Canadian Streamers See U.S. Rivals Avoiding Sales Tax as Threat

Alias Grace S01E04 Still - Publicity - H 2017
Jan Thijs/Netflix

Ottawa says it won't tax local subscribers of U.S. digital services as Netflix announces a $500 million investment over five years in local series like 'Alias Grace.'

As Canada rolls out a new digital strategy, the government has decided against imposing a sales tax on U.S. streaming video and digital services like Netflix, Amazon and iTunes operating in the country.

"We are absolutely not committed in any way to raising taxes on the middle class," Sean Casey, parliamentary secretary to the Canadian heritage minister, told The Hollywood Reporter while attending the annual Canada Media Fund content showcase in Ottawa on Wednesday night, which brought together on- and off-screen talent, broadcasters and local politicians.

Casey's comments came ahead of Netflix on Thursday announcing it will invest $500 million over five years to help produce Canadian content for its worldwide platform, and establish a "production presence" north of the border, its first-ever outside the U.S.

"Today’s announcement affirms there’s more to come as Netflix launches Netflix Canada, our permanent production presence in Canada, " Ted Sarandos, Netflix's chief content officer, said in a statement. "We look forward to continuing our work with Canadian talent, producers, broadcasters and other local partners to create Netflix originals in Canada for many years to come," he added.

Justin Trudeau's government had been weighing forcing U.S. online services, including Netflix Canada with its 5.2 million subscribers, to collect federal or provincial sales tax from monthly subscribers streaming imported content.

But as heritage minister Melanie Joly later on Thursday will unveil the government's vision for the future of Canadian media and broadcasting, deciding to forgo tax revenue from U.S. video streamers, while getting promises of inward investment, has reopened a debate about how to fund homegrown digital content.

Canadian video streamers already collecting the HST goods and services tax on behalf of Ottawa aren't happy. "Foreign video providers like Netflix and foreign digital advertising platforms like Google and Facebook, despite competing in Canada and earning millions of dollars in revenue from Canadians every month, pay no sales tax at all," said Rob Malcolmson, senior vp regulatory affairs at Bell Media, which operates the CraveTV streaming service.

"This is obviously not tax fairness, and Canada must maintain the ability to address this inequity with new modernized tax laws," he added. And ACTRA national executive director Stephen Waddell, head of Canada's actors union, also renewed calls for Netflix and other U..S. digital platforms operating locally to be regulated.

"Foreign internet broadcasters are generating hundreds of millions in Canadian revenue, but they're exempted from that system. This isn't sustainable or fair," Waddell said. ACTRA members were out in force at the Parliament Hill showcase, including Orphan Black's Kevin Hanchard, Mohawk Girls' Brittany LeBorgne, Heather White and Maika Harper, and Cindy Sampson and Samantha Wan from Private Eyes.

The Canadian government in recent years has rejected such calls to regulate and tax U.S. online giants to help fund Canadian programming. Netflix in a statement to the Hollywood Reporter said the U.S. video streaming giant "collects and remits tax wherever we are legally obligated to do so" in Canada.

Danny Cisterna, a partner at Deloitte Canada, based in Toronto, explains Netflix Canada, as an offshore business, doesn't have to register to collect the so-called harmonized sales tax (HST) as part of the country's sales tax regime. It is a consumption tax, which is included in cable TV and local streaming subscription bills.

"Selling into Canada in and of itself does not necessarily make a provider 'carrying on business' in Canada," Cisterna said. At the same time, Valerie Creighton, president and CEO of the Canada Media Fund, a major investor in local TV and digital content, said increasingly popular web-based media giants like Netflix, Amazon and others, while not regulated directly by the federal government, are increasingly investing in original Canadian series and shooting their own U.S.-originated shows in Canada.

"These companies are interested in Canadian talent and Canadian investment," Creighton argued. The Canada Media Fund develops, finances and promotes the production of Canadian content series for all digital platforms.

Creighton pointed to Netflix and the CBC co-producing the mini-series Alias Grace, written by Sarah Polley and directed by Mary Harron from a crime novel penned by Margaret Atwood. "That's the model," she said after Netflix and the CBC also worked together on Anne, a TV drama based on the Anne of Green Gables book series, and Netflix and Rogers Media, which operated the now defunct domestic streamer Shomi, teaming up on the Canadian thriller series Between.

Generous tax credits and other local subsidies, including from the Canada Media Fund, explain why Canadian TV series get made in the country before they travel well overseas, including into the U.S. market. BBC America's Orphan Black, Lifetime's Mary Kills People and Syfy's Killjoys are just a few of the Canadian series to land U.S. network slots as local producers eye foreign markets and financing partners for their projects.

Scott Garvie, senior vp business and legal affairs at Shaftesbury, which sold its supernatural mystery series Houdini and Doyle from House creator David Shore to Fox, the U.K.'s ITV and Canada's Shaw Media, said Netflix and other U.S. streamers are new platforms to sell to, but not the best business model for local players to build long-term and strong companies.

"If the OTT service fully funds a series, then it's not unlike a U.S. broadcast deal — they own the IP and may share revenues at the back-end," Garvie said.

Sept. 28, 10:30 a.m. Updated with confirmation from Netflix of its Canadian investment.