Introduction
In the era of globalization and homogenization, Canadian culture is more important than ever. Technology and globally intertwined economies are having a shrinking effect on the world and our culture is what allows us to keep our identity as a country. Few would challenge that our most prolific and tangible cultural offerings transpire through the arts. Canadian painters, writers, filmmakers and musicians supply our cultural voice both within and beyond our borders. In particular, the Canadian music industry plays a vital role in disseminating diverse cultural offerings from across the country. Such a feat however, is not accomplished without a great deal of commitment and investment by those who write, produce, record and distribute this music. In a time when the music business has been hit harder by technological and marketplace changes than arguably any other cultural industry, the county must commit to fostering the future success of Canadian music.
Looking at the state of music financing in Canada, we will examine the importance of effective tax law and policy in bolstering this cultural industry. Specifically, we will address the need for a unique federal tax credit to provide the support necessary for Canadian music creators to compete both at home and in the international market. Through an assessment of the music credit system in Ontario as well as alternative finance options such as grants and individual deductions, it will become clear that a federal tax credit presents the best prospects for the future of music in Canada.
The Current State of the Music Industry in Canada
Without delving too deeply, it is important to look at the developments and challenges faced by the music industry as a whole in recent years in order to appreciate the financial reality in which it exists today. Such a retrospective is also necessary to gain a full understanding of how and why a federal tax credit is very much needed in Canada. As recently as 1990 the Recording Industry Association of America (RIAA) reported that the cassette tape dominated the configuration of music purchases, holding 55% of the market, followed closely by CDs (which became the most popular two years later).[1] Around the same time, the Internet was beginning to develop a public persona and the number of Internet hosts (which function to allow users to serve content to the Internet) increased from 56,000 in 1988 to over 29 million by 1998.[2] Throughout the decade, Internet usership was also increasing at a rate of approximately 100% per year.[3] As has been discussed at length in recent years, this new technology provided a medium for music piracy via peer-to-peer sharing sites which were experiencing totals of more than 600 million free downloads each week by 2006.[4] Piracy aside, the Internet also changed the way that people consume music legally. As of 2010 the iTunes Store lead all music retailers in the United States with a 28% share of the purchased music market while digital sales on the whole accounted for 40%.[5] Beyond the United States, the digital share of global purchases of recorded music increased from 6% in 2005 to 31% by 2009 and is expected to eclipse physical distribution in 2012.[6] The purpose of including these numbers is to demonstrate the severity of the market shifts experienced by the music industry in recent years.
Turning our gaze to Canada, it is apparent that we have not been immune to these changes. Despite growing digital revenues, sales of sound recordings in Canada dropped from $765 million in 2005 to $619 million in 2008.[7] As a result, music companies have had to adapt and depend more heavily on other revenue sources such as music publishing, merchandising, concert tours, and alternative media forms. At a time when Canadian music is competing for attention with an ever-greater pool of accessible international content, music companies have had to reduce rather than boost their spending. Less available capital means that less financial resources can be placed on disseminating and marketing content, fewer bands can be signed and thus fewer artists can afford to record. According to a 2010 study commissioned by the Canadian Independent Music Association (CIMA), the largest obstacle facing independent record labels (“indies”) in Canada is cash flow. As little as $20,000 can mean the difference between signing a new Canadian artist to produce an album and turning those content creators away.[8] Though some may look to the Canadian divisions of major record labels such as Universal Music or Warner Music to pick up these artists, the fact is that a large portion of what these companies do is service the content created in the United States. On the other hand, the indies operating in Canada tend to be Canadian-owned and the majority, if not all, of the artists they sign are homegrown. It is these smaller labels that are integral to the production and promotion of Canadian musical culture and it is these labels that most desperately need a financial boost. This is where a federal music tax credit plays a role.
Does the Government Not Do Enough Already?
