As Canadian Heritage Minister Melanie Joly’s consultation on Canadian content in a digital world nears its conclusion – comments are due by November 25th – the big issue remains how to pay for an ambitious culture agenda. Joly has emphasized the benefits of expanding exports, which she hopes will bring foreign dollars and more foreign investment in the sector. While a stronger global presence makes sense, many of the established cultural groups have voiced opposition to measures designed to attract greater foreign participation if it risks reducing the guaranteed Canadian role in productions.
For example, the CRTC’s decision to loosen some Cancon rules has elicited ongoing anger, despite the fact that the change would likely make productions with foreign entities more attractive, thereby enlarging the overall size of the industry in Canada. With similar opposition to market-based reforms designed to reduce dependence on the current system (pick-and-pay television channels, gradual reduction of simultaneous substitution), there is little reason to believe that Joly can count on support for expanded exports to pay the bills.
This post unpacks some of the cultural policy options that have surfaced in recent weeks. The post stems from a panel discussion at the University of Ottawa featuring a paper by Richard Stursberg and commentary from myself, the Globe’s Kate Taylor (who covered the panel here), and ACTRA’s Ferne Downey (Stursberg’s paper is here, full video of the event here).
The broad range of funding possibilities fall into three categories: (1) increased revenues that are typically allocated toward “general revenues” (ie. go to the Department of Finance) but which could be earmarked for cultural funding; (2) new tax or levy plans that would be used to support the cultural sector; (3) other sources that derive from tax or cultural policies. I argue that the general revenue approach is the preferred one, given the benefits of new funding and without the significant drawbacks of the expansion of taxes or levies. Not discussed during the panel was the expansion of tax credits, which has the benefit of rewarding actual investment in the sector.
As I noted during my remarks at the University of Ottawa panel, any discussion of increased culture funding should include the context for how much public money is already allocated toward supporting the sector. According to the CMPA, nearly $3 billion was spent on film and television production in Canada in 2014-15. That represents a $230 million increase from the prior year and $500 million more than five years earlier. The public already pays for nearly half of this through tax credits (18% of the total costs from tax credits from federal and provincial governments) and various levies and granting programs. Further, the more than $1 billion in public support does not include the hundreds of millions that goes toward supporting the public broadcaster, the music industry, publishing industry, and video game industry. In other words, Canadians already invest heavily in supporting the cultural sector through taxpayer funded grants and credits.
Notwithstanding the existing support, there is pressure from some groups for more money (interestingly, I also participated earlier this month in a panel sponsored by Telus that primarily featured artists and producers from the west who emphasized marketing and global opportunities, not more funding). There are many possible sources of new revenues beyond more global success and partnerships, but all are not created equal. The remainder of this post highlights many of the possibilities: general revenues including digital sales taxes and spectrum licensing; new levies or taxes including a Netflix tax, Internet tax, and copyright link tax; and cultural or tax policy including benefits packages, tax credits, and digital advertising tax reforms.
A. General Revenues
1. Digital Sales Taxes
If there is one form of new revenue that generates an easy consensus, it is that foreign digital services with a sizable Canadian consumer base should pay digital sales taxes such as GST or HST. These taxes should technically be paid by consumers self-reporting what they owe, but few take the time and effort to do so. If sales taxes are to be applied equally, an unequal form of collection will not work.
Instead, digital services that meet a certain threshold for Canadian revenues should collect and remit the sales taxes. There are no shortage of arguments in favour of expanding sales tax collection in this manner: it creates a level playing field (Canadian services such as CraveTV collect HST but Netflix does not), generates additional revenues, and a growing number of countries have moved in this direction. While are some enforcement challenges and questions about appropriate thresholds for collection, digital sales taxes seem inevitable. As with all revenues of general application, however, there are no guarantees that the revenues will be directed toward cultural industries.
2. Spectrum Licensing
The Canadian government generates significant revenues from licensing spectrum. According to the Ministry of Innovation, Science, and Economic Development, the government collects approximately $1 billion per year in direct revenue and another $180 million in licensing revenue. The spectrum proceeds go to general revenues. However, many have argued that the money should be re-allocated back into the network. Indeed, spectrum revenues could help pay for programs designed to ensure affordable access to Internet services for all Canadians as well as for activities on the network, including the cultural industries.
B. New Taxes or Levies
3. Netflix Tax
The imposition of a “Netflix tax” is undoubtedly the most controversial new potential tax or levy. The government is on record on the issue: no new Netflix tax. Yet notwithstanding those public statements, the prospect of millions in new revenues may be too tempting to resist (Stursberg advocates for a new contribution requirement in his paper).
