broadcasting space, issuing a community programming policy that provides better access to funding under the current system for certain areas such as local news. The CRTC has also created the Independent Local News Fund, which provides funding access to independent broadcasters. The council is thus dealing with this problem as well and trying to find a way to improve local news investments.
The Chair: Do you have a supplementary, Senator Gagné? Go ahead and ask a quick question.
Senator Gagné: How did the Association de la presse francophone react to the announcement of the $10 million a year budget? And is the budget of the Canada Periodical Fund adequate to meet needs?
Mr. Lemay: First, there was considerable interest in the $50 million. The people from the Association de la presse francophone have held meetings with the department. People have expressed interest in this initiative. It has been well received.
Senator Gagné: Is the Canada Periodical Fund meeting needs?
Mr. Lemay: We could always do more and provide more money. Changes were made to the program in 2010, and, since then, that has enabled us to support more publications from the official language minority communities and to allocate more money to publications from those communities. On the whole, to date, we have supported 31 publications from the official language minority communities which have received $1 million from the Canada Periodical Fund for 2017-18.
Senator Gagné: All right. Thank you.
Senator Manning: I want to go back to Mr. Ripley. The general disruption across cultural industries brought on by new technologies, evolving business models and changing usual behaviours and expectations has raised a wide range of increasingly complex questions for policymakers, not least the nature and extent of government intervention as necessary or appropriate.
Do you want to elaborate on exactly what type of government intervention are we talking about and what level would be appropriate?
Mr. Ripley: Certainly. There are various types of interventions. First, there can be direct funding programs, which we have been discussing in the broadcasting context. There is the question of regulation and how prescriptive that regulation is.
On the topic we are discussing today, in terms of the deductibility, as my colleague from the Department of Finance highlighted, there is the question of whether, in extending the current deductibility rules in section 19 to online platforms, you would achieve the original policy objective when those provisions were first put in place.
It was simply meant to indicate we are at a moment in time where things are not developing in a linear manner. In many cases, what we have been alluding to is we are having to rethink how to achieve our current policy objectives. It may be the existing tools need to be changed or they may not be the correct tools for achieving those policy objectives.
Senator Manning: Is there an amount of Canadian content you strive for or is there a goal regarding the challenges in competition? How do you steer that vessel to make sure we have enough Canadian content? Is there a goal or an amount that you look for?
Mr. Ripley: The goal was to create a sustainable creative industry sector in Canada. When many of the various policies and programs and federal organizations like the CBC were put in place, there was the policy concern to ensure you have those voices to represent Canadian perspectives and stories.
It is difficult to quantify some of the things we monitor on a regular basis. Over decades we have achieved an industry that is quite successful. Some of the things we monitor continue to be the number of jobs in the sector and the contribution to Canada’s GDP.
On a more granular level, the CRTC is working through, as part of the licensing process for broadcasters, what an appropriate Canadian programming expenditure on them is — the amount of money they are required to invest every year in Canadian content.
As you alluded to, one of the significant investments the government makes every year is in our national public broadcaster and ensuring they tell Canadian stories in the various regions of the country.
Senator Manning: Thank you.
The Chair: But where is it successful?
Mr. Ripley: The CBC?
The Chair: No. You mentioned this industry. Where is it successful, where it doesn’t get government money or forced purchases on cable? Where is it successful except the local CFQC TV station in Saskatoon that doesn’t get government money but goes out and tries to sell advertising and serve the local community? They’re successful. Who else is successful besides them?
Mr. Ripley: I think of our production sector.
The Chair: You are giving government money for all of that too. If you want to produce a film, even Global or CTV, and CBC, actually, not only do they get money from the taxpayers, but they get money from grants, as well as being forced to watch CTV pay for CBC Newsworld. That is all forced money.
Mr. Ripley: You are right there are some support mechanisms in place for our production sector.
The Chair: Some? For books, it is the same thing.
Mr. Ripley: The Canadian Media Producers Association publishes a report every year. They showed they had, I believe, the highest production levels in Canada. That would include both production levels of Canadian content as well as those companies that choose to come and shoot in Canada. We have great infrastructure and support for production.
The Chair: The Canadian dollar helps.
Mr. Ripley: That study shows, I believe, that for every $1 that goes in, they get $3 out.
There are support mechanisms in place. However, as we highlight as part of our presentation, one of the objectives in Creative Canada is to drive economic growth. Our assessment is creativity and the cultural industries, as we move into an era with more AI and mechanization, our competitive advantage will lie in harvesting that creativity.
The Chair: Are you arguing the more subsidies we give, the more economic activity we will have?
Mr. Ripley: I am saying there are targeted support mechanisms in place to achieve certain objectives.
The Chair: In the previous legislation, by forbidding the deductibility of advertising on American television, for example, Seattle or Buffalo stations had an alternative television station to go to in Toronto or Vancouver that was broadcasting American shows. If we say we won’t deduct for Facebook and Google, what are the options for the Canadian businessperson? Where do they go for a Canadian Google or a Canadian Facebook?
Mr. Jovanovic: I’m not an expert per se in that area, but my understanding is there seems to be very few. Based on the report from the Friends of Canadian Broadcasting, it would be about a 10 per cent substitution if such a change in legislation would be made, which suggests there is, apparently, little substitute. In a way, that suggests it would mainly result in businesses paying more taxes, effectively.
The Chair: Which puts Canadian businesses at a disadvantage to American businesses who get the deductibility and we don’t. It could be the competing business.
Mr. Jovanovic: It’s not clear, then, what would be the direct benefits for Canadian broadcasters and newspapers, et cetera. That highlights the issue of effectiveness of the proposal.
The Chair: These are difficult issues.
Are there any other questions? If not, I would like to thank the officials from the Department of Finance, Canadian Heritage and the Canada Revenue Agency for appearing here today. It was an interesting discussion.
For our meeting tomorrow, Senator Bovey will be the chair. I have another commitment. Tomorrow we will have the National Ethnic Press and Media Council of Canada, Association de la presse francophone, the Alliance des radios communautaires du Canada and Magazines Canada.
(The committee adjourned.)