24 October 1996 External T.I. 9618735 - DEDUCTIBILITY OF ADVERTISING EXPENSES - INTERNET

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Whether section 19 or 19.1 of the Act applies to deny a deduction for expenses to be incurred by a Canadian taxpayer to advertise on a foreign owned web site.

Position:

No

Reasons:

A web site is not a newspaper, a periodical or broadcasting undertaking.

                                                      5-961873
XXXXXXXXXX                                      L. Roy

Attention: XXXXXXXXXX

October 24, 1996

Dear Sir\Madam:

Re: Deductibility of advertising expenses

This is in reply to your facsimile of May 24, 1996 in which you requested a ruling on whether expenses by a Canadian taxpayer to advertise on a foreign owned web site would be deductible under the Income Tax Act (the "Act").

Advance income tax rulings, in addition to there being a charge for the service, are given only in respect of proposed transactions involving specific taxpayers and will only be provided in response to a request for an advance income tax ruling submitted in accordance with the Information Circular 70-6R2 dated September 28, 1990, and the Special Release thereto issued on September 30, 1992, issued by Revenue Canada, Customs, Excise and Taxation. Nevertheless, we can provide you with the following general comments.

Advertising expenses related to the income earning process are generally deductible. However, pursuant to section 19 of Act, no deduction shall be made in respect of an otherwise deductible expense of a taxpayer for advertising space in an issue of a non-Canadian newspaper or periodical for an advertisement directed primarily to a market in Canada.

Also, subsection 19.1(1) of the Act provides that in computing income, no deduction shall be made in respect of an otherwise deductible expense of a taxpayer for an advertisement directed primarily to a Canadian market and broadcast by a foreign broadcasting outlet.

The words "newspaper" and "periodical" are not defined in the Act. The Webster's Ninth New Collegiate Dictionary has the following meaning for the word "newspaper":

"a paper that is printed and distributed usu. daily or weekly and that contains news, articles of opinion, features, and advertising".

The Supreme Court, in the King v. Montreal Stock Exchange, (1935) 4 D.L.R. 630 (S.C.C.), gave the meaning of newspaper for the purposes of the Excise Tax Act as follows:

"a paper printed and distributed at stated intervals... to convey news... and other matters of public interest".

The Department has taken the position that a periodical is a publication, other than a newspaper, the issues of which appear at regular intervals of less than a year.

Consequently, based on those definitions, it is our view that generally section 19 of the Act would not apply to expenses incurred by a Canadian taxpayer to advertise on a foreign owned web site, since the web site would not be a newspaper or a periodical.

Concerning the issue of broadcasting, subsection 19.1(4) of the Act defines "foreign broadcasting undertaking" to mean a network (as defined under subsection 19.1(4) of the Act), operation or a broadcasting transmitting undertaking located outside Canada or on a ship or aircraft not registered in Canada. Based on diverse definitions of words used in paragraphs 19.1(1) and (4) of the Act, it is our view that section 19.1 of the Act would not apply to expenses incurred by a Canadian taxpayer to advertise on a foreign web site since a web site is not a broadcast by a "foreign broadcasting undertaking".

As explained in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990, the above comments do not constitute an advance income tax ruling and are not binding on the Department. We trust that our comments are of assistance to you.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch