Everything you need to know about the ‘Netflix Tax’

With the power of the internet, modern businesses have the ability to expand their reach around the world without ever opening a satellite office.

That fact has been crucial in the recent deliberations regarding Netflix’s presence in Canada, though the company’s lack of a local office has exempted Canadians from paying a GST sales tax on their monthly subscription fee.

Internet businesses have created a new threshold for international commerce. Up until this point in Canada, there has been no talk of developing legislation for taxing an internet service that, in simplest terms, has no Canadian mailbox.

Media outlets have begun using the phrase “Netflix Tax” as shorthand for the discussions about this issue taking place at the federal level.

However, as the term has become more popular, many began to use it to refer to the arguments surrounding Netflix’s business model, including the claim that Netflix’s presence in Canada requires the company to contribute to the development of Canadian culture.

The name was also used in reference to the potential fee paid by Canadian users of other similar companies such as Spotify and Amazon Prime Video, which has come to be known as an “Internet Tax.”

MobileSyrup reached out to several experts to clarify the different debates around the phrase “Netflix Tax,” and the precedent that these discussions may set for digital legislation in the future.

Definition #1: A sales tax on digital servicesCredit Card

The Netflix Tax is most simply used to describe a potential solution to a legislative loophole that allows Canadian users of Netflix to avoid paying taxes on their subscription fees.

Federal representatives have realized over the past few years that there is no legal requirement for Netflix to collect such GST sales taxes from Canadian customers. This is because the law in its current state doesn’t equate the company’s digital presence to that of a physical one.

“If you are a subscriber to Crave, you pay HST, you pay sales tax. But that’s collected by Crave and remitted onto the government. If you subscribe to Netflix directly from Netflix, then Netflix does not collect and remit sales taxes. It doesn’t have a Canadian presence so it is not, at the moment, by law, required to do so,” said Canadian wireless law expert and University of Ottawa law professor, Michael Geist.

Any corporation selling products to Canadians, in Canada, is required by national commerce laws to impose a sales tax on their products to help reimburse the government for its permission to operate in the country.

Netflix has been able to avoid this requirement in two ways since its entry into Canada in 2010. The first method being that Netflix never opened a Canadian satellite office, and still hasn’t to this day. The government can’t tax a person or a company that has no in-country residence.

Secondly, Netflix doesn’t sell a physical product. This product doesn’t pass through a vendor that can institute such a tax at the point of sale, nor does it go through any other check and balance before reaching the consumer.

Through the power of the internet, Netflix has the ability to sell access to its service directly to Canadian customers without the oversight of any other body.

Geist goes on to say that a ‘Netflix Tax’ in its truest form refers to the simple fact that Canadian users of the service will see an extra few dollars accounting for the tax on their monthly bills.

The Minister of Finance has said in the past, however, that it will not impose such a tax on Netflix and has no plans to do so in the future.

“As we’ve said before, we have no plans to put a tax on Netflix. Our tax fairness measures are focused on looking at the tax system to ensure it better supports the middle-class — including increasing taxes on the wealthiest Canadians so we could cut them for the middle-class.”

This kind of tax would likely apply to all similar streaming services that reach a certain number of Canadians every month. A prime example of a similar company that may be affected is Spotify, a music streaming service that operates in much the same way as Netflix; one monthly subscription rate for access to a whole swath of music.

Definition #2: Can-con contributions from Netflix
Canadian Flag

The term, “Netflix Tax” has also been used to pose the question of whether companies like Netflix should contribute to can-con (Canadian content)  as part of the requirement of operating in the country.

The debate has centred around whether or not the video streaming giant should be required to pay into the Canadian Media Fund (CMF). CMF is an organization funded jointly by the Canadian government and IPTV and satellite providers. The group delivers funding and support to Canadian television and digital media through a few different funding models.

If Netflix fell under the Broadcasting Act, it would be required to make certain financial commitments to Canadian content, which would likely include paying into the Fund.

Netflix has claimed time and time again that it contributes willingly and substantially to the production of original Canadian content, without being mandated to do so.

Geist agrees, stating that Netflix has indeed served Canada’s local artists of its own volition.

“We’ve got a system that’s actually working pretty well in terms of marketplace based incentives and real successes for can-con in the Netflix space and a contribution requirement for those that have certain advantages that aren’t accorded to competitive OTT (over-the-top) players,” said Geist.

According to an article written by Geist, Canadian Heritage Minister Melanie Jolie has remained adamant that the government will not extend mandatory can-con contributions to Netflix.

“I think that when the Minister talks about doing a better job of promoting can-con she’s right,” continues Geist. “I think the goal is to find ways to bring Canadian content to bigger audiences and take advantages of the real competition that’s emerged in the streaming space.”

Some of the methods by which the video streaming company has done this include partnering with local broadcasters and streaming services to hire Canadian artists to produce local content.

