18 July 1991 External T.I. 911574 F - Cross Border Advertising

SUBJECT: Cross Border Advertising

This is in reply to your round trip memorandum of June 10, 1991 concerning the [24(1)] and cross border advertising.

Under the provisions of section 19.1 of the Act, advertising broadcast by a foreign broadcasting undertaking and directed primarily to a market in Canada is not deductible. We understand that you are requesting our general comments on the factors and criteria in assessing whether advertising on a foreign broadcast is deductible.

An additional issue you wish us to consider is the tax consequence resulting from a

24(1)

Specifically, you request our comments on the following matters submitted for your consideration by the Mississauga D.O.:

1.     What reference material is available concerning the determination of the market to which an advertisement is directed?

2.     What are the factors and criteria used in assessing the deductibility of cross border advertising?

3.     Would the following be considered key criteria?

(a)     The advertiser's intent as measured by the words and images of the message and the audience it appears designed to influence.

(b)     Advertising a brand that is not available in the foreign market place is sufficient to decide it is not directed at the foreign market but at the domestic market.

(c)     24(1)

(d)     Is the target audience relevant? We are not quite sure what the D.O. intended here.

We assume that the suggestion is that in determining the primary market for an advertisement it is the location of the target audience be it male, female, young, old, etc. that should form the basis of the determination rather than location of all the viewers or listeners.

The purpose of the D.O.'s request is to obtain guidance in the early stages of reviewing the taxpayer's request for reassessment. The D.O. acknowledges that the matter will likely have to be resubmitted in the future. We presume that this would be when complete information is obtained with respect to the advertising arrangement and strategy when the taxpayer has submitted arguments in support of their claim.

We are responding to the D.O.'s comments in the order set out above.

4.     As you know the determination of where an advertisement is directed must be made on the basis of the facts and circumstances involved in a particular case. Each particular advertisement must be considered on its own merits rather than as part of a campaign. There is little in the way of technical interpretations involved. We assume it is for this reason that there is little correspondence on our research files. Nor are we aware of other Departmental publications or sources dealing directly with this determination. The comments we have previously set out in two letters are provided in 5 below.

5.     The following are the criteria and factors suggested in previous correspondence on this subject:

(a)     the wording of a particular message;

(b)     the normal listening or viewing audience of the foreign broadcasting undertaking;

(c)     the concurrent use of the Canadian media to at least an equivalent extent to reach the potential Canadian customers;

(d)     the need to attract non-residents to the taxpayer's facility in view of its proximity to major cities in the foreign country, and

(e)     the target market (e.g. persons within an income or social scale) which is a subset of the potential public audience (i.e. persons who happen to tune into the commercial).

6.     The criteria and factors set out by the D.O. are for the most part in line with the comments in 5 above. However, where a brand is not available in the foreign market we would suggest it is a rebuttable presumption that the advertisement is directed at the Canadian market. In other words, the taxpayer would have to present convincing evidence that such a message was intended to reach the foreign market and was effective in attracting foreign customers to come to Canada and use the product before the expense would be allowed.

We also note the following as a practical matter. Although we agree that it is the particular segment of the listening or viewing audience "targeted" that is relevant, we would assume that the population in a border area would be homogenous and the number of listeners in each country could be used as the basis for any calculation assuming there are no additional factors.

As a final comment on the D.O."s criteria, the marketing agreement referred to above would seem to be a strong indication that the Canadian companies should not be incurring the expense of advertising directed at the U.S. market. Nevertheless, it is still a matter of fact as to what market a particular advertisement is directed. If it is established that the advertisement is directed to the U.S. market and section 19.1 is not applicable, the D.O. may be able to argue that it is not a proper expense of the Canadian company since it is not related to any direct source of income to the Canadian corporations. Obviously, diverting expenses from a foreign affiliate to the Canadian corporation has the effect of lowering profits for Canadian tax purposes and should be resisted. There is insufficient information to assess the chances of succeeding with either of the preceding arguments.

The D.O. also mentioned the findings of the Tax Court in the recent case, Ontario Craftmatic Ltd.. 1989 DTC 553. Although there are some troubling statements in this case, it was ultimately decided on the wording of the advertising message. This is one of the criteria we endorse.

We have concluded that there is no need to modify our views as a result of this case.

As a final thought on this issue we believe that the current "advertising game" is highly sophisticated.  Population demographics, typical listener/viewer profiles, station audience share, program popularity, audience and time slot, human psychology and no doubt numerous other factors come into play in designing an ad and targeting an audience.

?1(1)(b)

We trust these comments will be of assistance.

for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental     Affairs Branch