Before examining a proposed federal credit it is only prudent to look at what other initiatives and alternatives currently exist in Canada. The Canadian government currently plays an important role in fostering domestic musical works. Most of us are familiar to some degree with the regulatory concept of Canadian content (or CanCon) enforced by the Canadian Radio-television and Telecommunication Commission (CRTC). Under Canada’s Radio Regulations, commercial radio stations are required to air a minimum amount of Canadian content. Specifically, 35% of the category 2 content (popular music) and 10% of the category 3 content (special interest music) that they broadcast each week must be Canadian selections.[9] To ensure that stations do not relegate this music to the low listener periods, 35% of the category 2 content aired between 6:00 a.m. and 6:00 p.m. on Monday through Friday must also be Canadian.[10] Additionally, the Broadcasting Act identifies the CBC (Canadian Broadcasting Corporation) as the country’s “national broadcaster” with a mandate of providing radio and television programming that is “predominantly and distinctively Canadian”.[11] Though these are significant measures in the promotion of Canadian music, their effectiveness is somewhat limited. Firstly, their efforts are inherently constrained by national borders and success in today’s music market requires a greater ability to reach consumers beyond such corporeal boundaries. As the CIMA-commissioned study revealed, “while domestic sales are important, the Canadian market is limited. The industry’s long-term development will depend on its ability to generate international sales.”[12] In addition, the effectiveness of these government efforts continues to decrease as the way we receive music continues to change. As noted earlier, the Internet is playing an increasingly large role in the way that we consume content, music or otherwise. Over the years there has been a fragmentation of the audience base that previously relied on radio to discover music. More and more online platforms such as Facebook, YouTube, Myspace, last.fm and iTunes Ping are becoming the source to which many turn. As a result, there is a proliferation of foreign content being served to Canadians without regard for CanCon parameters. Listeners are in fact becoming their own program directors by actively seeking out content rather than passively receiving it. This is not to say that access is bad or should be limited but rather that we must be aware of the competitive effects on the market. The positive side to this is that there exists the opportunity to promote Canadian music to a broader audience than ever before. Marketing beyond national borders (both online and traditionally) is a necessary step in ensuring that Canadian artists succeed in the current music landscape. This process however, requires significant expenditure and, as will be explained later, this is where a federal tax credit can again be important. There are however, other existing alternatives still to be examined first.
Private Investment
In a free-market economy many might ask why the Canadian music industry is not relying more heavily on private investments for support. The simple explanation is that the private sector has not been very forthcoming with investments in this area. Music companies do not have the type of assets that most banks or other investors believe to be secure enough to act as collateral.[13] In large part there is a view of the music industry in recent years as being risky and subject to financial unpredictability. Consequently, this has left much of the private sector less than inclined to accept receivables as security. As it stands, the average success rate in music is generally thought to be approximately 10%.[14] What this means is that record labels need to produce 1 recording successful enough to cover the losses of the other 9. This is a higher risk ratio than that of the film industry, however the front-end investments required are also significantly less.[15] Therefore, the best approach is for labels to spread the risk over a large body of works and that requires cash flow. Thus, an unfortunate predicament develops whereby the Canadian music market suffers from a lack of scale. Investors are fearful of the industry’s uncertainty and the same uncertainty requires that labels produce large and diversified portfolios of projects.
At the same time, due to the comparably low project revenues and a lack of tax credits, banks do not provide interim financing the same the way they do for film and television productions that have tax credit receivables.[16] Unlike music, the film and television industries in this country benefit from a national credit called the Canadian Film or Video Production Tax Credit (CPTC).[17] The CPTC is a refundable tax credit equal to 25% of the qualified labour expenditure of a production. This qualified labour expenditure is the lesser of the amount of labour expenditures and 60% of the net production cost. In relation to private investors, this is significant for two reasons. Firstly, there is no limit on the monetary amount of CPTC one can receive for a production and secondly, under section 220(6) of the Income Tax Act this refundable credit can be assigned to lenders as security for bridge financing[18]. The absence of a comparable music credit leaves the indies (and to a lesser degree the major labels) with fewer resources to leverage into up front investments. This demonstrates another reason why a national tax credit is needed.