The Department of Heritage has stated recently that they will not impose can-con requirements on Netflix.

Definition #3: Taxing the InternetScreenshot of Rogers Bill

In addition, while the term ‘Netflix Tax’ has often been used to refer to the discussions around whether Netflix should give back to Canada in the form of a GST sales tax or a can-con mandate, a larger discussion about the freedom of the internet has emerged.

The growth of businesses in the digital age, and the desire of Canadians to access their services will likely force amendments to made to existing taxation and content laws.

This kind of tax would effectively be a levy on Canadian monthly wireless bills to be issued through their wireless carrier. The response to this hasn’t been positive, and several wireless advocacy groups have spoken out against the proposition.

In particular, OpenMedia, a wireless advocacy group, has been vocal on the subject. A representative from the group, David Christopher, explained their position in an interview.

“The high cost of internet access is almost crowding out the entertainment budget that families have. That’s just one of the many problems bringing up the question of availability,” said Christopher.

He went on to say that Canadians already pay so much in wireless fees that a big part of the reason why they’re not watching Canadian content is because there isn’t room in their budgets to purchase it.

This broader discussion, however, would be better referred to as the Internet Tax, which has stirred up tensions among several digital freedom advocacy groups.

The conversation about a Netflix tax has evolved into a precedent-setting discussion about the freedom of digital services and the laws that protect that freedom.

Geist agrees that the concept is a dangerous one, urging regulators to tread carefully as they navigate these discussions.

“The third area that some have raised is taxing ISPs, taxing the internet service itself. A lot of Canadians are already concerned with the cost of their internet services, the notion of making it even more expensive with that sort of extra fee would be hugely concerning” Geist said in an interview.

There’s nothing to worry about, yet

Netflix sign at Netflix's office

While many groups have argued that virtue of the web lies in the freedom of anyone to access it, it’s not clear whether the evolution of tax laws and commercial enterprise will affect that freedom.

It’s important to remember that as these discussions about Netflix are taking place, other digital services will likely follow suit as these laws are more widely adopted.

It’s become clear, however, that much of the anxiety surrounding the legislation of the internet has been conflated with the Netflix Tax. While several countries have experimented with such legislation, Geist concludes that this kind of legislation will likely be introduced in Canada eventually.

As of right now however, none of these proposals has been instituted by the Canadian government. So it seems that both Netflix and Canadian video streaming junkies are off the hook, for now.

Comments

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  • Michael Licht

    What next? They are going to tax microtransactions.

    And about teaching ISPs, Rogers already charges me tax on my internet service, should I be making calls?

    How can you charge tax from internet places? They can just refuse it. I would. I mean what’s Canada going to do? They can’t just block the service, that would be censorship, they can’t sue them, because it’s not a Canadian business and it’s not like they can complain to the internet government (hopefully never becomes a thing).

    I think if Canada starts charging tax, we should be able to get all the same services USA gets from Netflix and if the publishers disagree, Canada should fight for it. Otherwise this tax thing is just a way for Canada to make more money(which it is).

    • Humbre

      Let’s debunk your comment:

      “And about teaching ISPs, Rogers already charges me tax on my internet service, should I be making calls? ”
      -Rogers is a Canadian company operating on Canadian soil. As such it charges provincial and federal taxes on the services it provides to you. Id keep paying those if I were you.

      “How can you charge tax from internet places? They can just refuse it. I would. I mean what’s Canada going to do? They can’t just block the service, that would be censorship, they can’t sue them, because it’s not a Canadian business and it’s not like they can complain to the internet government (hopefully never becomes a thing).”
      -In theory an international company doesn’t need to comply to a tax, but in pratice they usually do and they have in other countries (i.e. France). And yes there is such a thing as “the internet government”, it’s called the CRTC.

      “I think if Canada starts charging tax, we should be able to get all the same services USA gets from Netflix and if the publishers disagree, Canada should fight for it. Otherwise this tax thing is just a way for Canada to make more money(which it is).”
      -You don’t have access to the american netflix’s library because of content exclusivity deals and how they are different from one country to the other. It has nothing to do with the tax and likely will not change without a significant content law overhaul.

      I hope this helps you understand the issues at hand more clearly.

    • Brad Fortin

      To add: They already tax microtransactions.

    • Smitty

      Also:
      “They can’t just block the service, that would be censorship,…”

      – No it wouldn’t. Couldn’t every business that streams videos stop paying taxes, claiming censorship? Rogers would still have Shomi if that were the case.

      “…they can’t sue them, because it’s not a Canadian business…”

      – Yes they can. Investor-state dispute settlement.

    • NoWayHosEH

      What does taxes have to do with having the same access to what the US has? Really, sometimes I wonder how people think.

    • They don’t think, that is the problem. We have passed the age where people know how much the things around us cost and how much is covered. A high number of people do not know where taxes go or how they are benefiting them.

