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TD walks back tax exemption request to ad agencies, following pressure

Toronto-Dominion Bank is backing down from a request for advertising agencies to help the bank avoid taxes on the agencies’ fees.

Andrew Vaughan/THE CANADIAN PRESS

Toronto-Dominion Bank is backing down from a request for advertising agencies to help the bank avoid taxes on the agencies' fees.

In late March, TD sent a confidential request for information (RFI) to a number of ad agencies competing for one slice of the bank's advertising business. A marketer typically sends an RFI as part of the process of inviting agencies to pitch for its account.

Several of those agencies raised concerns with an industry association over a section of the RFI that included the following instruction: "Suppliers should describe any suggestions for structuring the proposed products and/or services to minimize the amount of provincial/state/local and/or federal tax that will be added to pricing. In particular, suppliers should include suggestions for structuring services as 'financial services' or other categories of services that would be exempt from tax."

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The unusual tax-advice question highlights what some say is an increasingly unwieldy set of demands that marketers have been imposing on marketing and advertising firms when pitching for their business.

A number of agencies contacted the industry association, the Institute of Communications Agencies (ICA), to ask how they should respond. Upon being approached by the ICA, TD said it would remove the request.

"The RFI was based on an existing template, which was poorly worded. We've amended the wording to make the ask more clear. We will communicate this change to the agencies involved and, going forward, all RFIs will reflect this new wording," the bank said in an e-mailed statement. The new wording simply asks agencies to specify the taxes applicable to their fees.

Fees paid for many commercial services – including advertising-agency services – are subject to the harmonized sales tax (HST) in Canada. There are some exceptions, including financial services (which is why customers pay no tax on bank fees, for example) and what is known as the MUSH sector (an acronym for municipalities, universities, school boards and hospitals, as well as some other services.)

"Generally, HST applies to goods and services," said Vern Krishna, a tax lawyer and professor at the University of Ottawa law school. "There are exceptions to that. But they generally do not apply to regular commercial services."

He noted that the complexity of tax law makes it impossible to say that structuring a commercial-services agreement to avoid tax would never be permissible. Identifying legitimate ways to minimize taxes is a very common practice. However, companies have to be cautious not to stray into aggressive tax avoidance. Any company that attempted to "improperly recharacterize transactions" in order to reduce their taxes would be in danger of crossing that line.

"My concern is that it goes hand in hand with what we're seeing: more and more unusual requests asked of the agency sector, globally," said ICA president and CEO Scott Knox.

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Earlier this year, the ICA announced a "pitch watchdog" service encouraging agencies to report (anonymously if they wish) questionable demands from marketers during the pitch process – a program Mr. Knox already established in Britain during his time with the Marketing Agencies Association there.

Onerous terms have included asking ad agencies to produce speculative creative work at their own cost in order to participate in a pitch (a problem so common that one Toronto ad agency made a spoof video about it); contracts that specify marketers own all proposed ideas even if they do not hire the agency that pitched the idea or pay them for their intellectual property; and extensions in payment terms that leave agencies waiting longer periods of time for compensation.

In general, marketing departments and their agencies have been under increasing pressure to cut costs in recent years. And the growing influence of corporate procurement departments in the process of hiring ad agencies has placed extra pressures in the pitch process to produce more for less.

"I encourage marketers to get the best deal," Mr. Knox said. "These sorts of hurdles agencies are being asked to jump, it's excessive."

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About the Author
Media and Marketing Reporter

Susan covers marketing and media for Report on Business. Before joining The Globe and Mail in 2009, Susan worked as a freelance reporter contributing to the Ottawa Citizen, the Montreal Gazette and other publications, as well as CBC Radio's Dispatches and Search Engine. She has a Masters degree in journalism from Carleton University. More

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