Government Programs & Grants
Turning now to perhaps the most obvious and effective alternative to tax reform, it is necessary to consider the role of grants and government programs in music financing. Without a doubt, the existing grants and programs in Canada are an integral part of the nation’s music industry. Canada’s department of heritage, known simply as Canadian Heritage, is responsible for the administration of national policies and programs pertaining to culture and the arts. Under their guidance, the Canada Music Fund (CMF) seeks to strengthen the Canadian sound recording industry from creator to audience. This initiative, which absorbed the earlier Sound Recording Development Program, uses a series of complimentary projects to achieve the following three goals. Firstly, to enhance Canadians’ access to a diverse range of Canadian music choices through existing and emerging media; secondly, to increase the opportunities available to Canadian music artists and entrepreneurs to make significant and lasting contributions to Canadian cultural expression; and lastly, to ensure that Canadian music artists and entrepreneurs have the skills, know-how and tools to succeed in a global and digital environment.[19] While each of these objectives is laudable, the programs in place do not altogether address the financing issues faced by this cultural industry.
The Creator’s Assistance Program is an example of one of these CMF initiatives and is administered by the Society of Composers, Authors and Music Publishers of Canada Foundation (SOCAN Foundation). The focus of this program is to aid songwriters, composers and lyricists develop their craft by providing funding to Canadian non-profit music sector organizations.[20] While the grants offered by this program are significant, peaking at a maximum amount of $300,000 per project, the eligibility requirements greatly narrow its application.[21] Specifically, the grants are to be used for such things as workshops, seminars, roundtable sessions and the promotion of works by Canadians.[22] These are important undertakings in developing discourse and awareness, however, they do little to alleviate any of the financial obstacles faced by the industry. Even the inclusion of funding for promotions is limited in its effectiveness by the fact that only non-profit organizations may apply for such a grant. Unfortunately, as it stands there does not exist an extensive non-profit community devoted to marketing Canadian artists the way that private music companies do. The reality is that it is private labels that carry out the development and marketing of the majority of Canadian artists. Thus, while a program such as this is valuable, it will not eliminate the need for a tax credit in this area. As we will discuss in the next section, while the CMF does provide support to private companies through other initiatives such as the New Musical Works Component an the Collective Initiative Component, these programs are plagued by administrative issues.
While there are various other public initiatives offered throughout the provinces it is neither possible nor necessary for the purposes of our discussion to examine them in detail. Instead, what has been presented is a look at one of the country’s most significant national programs. While a number of these specialized projects serve a worthy cause, none of them provide the breadth and flexibility needed to adequately addresses the greater financing dilemmas faced by the industry. One might argue that the sum of these efforts amount to a comprehensive grant scheme, however, its effectiveness is limited by the administrative inefficiencies. Operating dozens of separate grant administrators out of various different organizations, each armed with unique eligibility requirements and deadlines creates an unnecessarily complex system. A service must be accessible and efficient if it is to properly and cost-effectively carry out its mandate. This is another reason why incorporating a tax credit into the existing, centralized federal tax system is the best option.
