As the president of one of Canada’s largest media buying firms, Kristine Lyrette advises corporate clients on where to place their advertising dollars.

Lyrette is a power player in the advertising world, as she distributes clients’ marketing budgets in radio, television, newspapers and magazines, and increasingly on platforms like Google and Facebook. But the future, perhaps not surprisingly, has been digital.

“We find the audiences that our clients want. Whether the platform is owned by Canadians or Americans, it doesn’t matter,” says Lyrette whose company, Zenith Canada, counts such clients as entertainment giant 20th Century Fox, multinational cosmetic company Coty, and Canada Post. “The end result is what matters.”

For the Toronto-based Zenith, digital marketing now makes up about 40 per cent of all requests, with the rest split among radio, TV and print. That’s up significantly from what it was only a few years ago, and the trend is increasing, says Lyrette.

Within the digital space, Google and Facebook command the overwhelming share of advertising dollars at about 72 per cent. The rest is divided up amongst other media, including legacy publishers like magazines and newspapers, who fight for a shrinking piece of the pie. In 2018, the amount Canadian marketers spent on digital advertising was estimated to be $7.7 billion.

There are myriad reasons for the dominance of big tech companies in the advertising world, including better capitalization, analytics, technology, superior targeting and return on investment, even as legacy publishers struggle to catch up.

Some critics argue tech companies have been given a free ride on outdated tax regulations that have caused a crisis in Canada’s media industry.

Canada’s tax code was not written for the digital age. And one small but significant change could help to level the playing field between tech giants and domestic publishers.

Ads purchased on foreign-owned websites are tax deductible under the federal Income Tax Act. That loophole should be closed, critics say, because it encourages local businesses to buy into foreign platforms.

“I think the common thread we’ve had so far is that when given a choice between standing up for Canada’s interests or doing basically nothing, the government has gone with the latter,” says Daniel Bernhard, executive director of the media watchdog group Friends of Canadian Broadcasting. “Silicon Valley has basically done whatever they wanted. We haven’t applied our rules when they are involved and that’s become really expensive to all Canadians.”

Section 19 of the Income Tax Act was created to help Canadian publishers gain a foothold against their more established foreign competition in order to support domestic news coverage. That legislation was made in the print era. Domestic advertisers couldn’t deduct the cost of their advertising in Time’s print edition, but they could if they advertised in Time’s Canadian competitor Maclean’s. However, the restriction doesn’t apply to websites.

“Essentially, you get a situation where you aren’t able to deduct your advertising if you advertise in the print edition of the New York Times, but you get to do that in the online edition, which is completely ludicrous,” says Bernhard.

A 2016 study by Bernhard’s group found that tax deductibility wouldn’t necessarily solve the problem, but it might redirect anywhere from 5 to 10 per cent of annual ad spending to Canadian websites.

“It certainly wouldn’t be enough to totally change the balance, but it would be a substantial move,” says Bruce Neve, president of independently owned media-buying company True Media Canada. “It would be interesting to see what the results would be like if it were really a level playing field.”

According to the 2016 study, tax deductibility could bring in an additional $250 million to $450 million in revenue into Canadian coffers. And that number would be even higher today. So far, despite intensive lobbying, the federal government hasn’t budged on the original interpretation of Section 19.

“Closing the loophole would be a clear message that the government of Canada values Canadian content and Canadian content producers, that they’re not scared of Facebook and Google,” says John Hinds, president and CEO of News Media Canada, which represents daily, weekly and community newspapers across the country. “Nobody’s asking for a free lunch. We just want them to apply the rules to account for the fact we are living in a digital age.”

The question is, should Canadian consumers care where they see their advertising? Should advertisers care where they advertise?

“One issue is that advertising pays for 90 per cent of the journalism that tells readers more about their backyard, while the internet companies don’t have an obligation to tell Canadian stories, they don’t have to put anything back,” says Howard Law, director media sector for Unifor, the country’s largest media union, which represents local broadcast workers at CTV and Citytv and newspapers such as the Globe and Mail and the Toronto Star.

