The Standing Committee on Canadian Heritage is reportedly set to release its much-anticipated study on the future of media today with a recommendation for a new 5% tax on broadband services to fund Canadian media and the creation of Cancon. The Globe reports that the Conservative MPs on the committee oppose the recommendation. I raised concerns about the possibility of new digital taxes last fall, fearing that Canadian Heritage Minister Melanie Joly would implement them as part of her review of Cancon in a digital world and noting that the Ontario government appeared supportive of the approach. Joly has yet to outline her plans which are scheduled for release in September, but has refused to rule out Internet taxes and regulation. I will update this post once the full report is released, but based on the Globe report it must be stated that an Internet tax to fund Canadian content is a terrible policy choice with exceptionally harmful effects on the poorest and most vulnerable households in Canada. [Update 11:45 am: Within minutes of the report’s release, Prime Minister Justin Trudeau rejected the Internet tax recommendation.]

An Internet tax would be a terrible policy choice even if the evidence did not indicate that foreign funding for Canadian television production is largely replacing declining funding from Canadian broadcasters and broadcast distributors. Despite claims of impeding doom, the reality is that $2.6 billion was spent last year on Canadian television production with support from licensing fees, tax credits and many other sources. The rise of foreign funding, which coincides with major investments from Netflix in original content, now exceeds virtually all other sources of funding, growing from 10% of financing in 2013-14 to 18% in 2015-16.  Rather than searching for new sources of mandated funding, the creative community is experiencing significant growth in new sources of funding that largely offset declines from mandated contributions.

An Internet tax would also be a terrible policy even if it complied with the law. However, as the Broadcasting Act is currently drafted, it does not. As the committee surely knows, an Internet tax is inconsistent with the Broadcasting Act, since the Supreme Court of Canada ruled in 2012 that ISPs are not “broadcast undertakings” for the purposes of that statute. As the court summary of the decision notes:

When providing access to the Internet, which is the only function of ISPs placed in issue by the reference question, they take no part in the selection, origination, or packaging of content.  The term “broadcasting undertaking” does not contemplate an entity with no role to play in contributing to the Act’s policy objectives.

In other words, the government cannot mandate that ISPs contribute to broadcasting objectives without changing the law.

An Internet tax would also be a terrible policy choice even if the public did not already contribute billions of dollars toward the creation of Canadian content at a time when there are market incentives for broadcasters to invest in original content production. The CMPA’s Profile 2016 reports that over a billion dollars was contributed from public sources including the public broadcaster, federal and provincial tax credits, and the Canadian Media Fund. In fact, CRTC Chair Jean-Pierre Blais’ noted in a speech this week that Canadian taxpayers and subscribers have invested over $20 billion over the past five years in the Canadian media content and broadcasting sectors.

An Internet tax would be a terrible policy choice even if the committee’s attempt to limit the tax to “broadband” services rather than slower connections were a good idea. It is not. The CRTC has established a target for all Canadians to have access to real broadband – 50 Mbps download and 10 Mbps upload. That target was roundly applauded as a necessary step in ensuring equality of access to critical communications services. Creating a two-tier Internet by taxing faster speeds would create anti-innovation incentives and consign poorer Canadians to slow, if any, access.

An Internet tax is a terrible policy choice for these myriad of reasons, but most importantly it is a terrible policy choice for the harm it will cause to affordable Internet access. The committee heard from many media and creator groups, but heard little about the cost of Internet access and what an Internet tax would mean for the digital divide (I appeared before the committee in October 2016). Had they studied access costs, they would learned that the CRTC’s annual report on communications in Canada found that Canadian broadband prices are higher than many comparable countries. Moreover, they might have listened to Navdeep Bains, the Innovation, Science and Economic Development Minister, who last week acknowledged the broadband affordability problem:

Low-income Canadians spend a higher share of their household income on cellphone and Internet bills than high-income Canadians. So it’s not surprising that only 6 out of 10 low-income households in Canada have Internet service.  By contrast, virtually all households that earn $125,000 annually have it. 

This digital divide is unacceptable. It represents a real barrier to continued prosperity for Canadians. Every child who’s unable to do school assignments or download music online is one less consumer of your products and services. Each one of these children is potentially one less software developer for your industry – and one less job creator for our country.
We need every Canadian to be innovation ready- ready to spot opportunities, imagine possibilities, discover new ideas, start new businesses and create new jobs. All Canadians need access to high-speed Internet, regardless of their income level or postal code. Until we bridge this digital divide, Canadians will not reach their full potential.

Simply put, there is no way around the fact that an Internet tax would make access less affordable, expanding the digital divide by placing Internet connectivity beyond the financial reach of more low-income Canadians. The tax would be particularly damaging in indigenous communities.

An Internet tax is largely premised on the argument that ISPs and Internet companies owe their revenues to the cultural content accessed by subscribers and they should therefore be required to contribute to the system much like broadcasters and broadcast distributors. The reality, however, is that Internet use is about far more than streaming videos or listening to music. Those are obviously popular activities, but numerous studies (CIRA, Statistics Canada) point to the fact that they are not nearly as popular as communicating through messaging and social networks, electronic commerce, Internet banking, or searching for news, weather, and other information. From the integral role of the Internet in our education system to the reliance on the Internet for health information (and increasingly tele-medicine) to the massive use of the Internet for business-to-business communications, Internet use is about far more than cultural consumption. Yet the committee envisions the Internet as little more than cable television and wants to implement a taxation system akin to that used for cable and satellite providers.

I reviewed many of the options for funding Cancon in a post last year, noting that mechanisms  such as digital sales taxes or spectrum revenues that could generate additional revenues for funding programs. Instead, the Liberal MPs on the committee including Hedy Fry, Julie Dabrusin, Seamus O’Regan, Pierre Breton, Darrell Samson, and Dan Vandal reportedly adopted the worst possible option (even a Netflix tax would be preferable), one that is non-compliant with the law and that would help put the Internet further out of reach for four out of every ten low income households in Canadians. Given its importance to virtually all aspects of modern day life, there are few policy goals more essential than ensuring that all Canadians have affordable access to the Internet. That goal would be badly undermined by an Internet tax that would increase consumer costs and stymie Canadian innovation.