Private Non-Profit Grant Organizations
Turning now to the other side of grant-financing in Canada, we come to the private non-profit grant system. The most well known of these organizations are the Foundation Assisting Canadian Talent on Recordings (FACTOR) and MuchFACT (previously VideoFACT). FACTOR was founded in 1982 in part by CHUM Limited, Moffat Communications and Rogers Broadcasting Limited and is currently funded by two separate sources.[23] Firstly, they receive arm’s length funding from the federal government under the CMF’s New Musical Works and Collectives Initiative.[24] The second source of financing comes directly from Canada’s private broadcasters, whose once voluntary contributions are now required by means of the Broadcasting Act.[25] Under Part III of the Radio Regulations, these companies must donate a specified portion of their revenues in support of “Canadian Content Development”. Specifically, 60% of these contributions must be directed to either FACTOR or its French language equivalent, MUSICACTION.[26] As a result, since 2006 FACTOR has received approximately $45 million in contributions from Canada’s private broadcasters, making those companies the organization’s largest financial providers.[27] Similarly, MuchFACT was established in 1984 as a condition attached to the license granted by the CRTC approving the specialty music television channel MuchMusic.[28] However, unlike FACTOR, 100% of the MuchFACT funding is private. MuchMusic and MuchMore (previously MuchMoreMusic) are required to commit a percentage of their gross annual revenues to the fund.[29] Together, FACTOR and MuchFACT provide valuable subsidies in a variety of areas ranging from recorded production, marketing, promotions and touring[30] to music video production and website development.[31] However, the source of funding behind these organizations has caused some in the industry to criticize the grants as being too heavily guided by the interests of their private financiers. In a condemnation of the allocation of these grants, Greg Ipp, founder of Toronto-based indie label Unfamiliar Records, recently wrote:
“Today, as I looked over the latest round of VideoFACT grants, I was struck by a thought that has cycled through my head on so many occasions: Why the hell are these bands getting the money? Metric? They have now received two successive video grants in the last three months – one from FACTOR, the other from VideoFACT, for a total of about $60,000. On top of this, they have received various grants, and have already sold over 50,000 units of their new album… the list was made up primarily of bands under the wing of well-funded labels with cash to spare… Over the years, I have had one too many industry insiders tell me I had to “get to know the judges in order to win”… Sure, that’s how the industry often works in terms of your reviews, your covers, your shows and even getting signed, but the Canadian grant system?”[32]
Ipp’s sentiments are ones that have been raised before and they are not completely without foundation. Even FACTOR acknowledged in their most recent annual report that, “FACTOR has worked hard to develop relationships with broadcasters to support their year-round activities and provide measureable benefit for the contributions made.”[33] It is understandable that the private radio broadcasters and television channels funding these grants want to support those artists and content that have a demonstrated record of success. As businesses, whether their participation is forced or not, they seek to invest in commercially successful content which they can broadcast and earn upon. In a response to Ipp’s article, Metric’s manager, Mathieu Droulin, noted that it would have the effect of “diluting the impact of the funding to the point of being completely ineffective” if instead smaller grants were given to all who applied. He further contended that by supplying a meaningful amount to rising artists, it lends credibility to these funding programs as well as the Canadian cultural sector.[34] It is true that when a Canadian band like Arcade Fire (a FACTOR grant recipient) wins the Grammy Award for Album of the Year (2011), it inevitably shines a light on Canada and has the potential to benefit even those artists who didn’t receive funding. After all, as we spoke to earlier, garnering international attention for Canadian content is vital to the competitiveness and success of our cultural industry. Nevertheless, as the concerns raised by Ipp and others demonstrate, the governance and allocation of funds by these privately operated programs leave a large portion of the industry without the necessary financing. In her recent dissenting opinion on the issue of commercial radio policy, CRTC Commissioner Barbra Cram pointed out that the allocation of FACTOR funding is also greatly unbalanced on a regional basis. Consequently, while the monies dispensed by FACTOR come from taxpayers and broadcasters across the country, the vast majority of the benefits go to a few specific markets.[35] In particular Cram drew attention to the fact that Ontario, British Columbia and Quebec make up 75% of the nation’s population yet routinely receive approximately 90% of the funds granted each year.[36] Criticizing the CRTC’s use of FACTOR as the “national” vehicle for fund distribution, Cram wrote:
“My colleagues in the majority are giving the broadcasting system’s money to an organization over which the Commission has no control and which has “governance challenges” which, to date, empirical data shows have not been resolved but exacerbated.”[37]
In his decent on the same issue, Commissioner Stuart Langford added that:
“their national mandate too often turns out to be a Montréal, Toronto, Vancouver focus. “The regions,” as the Maritimes, the prairies and the north so pointedly refer to themselves, do not appear to be major FACTOR and MUSICACTION concerns.”[38]
Additionally, the fact that this portion of Canada’s grant system is so heavily tied to private business motives, raises questions about the future of such funding. In fact, in 2010, CTV (the owner of MuchMusic) approached the CRTC with a request to cut the number of music videos it broadcasts, as well as the money it gives to MuchFACT, by half. This planned reduction in Canadian content was part of the network’s strategy to move increasingly towards a focus on teen-oriented “lifestyle” programming.[39] Though the request was rejected, this application demonstrates the level of commitment (or lack thereof) by the financier to its own grant program. Condemning the attempt made by the network, former chair and co-founder of MuchFACT, Bernie Finklestein, noted that while music videos may not suit MuchMusic’s business model anymore, they are more important to the market than ever due to consumption mediums like YouTube.[40] This examination of the private grant organizations is by no means intended to trivialize their importance as they inject millions of dollars of much needed funding into the industry. However, what is clear is that they do not do away with the need for a more equally distributed federal tax credit.
