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New digital taxes may be the future of Cancon

Michael Geist holds the Canada Research Chair in Internet and e-commerce law at the University of Ottawa law faculty

Canadian Heritage Minister Mélanie Joly has energetically crossed the country emphasizing the economic benefits of the cultural industries. Yet as the government conducts a national consultation on Canadian content in the digital world, new digital taxes may ultimately play a starring role.

Ms. Joly has opened the door to an overhaul of Canadian cultural policy, but the million-dollar – or perhaps billion-dollar – question is how to pay for it. Internal government documents obtained through the Access to Information Act suggest that officials believe foreign sources of funding from international sales and joint productions could play a pivotal role in bringing new money into the system.

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The industry has resisted policies that might increase foreign-backed productions, arguing that lowering qualifying requirements for the number of Canadians involved will lead to lost jobs and less distinctive content.

Their hopes appear to rest primarily with a series of new digital taxes. While new taxes are never popular, the possibilities include the proverbial good, bad and ugly.

The good involves proposals to divert revenues from spectrum licences to cultural funding (effectively a spectrum tax invisible to consumers) and to extend sales taxes such as GST or HST to foreign digital services. Canadian-based services such as CraveTV currently incur sales tax, while foreign-based services (such as Netflix) remain largely tax-free. The differential treatment creates a tax-revenue shortfall and places domestic services at a disadvantage.

Extending sales taxes to digital services may be complicated, as enforcement costs can outweigh revenues for smaller services, but work on global standards is likely to provide assistance in developing efficient tax collection mechanisms and common threshold exemptions.

The bad would involve the introduction of a controversial "Netflix tax" that requires online video services to contribute a percentage of revenues toward creation of Canadian content. Ms. Joly has previously rejected a tax, but the prospect of new revenue may be too tempting to resist.

A Netflix tax would face several significant hurdles. Public opposition to new fees to the enormously popular service would be intense, while Netflix and other services would reasonably argue that the fees are discriminatory since they are unable to benefit from the resulting productions in the same manner as conventional broadcasters. In fact, Canada may have already signed away its ability to levy a Netflix tax in the Trans-Pacific Partnership, which explicitly blocks the introduction of discriminatory fees on foreign providers to support Canadian content production.

If a Netflix tax proves to be a non-starter, the government may turn to the ugly: a tax on Internet service providers. A levy on Internet service has long been the holy grail for the cultural industries, which argue that digital broadcast is the functional equivalent of conventional broadcast and that both should face similar funding requirements.

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To date, the law has not supported that argument with the 2012 Supreme Court of Canada ruling that ISPs are not "broadcast undertakings" for the purposes of the Broadcasting Act. However, Ms. 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 would become less affordable, expanding the digital divide by placing connectivity beyond the financial reach of more low-income Canadians. The increased costs would also be felt by the business community, potentially undermining the innovation strategy championed by Navdeep Bains, the Minister of Innovation, Science and Economic Development.

The digital Cancon consultation may not attract the attention of most Canadians, but the prospect of new digital taxes might mean that they end up footing the bill.

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