We are about two decades into the commercial internet age. Alongside the expanding list of never-before-seen online goods and services, traditional bricks-and-mortar businesses are simultaneously being transformed by this digital revolution. The lines have blurred in terms of physical production, as have geographic and regulatory borders.
When it comes to taxes, some may find it appealing (possibly amusing) to see our authorities playing catch-up, but that means uncertainty for entrepreneurs. To make viable financial plans, businesses need to know whether and how existing rules will map over into their digital activities, or if they have entirely new compliance requirements to contend with.
Early on much of the focus was simply on what is subject to tax, and as new offerings emerge those determinations continue. Equally important is the question of what may be deducted from that income, to which the Canada Revenue Agency has recently provided some clarity in the area of advertising on social media.
Income Tax Act (ITA) Canada – Deductions generally
The general ability to take a tax deduction is expressed first as a denial, followed an exception:
18 (1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of (a) an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property [my emphasis obviously]
Of course, numerous provisions constrain the application of that general exception. Some of those are overarching such as the reasonableness requirement in s. 67. Others are more targeted, in particular for our purposes the sections dealing with advertising.
ITA – Limitation on advertising expense
The advertising limitations are expressed in s.19 for newspapers (including any “comics supplement”), s.19.01 for periodicals, and s.19.1 for a broadcasting undertaking.
Much of these rules address cross-border issues: from the citizenship of the publisher; to the degree to which editorial activity occurs in Canada; to the geographic location of typesetting or physical printing; to the proportion of editorial-to-advertising space, and more. Depending on the resolution of these issues, advertising may be fully deductible, half-deductible, or not at all – and in some cases a reference to the Department of Canadian Heritage may be called for.
It requires a great deal of interpretation to apply that language and those concepts in a dynamic new media industry, not to mention the due diligence burden placed upon the taxpayer to ascertain the necessary information to work with. In fact, it would not be unreasonable to characterize that traditional framework as antiquated, and in many ways unmanageable.
CRA letters 2017-0708891M4 (August 2017) and 2017-0719471E5 (September 2017)
In August 2017, the Minister of National Revenue Diane Lebouthillier personally responded to a taxpayer inquiry sent to a Member of Parliament. The question was whether foreign online advertising was deductible. The Minister acknowledged the general s.18 deductibility and the constraints of ss. 19, 19.01, and 19.1. She then advised, as head of the CRA, that those limiting rules would not be applied to the deductibility of advertising expenses on foreign Internet websites.
Another letter was issued by the CRA in September 2017, responding to a similar issue. The question was about the treatment of advertising on social media. The agency confirmed that the Canadian content and ownership rules would not apply to social media sites or networks, including foreign websites.
- Expenses are generally deductible if an outlay is incurred to generate income from a business or from property, and it is reasonable in the circumstances.
- There are rules that limit deductibility of advertising expenses, contingent on whether certain Canadian content or Canadian ownership requirements have been met.
- The CRA has confirmed that Canadian content / foreign rules will not apply to advertising on social media networks or foreign websites.