Why is Tax Policy the Appropriate Avenue for Success?
Having acknowledged and examined the existing financial initiatives and alternatives we can now elucidate the reasons that a federal tax credit is necessary. To properly understand the assertion that tax reform is the appropriate approach it is helpful to begin by considering tax policy more broadly. The tax system is Canada has a number of fundamental purposes. On a macro scale, the most obvious of these is the raising of revenue to fund government spending on public goods and services. It is also, however, a tool used to stabilize the economy, increase the rate of economic growth and even to achieve a morally acceptable distribution of income. Additionally, in recent years another evaluative criterion has been the ability to create a system reflecting international harmonization and competitiveness.[41] Given the goals of the Canadian tax system and the nature of the assistance needed by the music industry, namely financial rehabilitation, tax reform is the obvious way forward. As Justice Estey of the Supreme Court of Canada explained:
Income tax legislation, such as the federal Act in our country, is no longer a simple device to raise revenue to meet the cost of governing the community. Income taxation is also employed by the government to attain selected economic policy objectives. Thus, the statute is a mix of fiscal and economic policy. The economic policy element of the Act sometimes takes the form of an inducement to the taxpayer to undertake or redirect in a specific way.[42]
If properly implemented, a federal tax credit can provide this cultural industry with the aid it needs while simultaneously raising revenue for the government, creating jobs and stimulating the economy. This is not a radical concept. Tax policy often makes use of “tax expenditures” in the form of exemptions, deductions and credits to provide implicit subsidies to those industries producing results that the government wishes to encourage.[43] As such, the federal Income Tax Act currently includes such credits as the Scientific Research and Development Tax Credit[44], the Canadian Film or Video Production Tax Credit[45] and others. Nevertheless, the federal government has yet to extend the same support to Canada’s music industry. Such neglect is somewhat arcane given the government’s various other efforts to protect domestic content and the potential for this industry to service the goals of our national tax system.
Can Musicians and Companies Not Just Make Use of Existing Tax Deductions?
It is true that the Income Tax Act presently contains deduction provisions that both musicians and music companies can make use of without the need for tax reform. Specifically, section 18(1) of the Income Tax Act allows taxpayers, whether individuals or companies, to deduct expenses and losses incurred in the operation of a business.[46] The way these deductions work is by lowering a taxpayer’s income for a given tax year and thus the amount upon which tax is levied. When it comes to the effect of this operation however, it is important not to be misled by the use of the word “deduction”. To begin with, these subtractions must be properly viewed as simply the way in which taxable income is calculated rather than as a subsidy. It is common sense that the profit from a business venture amounts to the income minus the cost of operation. When that is understood, it is immediately apparent that this does not address the need for additional financing. An industry cannot revitalize itself on the basis that they are only taxed on income. In addition, musicians and music businesses are often in the unenviable position of having to fight to even have these expenses deducted. This stems from the fact that participation in the creation and performance of music is often viewed as a hobby or leisure activity rather than as a “business”. In addition, a musician’s claim to the contrary is often viewed with a degree of skepticism given the fact that music is seen as enjoyable and that the success rate in the industry is so low. It is also not uncommon for artists, managers and the like to work “day jobs” in order to be able to fund the continued pursuit of their musical efforts. As such, the question of what constitutes operating a “business” for the purposes of these deductions has been a somewhat litigious topic in recent years. In 2002, the Supreme Court of Canada ruled on the matter, stating that where there is a personal or hobby element to the concern it becomes a question of whether it is undertaken in pursuit of profit in a businesslike manner. The court also noted that while not always determinative, the reasonable expectation of profit (or REOP) may be a relevant factor.[47] Since that time, various cases have come before the Tax Court of Canada in which the activities of musicians either have[48] or have not[49] made the grade as “businesses”. As tax lawyer Thomas McDonnell of Thorsteinssons LLP in Toronto notes:
There is often an unconscious bias on the CCRA’s part: artists like being artists, after all, and they would pursue an artistic career whether or not it made money. The presumption is reinforced when the artist reports losses rather than income. In fact, in Interpretation Bulletin IT-504R2 the CCRA acknowledges that a taxpayer may not realize a profit during his or her lifetime but may still have a REOP. In practice, however, not all assessors are this sensitive to the realities of an artistic calling.[50]
Thus, while the Income Tax Act does allow for certain deductions and while these are theoretically available to musicians, they may be difficult to claim and are, even then, not a suitable replacement for a tax credit.