Facebook did not respond to queries from the Star. However, Google Canada spokesperson Aaron Brindle stressed his platform shares a “common mission” with Canadian publishers.

“The fate of Google and the publishing industry are inextricably linked,” says Brindle in a statement to the Star. “An open press and healthy news industry plays a critical role in our democracy.”

Billions of clicks a month are driven to publishers’ websites for free, representing an opportunity for them to grow and monetize an audience, argues Google. Globally, the company shared more than $13 billion with publishers in 2018.

“By sharing revenue, driving traffic and supporting innovation we see ourselves as partners to the news industry,” says Brindle.

Not all publishers agree with the concept of making it more expensive for Canadians to advertise on foreign platforms.

Jeff Elgie, publisher of Village Media Inc., a collection of hyperlocal community news websites in Ontario, says that would be a “huge mistake.” He says Canadians would be “effectively disadvantaged” against anyone outside our borders when it comes to buying advertising.

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“The U.S. company selling widget ‘X’ to Canadians, buying ads through Google or Facebook to target Canadians, is going to be able to deduct those expenses, while the Canadian company attempting to do the same thing is not,” says Elgie. “Does the media industry really want to have a narrative that suggests that because they want these channels penalized, that every other business in Canada has to be penalized as well?”

But critics and government watchdogs say more can be done to make sure digital companies pay their fair share.

On a separate but significant tax issue, the Canadian auditor general found this month that the Canadian sales tax system has “not kept pace with the rapidly evolving digital marketplace.”

Because they failed to collect the GST on companies such as Netflix, Google and Facebook, Canada lost $169 million in 2017 on digital products and services sold nationally according to the auditor general. That’s because companies that don’t have a substantial physical presence in Canada do not have to collect taxes. It’s up to the consumer to remit those taxes to the government, but that happens rarely, if ever.

Despite the reluctance of the federal government, Quebec and Saskatchewan, meanwhile have been collecting provincial sales taxes from digital companies since the beginning of the year.

Facebook has said they would voluntarily collect and remit sales taxes to Ottawa. They are expected to do that sometime in the second half of the year. But Google so far has not followed suit, leaving it up to regulators.

“Should the federal government create legislation to require the collection of value-added taxes on digital sales, we would comply with that legislation,” says Google’s Brindle. “Quebec passed legislation that requires the collection of Quebec Sales Tax. We comply with that legislation.”

Unifor’s Law meanwhile, says the Canadian government could consider a specific digital content tax similar to some European Union countries that are implementing taxes of anywhere from 2 per cent to a suggested 6 per cent of revenues.

That situation is similar to the plight of Canadian broadcasters who have noted that competitors such as Netflix don’t have to contribute a percentage of their profits into entities such as the Canadian Media Fund. If they did, those funds would go into making Canadian television content. Similarly, some of the proceeds of that digital content tax could be diverted into creating local news.

“A content tax could make sense. (Foreign digital platforms) make no significant contribution to journalism, but they vacuum up the advertising dollars,” says Law.

Despite the fact she has to be dispassionate about where she places her clients’ budgets, media buyer Lyrette says she understands the importance of supporting local media. But she’s not in the charity business. Clients want to go where they feel they can get the most eyeballs on a cost effective basis.

“In some ways it is the beginning of the end. If you’re not supporting your own local community, that media community will eventually go away,” says Lyrette. “It’s still important to have a local market otherwise your community won’t be reflected in it. It’s a pretty basic question. But it’s also a competitive landscape.”

The Trudeau government meanwhile, is paying close attention to the issues of privacy, hate speech and electoral interference. On Thursday, the prime minister announced a “Digital Charter” to rein in the industry, including financial penalties for companies that break the rules.

But so far it hasn’t looked at what Hinds says is the underlying issue: The health of the industry.

“There are a lot of words around fake news and hate speech. But they have not addressed the business side of the equation. To combat all that, you have to have a healthy industry of credible, legitimate players,” says Hinds. “You have to fix that issue first if you are to have any long-term sustainability. What’s hopeful is that the rest of the world is engaged in that discussion. And hopefully Canadians will catch on, too.”

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