Typically described as a Netflix tax, the proposals are neither limited to Netflix nor technically a tax. Rather, the Netflix tax would seek to extend the current contribution requirements on broadcast distributors to online video services such as Netflix. Supporters of the plan argue that given the growth of Netflix, the contribution requirement would generate tens of millions of dollars and help offset the likely decline in contributions from cable and satellite companies as more consumers cut the cord.
While there may be a superficial appeal to a new contribution requirement on Netflix, there are many problems with the proposal. First, online video has become a staple for a wide range of sites from giants such as Netflix to newspapers that incorporate video into their sites to independent film sites that may use YouTube to distribute their content. Identifying the limitations of a contribution program is difficult and there is a danger that the proposal quickly becomes a tax on all Internet content.
Second, conventional broadcast distributors and Netflix may look similar, but they are very different. Conventional broadcast distributors retransmit over-the-air broadcast channels at no cost, whereas Netflix licenses or creates all the content on its platform. Indeed, the contribution from broadcast distributors may reasonably be viewed as compensation for benefiting from a retransmission system at no cost for content. Netflix is very different – it pays for content and transmission, enjoying none of the benefits accorded to broadcast distributors.
Third, there are obvious enforcement concerns. Netflix and Google argued during a CRTC hearing in 2014 that their activities fall outside Canadian broadcast regulation. The laws could be changed, but not without a legal challenge over the reach of Canadian law. In fact, even if Netflix (with its many Canadian subscribers) does fall within Canada’s reach, the extension of a levy to online video providers still raises questions about which services should or could be caught by the jurisdictional net.
Fourth, the Trans Pacific Partnership is in trouble, but if Canada moves forward with the deal, it will have agreed to no limitations on access to foreign video providers and no discriminatory payment requirements. In other words, no Netflix tax.
4. ISP or Internet Tax
If a Netflix tax were not enough, there is mounting concern that Joly may be pressuring cabinet colleagues to support an Internet tax on ISPs and digital services. A levy on Internet service has long been the holy grail for the cultural industries, who argue that broadcast on the Internet is the functional equivalent of conventional broadcast and that both should face similar funding requirements. Demands for such a tax have come from cultural groups such as the Canadian Independent Music Association, which recently called for mandated contributions to support the development of Canadian content, and ADISQ, which has previously lobbied for a similar policy approach.
When asked about the issue several weeks ago on CTV’s Question Period, Joly stated:
I’ve said that we’re willing to have a conversation with digital platforms. Netflix is one of them. There are Amazons, Hulus, Apple. There are big companies that are part of our ecosystem, that are used and liked by Canadians. This is why we want to make sure that we know that they are using a large part of our spectrum that we can have a conversation with them to see how they can participate.
The comment suggests that Joly subscribes to the view that there is a parallel between conventional broadcast and the Internet that invites a similar regulatory approach. Part of the rationale for broadcast regulation is that broadcast spectrum is scarce, therefore requiring licensing and regulation. By indicating that Internet services use a “large part of our spectrum”, Joly is making the case for treating Internet services as equivalent to broadcast. Moreover, Joly speaks of the need to have a conversation with Internet services “to see how they can participate.” Services such as Hulu and Amazon’s streaming service are not even available to Canadians, but even with those services that are (such as Netflix), the notion of exploring how they can participate again assumes a regulatory approach in which offering a service leads to regulated participation in the Canadian system.
To date, the law has not supported that argument with the Supreme Court of Canada ruling in 2012 that ISPs are not “broadcast undertakings” for the purposes of the Broadcasting Act. However, Joly’s legislative overhaul could involve changing the law to allow for the imposition of new fees on Internet services.
The ISP tax would come at an enormous cost to other policy priorities. Internet access in Canada would become less affordable, expanding the digital divide by placing Internet connectivity beyond the financial reach of more low-income Canadians. The tax would be particularly damaging in indigenous communities. The increased costs would also be felt by the business community, potentially undermining the innovation strategy currently championed by Navdeep Bains, the Minister of Innovation, Science and Economic Development.
An Internet or ISP tax is largely premised on the argument that ISPs and Internet companies owe their revenues to the cultural content accessed by subscribers and they should therefore be required to contribute to the system much like broadcasters and broadcast distributors. The reality, however, is that Internet use is about far more than streaming videos or listening to music. Those are obviously popular activities, but numerous studies (CIRA, Statistics Canada) point to the fact that they are not nearly as popular as communicating through messaging and social networks, electronic commerce, Internet banking, or searching for news, weather, and other information. From the integral role of the Internet in our education system to the reliance on the Internet for health information (and increasingly tele-medicine) to the massive use of the Internet for business-to-business communications, Internet use is about far more than cultural consumption. Given its importance to virtually all aspects of modern day life, there are few policy goals more essential than ensuring that all Canadians have affordable access to the network. That goal would be badly undermined by an Internet tax that would increase consumer costs and stymie Canadian innovation.