How Would a Tax Credit Work?
Unlike deductions, which reduce your income base, a tax credit functions by providing a dollar-for-dollar reduction in the amount of actual tax payable by a taxpayer. The amount of the reduction is determined by multiplying the relevant amount in the circumstances by a designated percentage.[51] These credits are either fixed-value or expenditure-based and either refundable or non-refundable. As an example of a fixed-value credit, the base amount of the current “personal tax credit” in Canada is $10,320 and this is multiplied by 15%.[52] Thus, every individual currently receives an annual credit of $1,548. This is also an example of a credit that is non-refundable, meaning that if you owe less than $1,548 in taxes, you do not receive a cheque from the government for the difference. Alternatively, there are expenditure-based tax credits such as the Ontario Sound Recording Tax Credit (OSRTC) and the federal film credit discussed earlier (the CPTC). These credits allow taxpayers to apply mandated percentages to eligible expenditures rather than to a fixed amount. In addition, both the OSRTC and CPTC are also examples of refundable credits and thus may result in the taxpayer receiving money back from the government. It is this form, namely that of an expense-based and refundable credit, that the proposed federal arrangement should follow. The rationale behind it being expense-based is that music projects come in a range of sizes and require various degrees of labour involvement and financial investment. Recording a three-song demo is a very different undertaking from sending an artist out on tour. To offer a standard credit to all eligible ventures would squander funds in some cases while resulting in ineffectual support in others. Rather, customized support can be achieved with a system that applies a standard percentage to the eligible expenses incurred by a project. At the same time, by making the credit refundable, it encourages private investment by the recipients of the credit as well as their partners and investors. As was discussed earlier, this can be instrumental in allowing a project to move forward as it provides a means of attracting financiers. In fact, under the current OSRTC, it has been found that approximately 33% of those projects that receive support would not be able to proceed without it.[53]
Is a Tax Credit Just a Music Industry Bailout?
