Principal Issues: Does subsection 19.1(1) of the Income Tax Act apply to disallow a deduction for outlays and expenses paid by a Canadian company to a Canadian advertising agency, who uses part of the funds to purchase air time for them on a foreign broadcast undertaking? Would this provision also apply to deny the Canadian advertising agency a deduction for the cost of purchasing this air time?
Position: Question of fact; however, subsection 19.1(1) would generally not apply to the ad agency.
Reasons: It is likely that the ad agency is acting as an agent for its Canadian client when purchasing the air time on the foreign broadcast undertaking.
XXXXXXXXXX 2006-018544 James Gibbons, CGA January 4, 2007
Dear XXXXXXXXXX:
Re: Advertising on a Foreign Radio Station
This is in reply to your email dated May 10, 2006, requesting our views on the application of subsection 19.1(1) of the Income Tax Act (the "Act"). One of your clients, an ad company ("Adco"), is thinking of buying air time for a Canadian customer ("Canco") from a radio station located near the border of Canada. You wish to know how subsection 19.1(1) would apply in these circumstances.
Our Comments
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to offer the following general comments.
Subject to the exception in subsection 19.1(2) of the Act for older grandfathered agreements, subsection 19.1(1) of the Act provides that "in computing income, no deduction shall be made in respect of an otherwise deductible outlay or expense of a taxpayer made or incurred after September 21, 1976, for an advertisement directed primarily to a market in Canada and broadcast by a foreign broadcasting undertaking," (the latter term being defined in subsection 19.1(4) of the Act).
Whether or not a foreign advertisement "is directed primarily at a market in Canada" as contemplated by subsection 19.1(1) of the Act is a question of fact having regard to the advertisement's actual target market in both the Canadian and foreign market. For income tax purposes, a taxpayer must be able to substantiate a claim that an advertisement by a foreign broadcast undertaking is not directed primarily to a market in Canada by reference to the actual documented strategy used for such advertisement, including the underlying population demographics, typical listener/viewer profiles, station audience share, program popularity, audience and time slot, human psychology, etc.
In the specific case where air-time for an advertisement is purchased from a foreign broadcast undertaking located near the border to Canada, it may be reasonable to presume, depending on the product or service being sold, that the radio advertisement is directed at both a Canadian and foreign audience. Given this presumption, and also assuming that the population in the particular border area is homogenous, it might be reasonable to use the number of listeners in each country as the basis for determining whether the advertisement is directed "primarily" (i.e., over 50%) at a market in Canada. Nonetheless, reference would also be made to the actual advertising strategy to determine whether a pro rata calculation is reasonable in the circumstances.
Taking into account the foregoing, if it is determined that section 19.1 of the Act applies, Canco would be denied a deduction for the entire amount paid by it to Adco, including the amount paid for preparing the particular ad and the amount paid in respect of broadcasting the ad on the foreign radio station. In terms of the application of section 19.1 of the Act to Adco, if it is simply acting as an agent of Canco in respect of the acquisition of air-time on the foreign radio station, passing all of those costs, in addition to the fees it charges for its own services, onto Canco, it is our view that it would not apply.
We trust this information is helpful.
Yours truly,
Randy Hewlett
Manager
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch