Netflix says it will pay sales tax — all Ottawa has to do is ask
Feds studying issue as other jurisdictions move toward regulation
It was a bizarre election stunt, with a suddenly folksy Stephen Harper warning of an apocalypse where ordinary citizens would be penalized for watching TV.
“Some politicians want to tax digital streaming services like Netflix and YouTube,” the then prime minister warned in a 2015 election campaign video. “I love movies and TV shows. I’m 100 per cent against a Netflix tax.”
And by the way, his favourite show, if you didn’t know, was Breaking Bad.
The problem? The new “tax” was never supported by any of the opposition parties in the first place. And there was an existing tax that wasn’t being enforced. Digital services like Netflix never had to collect GST or relevant provincial sales taxes under current laws if they didn’t have a substantial physical presence in Canada. It meant that consumers who subscribed to Netflix were required to submit that tax to the government themselves. Not many did.
That has, according to some estimates, resulted in hundreds of millions of dollars in lost revenue that would have gone into the Canadian economy since Netflix set up shop north of the border in 2010.
Harper’s messaging worked. The incoming government of Justin Trudeau enthusiastically pledged there would never be a Netflix tax. And he has been true to his word, with no suggestion he will introduce one, even after the upcoming federal election. A report by the auditor general released last week says in 2017 alone, Ottawa lost $169 million in GST revenue because of its reluctance to force streaming companies to collect taxes.
“It’s absolutely weird to me that Justin Trudeau adopted a talking point from Harper and ran with it. It’s so ironic that we have to pay GST on all the services we receive, but the one that’s not collected is by a foreign service provider,” says David Sparrow, national president of the Alliance of Canadian Cinema, Television and Radio Artists (ACTRA). “This should have been a no-brainer. It makes sense that Netflix should collect the taxes like everybody else, but somehow it became this political football.”
The ground is now shifting, although for some, not fast enough. At the beginning of this year, both Quebec and Saskatchewan introduced legislation requiring that provincial sales tax be collected on digital enterprises. Quebec expects to raise $154.5 million from that move over the next five years.
The two provinces are following a global trend that has seen regulators in Europe and Asia introduce tax and content requirements for online broadcasters.
So far, there has been little movement at the federal level, although a legislative review panel headed by former Telus executive Janet Yale is currently hearing submissions looking into broadcasting and telecommunications laws, including the issue of taxation. An interim report is due in June. But final recommendations won’t be ready until January 2020, well after the October election.
“God help us if the new government ends up packing all that work in a box and shoving it under the bed,” Sparrow says. “Then we’d be back to square one.”
Netflix Canada, meanwhile, says it is happy to comply with any government regulation and will collect taxes if requested to do so. But so far, the government hasn’t required it to.
“There was no agreement or special deal on taxation of any kind. We will comply with tax laws if and when they legally are extended to services like Netflix,” says the company in a filing to the legislative review panel provided to the Star.
The federal Liberals did try to appease the critics: They unveiled an agreement in 2017 under then heritage minister Mélanie Joly that would see the streaming giant invest $500 million over five years in Canada, with an additional $25 million to develop French, Indigenous and female-focused content. Netflix also announced recently it would build a production hub in the Toronto Port Lands district, which it says will create an additional 1,850 jobs.
As a result, Netflix says it is on track to “significantly exceed” the $500 million originally promised. Netflix Canadian content co-productions have included the CBC’s Anne with an E and Northern Rescue, Travellers with Corus, and Degrassi: Next Class with DHX Media.
However, the deal has been pilloried by critics who say Netflix would likely have spent that money in Canada anyway, with some detractors acting as if a naive Joly had given away the sacred cow of Canadian culture for a handful of magic beans. Netflix, after all, spent $12 billion in 2018 and analysts say it could spend up to $15 billion this year.
“I think they were able to give Mélanie Jolie a big flashy number she could put in a headline. But spending $100 million per year in Canada is not unrealistic given their global budget. They are here in Canada because of our excellent tax credits, our low Canadian dollar and talented artists,” Sparrow argues. “If conditions were to change, they would be somewhere else. We shouldn’t delude ourselves into thinking they are doing this solely for our benefit.”
The most vocal criticism from the industry has been that the government inadvertently created an unlevel playing field between powerful global technology companies and local broadcasters. Canadian firms such as Rogers, Bell and Corus are forced to collect the taxes, making their services comparatively more expensive than offerings by Netflix and making them less competitive.
Netflix is the largest, but not the only player in the game, of course. Founded in 1997 in Los Gatos, Calif., the subscriptionbased digital service has chipped away at the dominance of the cable broadcast model by giving consumers content whenever and wherever they want it. It has more than 148 million subscribers, with an estimated 6.7 million of them in Canada.
