By Tony Wong, Technology Reporter. The Star Fri., Nov. 8, 2019
When then-Quebec finance minister Carlos Leitao proposed controversial legislation to have digital giants like Netflix and Amazon collect sales tax in the province, he was prepared for pushback from angry consumers.
After all, former prime minister Stephen Harper had campaigned against a so-called “Netflix tax,” arguing it penalized hard-working middle-class Canadians.
The idea of a tax had been so demonized by Ottawa, it was deemed political kryptonite for a politician to propose taxing one of the most popular forms of entertainment for Canadians.
That mantra was taken up by Prime Minister Justin Trudeau who said Canadians were “already paying enough for their digital subscriptions.”
But Leitao, a former chief economist with the Laurentian Bank before he got into politics, says it was about common sense.
“I wasn’t thinking whether this had been done before and who would be first to do it,” says Leitao, now the opposition Liberal finance critic in the National Assembly of Quebec, in an interview with the Star. “It was simply a question of basic fairness and equity that all businesses should follow the same rules.”
Leitao’s legislation, which he proposed in late 2017, meant Quebec was on the forefront of implementing the dreaded Netflix tax. This was followed by Saskatchewan. They are now the only two provinces to force online digital platforms to collect sales taxes.
“Why would you not impose a tax on Netflix, but you would impose a tax on Bell and Rogers?” asks Leitao. “The biggest thing about this, and I don’t want to sound too dramatic, was that at the end of the day, there was nothing to fear but fear itself. All we had to do was ask.”
The implementation was spectacularly successful: Quebec estimated it would receive $28 million annually after the tax came into effect Jan. 1. By the end of August, they had already raised $38 million. That money will go into the province’s general revenue fund where it could be used for any number of things, including education, or infrastructure or security.
“We were surprised at the number and at the speed at which suppliers complied with regulations,” said Leitao. “It really all worked out rather well.”
So if it worked for Quebec, why hasn’t the federal government followed suit?
Under current tax laws created before the digital era, companies that don’t have a “substantial physical presence” in Canada aren’t required to collect sales taxes. Domestic companies have to, creating an unlevel playing field.
“You already have an unfair advantage between a foreign company and a local one of 15 per cent in Quebec (5 per cent GST and 10 per cent QST) which is huge,” said Leitao. “So it’s no surprise that Canadian companies aren’t happy with that situation.”
According to Canada’s auditor general, the federal government lost $169 million in sales taxes (GST) alone in 2017 based on foreign digital products and services sold. That amount would likely be higher today given the increasing trend to digital services.
The issue will only get bigger. Apple TV+ recently launched in Canada and Disney+ launches next week, joining a crowded field of streaming platforms.
“Godzilla has landed on our shores and the government still hasn’t done anything about it,” said Howard Law, director of the media sector for Unifor, the division of the union representing workers in the newspaper and broadcasting industries, including Toronto Star workers. “You’ve essentially got Netflix 2 and Netflix 3 testing the waters, so now is the time.”
After a hands-off approach to big tech, the Liberal government has become much tougher on taxing and regulating the industry over the last year. Public sentiment also shifted dramatically as opinion polls show more Canadians favour regulation and are distrustful of big tech.
Trudeau promised to follow France’s lead by implementing a 3 per cent tax on the revenues of big technology firms ensuring “multinational tech giants pay tax on the revenue they generate in Canada.”
And in an exclusive interview, Heritage Minister Pablo Rodriguez told the Star he intends to make sure there are “no more free rides” when it comes to digital platforms contributing to Canadian culture.
Unifor’s Law says if the government were serious, it could act on this quickly with an order-in-council to the Canadian Radio-television and Telecommunications (CRTC) board overseeing the Broadcasting Act. They could require foreign platforms to spend money on Canadian content, similar to domestic broadcasters.
“I think the Liberal government has gotten over the fear of being slagged politically for putting on a Netflix tax. Now they’ve got to follow through,” says Law.
What makes it all the more baffling to some critics is why the government doesn’t simply tackle the low-hanging fruit of ensuring that everyone, including foreign companies, collect sales tax as Canadian companies are already forced to do. It’s a policy that would be far easier to implement since it is simply enforcing the law equally for all businesses.
“Taxes are a tough sell. I think across Canada there is this almost visceral reaction to taxes. Take the GST, after all these years people still don’t like it,” said Leitao. “But really, this is about equity between local and foreign suppliers.”
The Liberals, however, did say they would work to “ensure digital corporations whose products are consumed in Canada, collect and remit the same level of sales taxes as Canadian digital corporations,” but this wasn’t included in their fiscal plan or costed out by the Parliamentary Budget Office, according to lobby group Canadians for Tax Fairness.