It is important to note that while a tax credit would involve an initial expenditure by the government it is a misrepresentation to depict it as simply a handout to the music industry. More accurately, these credits should be viewed as investments by the government in achieving the goals of the tax system discussed earlier. The best representation of this can be seen by using the OSRTC as a case study. Introduced in 1998 and positioned under section 94 of Ontario’s Taxation Act, the OSRTC is a refundable expenditure-based credit like the one being proposed. Specifically, the credit is available to companies for up to 20% of the total eligible production and marketing expenditures incurred in the development and promotion of emerging artists.[54] In particular, the credit applies to record production costs (including artists’ royalties), music video production expenses, album marketing and a variety of other areas (notably excluding performance and manufacturing).[55] In 2009, the Ontario government provided $1.5 million in support through this credit to over 100 sound recording projects produced by 17 different music companies. These projects resulted in a total expenditure of $8.1 million dollars, or $6.6 million of private investments in addition to the credits.[56] The effects do not end there however, as the works created by such local investments trigger a chain reaction globally. Thus, these same recordings resulted in an additional $4.6 million in revenues to manufacturers and distributors, $4.2 million to retailers and $13 million in performance revenues to artists, promoters and concert venues worldwide.[57] Of course, while these numbers are impressive, the government’s concern is not economic growth abroad but rather the benefits that are felt at home. It is significant then, that of the $29.7 million in global revenues, $20.7 million (or 70%) were captured by Ontario residents and businesses.[58] In addition to stimulating the economy, these expenditures also service tax policy’s primary goal of raising government funds. Viewed from a plain cost-benefit perspective, the $1.5 million outlay by the provincial government resulted in $1.9 million dollars in revenues from income taxes, corporate taxes and sales taxes. In other words, for every dollar they spent, the Ontario government collected $1.32 in revenues.[59] Though these figures are not proof that a federal credit will bear the same results, they illustrate the strong prospect of success. In particular, they demonstrate that a federal investment in this area has the potential to service not only the goals of this cultural industry, but the economic policy incentives of the tax system as well.
In addition to financial growth, support for this industry also serves the tax system’s goal of stabilizing the economy by creating and preserving jobs. Music represents arguably the most interconnected of all of the cultural industries in Canada. It forms an integral element in each of the digital media, film, television, radio and communications industries. Thus, as Stuart Johnston, President of CIMA, notes, “with these industries in mind, the music industry should be viewed through a wider lens than merely, for example, assessing the income of the individual artists and independent labels”.[60] In fact, entire departments in the companies of many of these other cultural trades are devoted to the integration of music into their works or services. Consider for example the television, film, and advertising jobs that are directly tied to the sound recording industry through the administration of music licensing. In an even more direct correlation, vast numbers of jobs depend on the success of the live music industry in Canada. Specifically, a large number of Canadians are employed by promotional and event management firms, concert venues and an array of offshoot activities ranging from event security to concessions and audiovisual operations. When we consider the fact that, as mentioned earlier, about one third of the projects that receive OSRTC funding would not proceed without it, it becomes apparent that more than just the artists and labels would suffer the consequences of its absence. It is perhaps this realization that triggered Ontario to commit to the sound recording industry as part of their “Open Ontario Plan” to help create more jobs in the province.[61] As the Ontario Ministry of Finance noted in their 2010 budget report, provincial credits and investments attributed to a rise of 3% in their creative-industry job market in 2009. In fact, despite the pressures of a global recession, this job market has increased by 12% since 2003.[62] Again, while these numbers may not predict the exact results that a federal tax credit will achieve, it is another illustration of the way in which tax reform in this area can accomplish the goals of Canadian tax policy.
To What Would The Credit Apply?
Having established what type of credit is needed, the next question becomes what expenses will be eligible and at what rate the credit will be applied. Again, it is useful to look at existing cultural tax credits in Canada to get a sense of the various approaches taken. Specifically the OSRTC, the CPTC and Quebec’s music credit, Crédit d’impôt pour la production d’enregistrements sonores (CIPES), provide valuable insight into these matters. In establishing the proposed federal credit however, it is important to recognize both the successes and the shortcomings of these existing systems so as to properly tailor this new credit to the realities of the industry
The appropriate place to begin is by looking at what projects will be eligible for the tax credit. Having just discussed the great results that have been achieved by the OSRTC in its support of recorded music production, it is unnecessary to reinvent the credit model in that regard. Rather, what is needed is modification of the existing eligibility requirements to properly reflect the needs of today. Given the recent technological and market changes in the music industry discussed earlier, the needs and the costs incurred by Canadian artists and music companies have been altered. Between 2007 and 2010, the average cost of recorded production for an album in Canada dropped by 17%. During the same period however, marketing costs for an album climbed by 34%.[63] The change in recording costs can be directly attributed to technological advancements such as Avid’s Pro Tools and other digital software, which have greatly streamlined and simplified the studio process. On the other hand, the steep rise in marketing expenditures is a byproduct of the digital proliferation of content from an international pool of competitors. As noted previously, this means that more innovative and costly international marketing initiatives have become necessary to connect with consumers. Given the dominance of U.S. conduits such as MTV, Pitchfork and the like, greater exploitation of foreign marketing channels have become necessary to reach even domestic markets. However, under the OSRTC model, only 50% of marketing costs that extend beyond the provincial border are eligible for the tax credit (compared to 100% of those within the province).[64] Given that international marketing is taking an ever-larger role in the Canadian music industry it seems that the federal credit will need to be more robust. In other words, a significant increase in the eligibility of cross-border marketing will be required if an earnest effort is to be made at aiding the success and longevity of Canadian music at home and abroad.