Other online producers include Amazon Prime Video, CBS All Access and Hulu. There is also a rash of upcoming players including Disney and AppleTV that will compete against budding domestic players in the same pool, such as Bell Media’s Crave and CBC’s Gem.
Another key issue, separate from the collection of sales taxes, is that Netflix, unlike domestic cable companies, is not required to put 5 per cent of its gross revenue into the Canada Media Fund (CMF) to produce Canadian content.
“Foreign streaming services must be required to contribute to the production of Canadian projects,” says Reynolds Mastin, president and CEO of the Canadian Media Producers Association, the national trade body representing independent producers. “They also need to ensure Canadian audiences can access this programming. How this will happen is up to debate, but we need government to make this a priority.”
Other jurisdictions so far have provided something of a potential road map: The European Union in the fall of 2018 issued a directive that on-demand video services such as Netflix and Amazon Prime Video devote at least 30 per cent of their offerings to European content. They are also required to make a direct investment in content. In France, they are required to contribute 2 per cent of their revenues to fund French content. In Germany, that number is 2.5 per cent.
Netflix, however, says it would be unfair to pursue a similar path in Canada.
“It would effectively force foreign online services to subsidize Canadian broadcasters,” the company says in its submission to the federal panel.
The idea of levelling the playing field is a fallacy, Netflix says, because Canadian broadcasters get a myriad of regulatory protections that are not afforded to foreign companies. That includes dedicated channels of distribution and simultaneous substitution rules allowing Canadian broadcasters to replace foreign advertising with their own.
“Netflix is already a significant investor,” through co-productions that reflect Canadian content policy, the streamer says in its submission to the federal panel. “Requiring foreign online services to contribute to the CMF could generate problematic and discriminatory outcomes.”
Mastin says they have tried to work with Netflix on solutions in the past, but have come up empty.
“We are ready to work with Netflix and other streaming services to find a solution that strikes the right balance — one that allows foreign streaming services to benefit from access to Canadian audiences, while also ensuring they contribute to the health of our domestic production sector. Unfortunately, Netflix has said ‘No’ to every proposed solution that’s been put forward to them so far.”
Netflix said a spokesperson was not available for comment to the Star, instead referring to the company’s 30-page submission to the legislative review panel. One key assertion by Netflix is that it shouldn’t come under the same rules for broadcasters. That’s because Canadian regulators determined that audiovisual content over the internet was exempt from licensing and not subject to the same kinds of oversight as domestic broadcasters.
“Netflix does not consider online services to be broadcasters or encourage proposals that would regulate online services as broadcasters,” it said. “Regulation can risk undermining Canadian content’s online success.”
But ACTRA’s Sparrow says if it walks like a duck, it is a duck.
“Why are we fetishizing the internet as if it’s different? It’s a pipeline like any other. The internet is a bunch of cables that come to your home, just like the other guys, and it should be regulated.”
Not everyone is in agreement with the broadcasters. Law professor Michael Geist has been a staunch defender of the rights of digital streamers, saying they already make significant contributions without the need for additional regulation.
“Calls to regulate due to socalled existential threats, level playing fields or European models ring hollow against an evidence that points to remarkable Canadian cultural success story without new taxes or regulation,” Geist says in a blog post.
Geist also chastised CBC president Catherine Tait, who controversially compared Netflix this year to a foreign occupying force with a colonializing effect on Canadian culture, saying her comments were “wholly inappropriate.”
Tait also said in earlier statements, referring to the digital streamers, that “everybody’s swimming in the same swimming pool. But some of the people aren’t cleaning it up.”
Those assertions don’t sit well with Netflix. Canada, after all, was its first foreign market outside the U.S. The argument that “Netflix benefits from the system without giving back” is simply false, the company says. “Revenues earned from our Canadian members contribute directly to our content spending,” it says, adding Canada is one of its top three locations worldwide for original content production. What worries Sparrow though, is not the present, but the future. The Canadian movie and TV industry is going through a remarkable growth spurt, buoyed by the era of peak television with more than 500 new dramas every year. For the first time, in 2018, the number of new streaming shows surpassed the output of basic cable and broadcast networks. Cities such as Vancouver and Toronto have been major beneficiaries. And that number is poised to get bigger in the short term at least. “The concept of peak TV means that this global boom will end, and we believe this will happen,” ACTRA says.
Other broadcasters — including FX chief executive John Landgraf who coined the term peak television, arguing there were far too many series being produced — believe there will be consolidation in the market. When that happens, some believe production will inevitably slow. But that’s why it’s important to have regulatory safeguards in place, Sparrow argues.
“It just makes sense you pay for the privilege of having access to Canadian homes and eyeballs.”
“Why are we fetishizing the internet as if it’s different? It’s a pipeline like any other.” DAVID SPARROW ALLIANCE OF CANADIAN CINEMA, TELEVISION AND RADIO ARTISTS