      I think the schools are to blame for not hammering this home in all grades. Michael Licht actually thinks that paying HST should allow Netflix to bypass national content agreements.

  • fred

    #1 is a must. Time to close the loophole. Otherwise there will never be a large Internet service company (think Netflix, Google, Facebook) operating from Canada.

    • Brownstar

      Google already has offices in Canada

    • fred

      but it’s a different subsidiary from the Google who sell ads. So there is no GST/PST on what they actually sell the most.

  • Vito R.

    The #1 thing to know about the “Netflix Tax” is that there is no Netflix Tax.

  • Kasey C

    LOL, if they ever do tax Netflix, I’ll just drop a Canadian product from my purchasing to compensate.

    • Jonathan Epp

      The choice of where to spend your money is an important one.

      This is a decision you are already free to make.

      The only difference is that currently Netflix can do this without providing the same benefits to our country, as a Canadian based service. Further, this gives Netflix an additional competitive advantage.

      Many users may (and many likely already) choose to only subscribe to Netflix. That’s a feature of the open market model. That’s okay. However, with a tax it insures that Canadians collectively gain part of that benefit regardless of your choice. It also helps equal the playing field, which is usually good for the consumer in the long run.

    • The fact that others don’t see this is worrying. We pay tax for the many programs and services that we brag about having in Canada.

      Tax sucks to pay but it could be worse. Our neighbors to the south pay similar tax and still have to pay out of pocket for things like child birth.

    • NoWayHosEH

      I wish we can drop you from your health benefits

    • JoMore

      +1 for making me lol

    • NoWayHosEH

      At least you are a good sport ????

    • JoMore

      So since standard hst on $10 is $1.30 per month, what Canadian product would you drop from your purchasing to make up the massive sum of $1.30?

    • Kasey C

      It’s not the “saving” of $1.30, it’s a “political” statement. What I would drop would cause a tax loss substantially more than $1.30.

  • Jonathan Epp

    Thanks so much for providing this uniquely Canadian tech coverage. This piece stands on it’s own merit though. You’ve taken a complicated subject and described in a very straightforward and balanced way. Thanks for taking the time to do this.

  • uncle_tek

    I don’t think it’s true that no body knows what services you buy outside of the country. Your bank certainly knows. I don’t think there is any way of buying a non-Canadian service on the internet without that credit card. Maybe something can be done with that?

  • uncle_tek

    I’m confused by this statement: “Any corporation selling products to Canadians, in Canada, is required by
    national commerce laws to impose a sales tax on their products to help
    reimburse the government for its permission to operate in the country.”

    So is the Canadian consumer paying for that “permission” for that company to operate in Canada? This doesn’t sound right and brings other questions. I admit that we only spend our hard earned money on things we choose so in a sense we permit that company to operate in our lives. But getting taxed for it? Doesn’t the government spend the tax money on the security of the consumer by creating programs to make sure those products/services are right for the consumer – which is fine by me? But if that’s the case, the word “permission” in this statement is rather confusing.

  • hardy83

    100% for taxing services online even if they have no office here.

    If they want the privilege of sucking millions of dollars in profits out of the country, they can pay a tax on that profit.

    • ForzaTotti

      Where do you think that money is going to come from? Hint: Netflix subscribers

    • bart

      I for one am OK with paying tax on my subscription. The service is provided in Canada, The content on Netflix Canada is unique to Canada, so in my mind the service is Canadian, and because of that fact Netflix should be treated as Canadian company and follow the same rules as if they had a Canadian address.

    • Roger Stone

      Of course it comes from Netflix subscribers, where else would it come from?
      I’m with hardy83, they should be taxed like any other company selling services to Canadians. How they do it is a bit trickier, but at least it should be agreed that they need to collect taxes

    • NoWayHosEH

      Where do you think the money comes from when you go to the hospital? Hint: Tax Dollars

    • The money tree?

    • NoWayHosEH

      Yes it used to be the money tree. Now it’s from the oil well.. lol

  • bigshynepo

    Why doesn’t the government just make Canadian Content Streamers exempt from paying tax on their membership fees so they can be competitive?
    Shomi was awful and Crave doesn’t compare to Netflix, and how can they without all of Netflix’s billions of dollars in original content?
    Unfortunately, Netflix delivers on a class of it’s own and the Canadian government should continue to nurture a positive and collaborative relationship regarding original production instead of take the hostile ‘tax’ approach that Netflix has been so careful to avoid.

    Thanks for the article!

  • I think the tax is fair. Right now they aren’t really giving back to our economy, just taking. That can only create a negative effect in the long run.

  • The last thing I want is to pay more taxes, but I I agree with others that this makes sense and sounds fair. But I hope that the government keeps good on their word to not enforce can-con. Good Canadian content will be distributed organically, we don’t need laws forcing Canadian content down our throats.