5. Copyright Link Tax
The government is scheduled to conduct a full copyright law review in 2017, but that has not stopped some groups from pointing to copyright reform as a source of new revenues for the sector. For example, Duff Jamison of the Alberta Weekly Newspaper Association told the Standing Committee on Canadian Heritage:
I do think that copyright laws were designed before we had this mass digital distribution of content. They probably need to be reviewed and brought up to date, so that there is a means…. We put in a possible suggestion. If you click through to a journalist’s story, then at that point perhaps that journalist and the newspaper that employs him should receive a payment. There are ways to get at this.
Jamison’s comments point to a new copyright link tax. The link tax proposal, which has gained traction in Europe, speaks to the possibility of requiring compensation for merely linking to an article. Yet as the Supreme Court of Canada noted in the Crookes case involving links:
The Internet’s capacity to disseminate information has been described by this Court as “one of the great innovations of the information age” whose “use should be facilitated rather than discouraged”. Hyperlinks, in particular, are an indispensable part of its operation.…
The Internet cannot, in short, provide access to information without hyperlinks. Limiting their usefulness by subjecting them to the traditional publication rule would have the effect of seriously restricting the flow of information and, as a result, freedom of expression. The potential “chill” in how the Internet functions could be devastating, since primary article authors would unlikely want to risk liability for linking to another article over whose changeable content they have no control. Given the core significance of the role of hyperlinking to the Internet, we risk impairing its whole functioning.
While the Crookes case involved defamation, the Court clearly understood the importance of linking to freedom of expression. Attempts to limit linking – whether by regulation or the imposition of fees – would undermine critical freedoms.
Moreover, creating a link tax would likely mean that sites and search engines stop linking to certain kinds of content. Such an approach would hurt independent creators and others who are dependent on links to find their audiences.
C. Cultural and Tax Policy
6. Benefits Packages
An oft-overlooked source of revenue, benefits packages are created where there is a change in control/merger in the communications sector. Given the number of transactions in recent years, there is a considerable amount of money currently in the system. According to some estimates, benefits packages have already provided hundreds of millions of dollars and will provide $420 million more over the next five years. Any calculation of cultural revenues should take this source into account.
7. Expansion of Tax Credits
Tax credits are commonly used by federal and provincial governments to support the cultural industries on the premise that public support should be contingent on private investment. The value of the tax credits runs into the hundreds of millions of dollars every year. As noted above, the CMPA data indicates that last year the value of federal and provincial tax credits for film and television production was over $500 million. Tax credit programs similarly sit at the heart of support for the video game industry, where provinces compete with other jurisdictions to attract companies based on generous tax credit programs. Looking ahead, a rationalization of the tax credit system for the cultural sector is long overdue and would be provide a far better sense of the full scope of taxpayer support for the industry.
8. Digital Advertising
The Stursberg paper emphasizes the need to target digital advertising, focusing on two issues. First, he discusses applying digital sales taxes to large firms such as Google and Facebook that dominate the digital advertising space. Much like applying GST/HST to Netflix, sales taxes on digital advertising should be similarly uncontroversial. However, unlike consumer purchases such as Netflix subscriptions, digital advertising in typically a business-to-business transaction with some of those revenues offset by the GST/HST paid by the firms.
Stursberg also recommends changing the Income Tax Act by removing the availability of tax deductions for advertising through services such as Google and Facebook. Stursberg believes that removing the deduction will increase advertising on traditional Canadian-based services and sources. As I noted during the panel, I think he’s wrong and misunderstands how digital advertising works.
First, digital advertising is a function of the audience. Given that more and more people are shifting their viewing and media consumption habits from offline to digital, advertisers are unsurprisingly following their audience. A change in the tax code will not result in a shift to less effective advertising venues. Rather, it will simply make the digital advertising more expensive and leave Canadian business less competitive in the digital marketplace.
Second, digital advertising with companies such as Google typically involves a revenue share between Google and the site where the advertising appears. In other words, the advertising is on the same Canadian sites that Stursberg wants to support. That revenue goes to Google, which then sends a portion back to the site or media organization. There is a reasonable debate to be had over the dominance of Google and Facebook in the digital advertising sector, but cutting the flow of dollars to those companies will do little to actually help Canadian organizations seeking to attract digital ad dollars.