Whether the Liberals will move in this direction is another issue, given their minority mandate. But their natural allies, including the NDP, the Bloc and the Greens have already said they believe in a “level playing field” and foreign multinationals must pay their fair share.
Still, the leadership on the Netflix tax means Quebec has given Canadians a model to work with, say economists.
“What Quebec did was exactly the right thing,” said tax expert Jack Mintz, president’s fellow in the School of Public Policy at the University of Calgary. “They took the bull by the horns and went with it. Now that we know the Quebec experience, the federal government should go ahead. It was totally appropriate, an additional source of revenue for the government and exactly the right thing to do from a tax policy perspective.”
Netflix has already said it would comply with collecting taxes if required to by the Canadian government. It just hasn’t been asked.
But the question is so sensitive that platforms are reluctant to give details of their operations.
Netflix, for example, will not reveal if it currently has an office in Canada. Instead, “confirming we have no comment” when asked basic questions such as if it had an office, where it might be, or how many employees it may have.
Still, it remains invested. This week (Nov. 5) they announced a partnership with the Toronto International Film Festival, a three-year investment to invest in emerging talent.
Netflix also said it had surpassed $500 million in production in Canada, only two years after it established its first presence here. The company had promised to invest at least that amount over five years.
“These significant investments made by Netflix in Canada demonstrate that Netflix is in Canada for the long-haul and committed to working with Canadian producers, creators, talent and crews to create more great content,” said the company in a statement.
Canada is the fifth most important market for Netflix with an estimated 6.3 million subscribers and $942 million in revenue annually, according to U.K.-based analysts Comparitech Ltd. Just the GST alone would be $47 million based on those figures, not including provincial sales taxes.
“It is a lot of money when you consider that it is not just Netflix, but other major platforms that are coming to Canada, and this is becoming a bigger issue,” says Leitao.
When Leitao’s Liberal government set out to implement the tax in late 2016, it was sparked by lobbying from vested interests such as Quebec’s Vidéotron cable company and other broadcasters who said they were at a tax disadvantage. Consumers have to pay GST and PST on cable services and for online Canadian platforms such as Bell Media’s Crave, but not for foreign digital platforms.
There was also fear by politicians that the big digital companies wouldn’t play ball if they were asked. And there was the perception that there would be pushback from consumers. But none of this happened, as the government framed the tax collection as one of national importance.
“It was not just a problem of more taxes, when you think of it, it is a cultural issue and a nationalistic one,” says Leitao. “It is the fundamental question of why we are treating our local companies, not equally, but worse than the foreign companies. And that is what we told the people of Quebec.”
The biggest hurdle it turned out, was not the voters, or Neflix or Amazon or other suppliers. But convincing Quebec’s bureaucracy in the Revenue Ministry (which reports to the Finance Minister) that this would actually work.
“There was certainly a great deal of uneasiness. There was talk that this was going to be too difficult. That the companies will find all kinds of ways not to comply,” says Leitao. “So I think, in the beginning, there was a real reluctance to explore the possibility of doing so.”
A turning point for Leitao was in 2017, when he visited Paris to talk to the OECD on how they were tackling the issue of taxing digital platforms. The European Union has been at the forefront in updating legislation to deal with the digital era.
“We realized that we had to put in a more simplified system for companies that didn’t have a physical presence in Canada,” says Leitao. “Although it was all a lot easier said than done.”
But Leitao knew he had a win when later that year Quebec encountered little pushback from digital platforms after unveiling their plan.
“They knew they weren’t being levied a new tax, they were simply collecting the tax, so they were very wiling to co-operate,” says Leitao. And the public seemed to be on side, despite the perception initially that this may have been an additional tax.
The Quebec tax has been such a success, the government is looking at a pilot project to expand the tax to collect QST for online purchases of tangible goods from suppliers located outside Canada.
“This is a more complicated project because there are thousands of suppliers,” says Fanny Beaudry-Campeau, press secretary to Quebec Finance Minister Eric Girard. “If you buy a book from Amazon, if it comes through customs, we should have the QST collected on that.”
With the project, the Quebec government has seconded four Revenue Quebec employees on the 12-month experiment with Canada Border Services.
“This is certainly something we can see snowballing to other parts of Canada,” says Beaudry-Campeau. “We have been taking a hard look at what other countries have been doing. If they can do it, the question is, why can’t we?”
Leitao, meanwhile, says the second stage of the tax could potentially provide a bigger windfall to Quebec than the Netflix tax.
“It’s also something that could be a model for the rest of Canada to follow,” says Leitao. As for the Netflix tax, which is now part of his legacy, Leitao says during the early days, he resisted any calls to make the tax one that would go toward any specific group or industry.
“The sales tax is a general sales tax and it goes into the general revenue fund. That’s the way it should be. And that way it helps all residents. And it will benefit Quebec for years to come.”