Moving away from the creation and sale of albums, the next proposal is perhaps the area in which the largest digression from the existing credit structures is necessary. As the names of both the OSRTC and CIPES imply, they are structured around the production of sound recordings. Unfortunately, this means that expenses incurred as part of concert tour production are not eligible under either model. As has been discussed however, the expenses and the income generated by recordings themselves are in fact falling due to digital piracy and changing consumption patterns. On the other hand, during the height of the Napster and KaZaA piracy boom, concert revenues in the United States rose from $1.3 billion in 1998 to $2.1 billion in 2003. This increase occurred despite the drop in CD sales by 26% between 2000 and 2003.[65] In fact, as of 2008 Canada and the U.S. had recorded their ninth consecutive year of setting new concert revenue heights.[66] Thus, as the music industry has continued to struggle with technology-driven shifts in the market, tour production has consistently proven immune to such hardships. Consequently, by supporting this area it will help to future-proof the industry to some extent against continued erosion. Along with marketing, the travel and performance of Canadian artists throughout domestic and foreign regions is the best way to infiltrate and introduce Canadian music to new markets and consumers. In addition to this cultural significance, the Canadian tax system’s goals of stabilizing the economy and promoting economic growth can be served by supporting tours. The basis for this assertion is that tour production represents a heavily labour-based element of the music industry. Depending on the size and nature of a tour it can provide work for set designers, sound technicians, tour management, roadies, and various other related positions. This is significant when we consider that great success has been had with other fundamentally labour-based credits like the CPTC and CIPES. Under both of those models, the credits are tied directly to the labour expenses of a given project. Thus, by incorporating the eligibility of tour production and labour expenditures into the proposed federal music credit it would encourage investment and job growth in this area. Such an achievement would again directly service the principles behind our national tax system. Given the inherent nature of international touring however, some concern may arise over subsidizing expenditures incurred on labour outside of Canada. Such a concern should not pose an insurmountable barrier however, as a compromise can be met by applying suitable percentages and requirements to those tours extending beyond our national borders. As with any tax policy it will be the task of legislative drafters to find the appropriate balance so as to meet the goals of the government while establishing a meaningful subsidy.
To Whom Would the Credit Apply?
Just as important as the sorts of projects to which the credit would apply, is the issue of to whom they will apply. This is the feature of the credit that allows it to effectively focus on promoting Canadian culture and supporting those efforts most in need. After all, the purpose of the proposed federal credit is not merely to bolster an arbitrary business sector, but rather to preserve a specific cultural amenity. Thus, the most effective way to do this is by establishing meaningful eligibility requirements for the content making up these projects. Looking again to the existing cultural credits it seems that a combination of the OSRTC and CPTC models present the best approach.
Firstly, under section 36(3) of Ontario’s Taxation Act regulations, the OSRTC limits eligibility to only those projects by “Emerging Canadian Artists”. Specifically, the artist (or 75% of the artists for a group) must be Canadian citizens or permanent residents who are ordinarily resident in Canada.[67] Immediately, this has the effect of ensuring that the tax credit is devoted to supporting only Canadian talent and thus furthering the goal of cultural protection. Additionally, “emerging” artists are those who have not previously had a gold recording (sold 40,000 units) as an individual or as a member of a group in the United States and either Canada, the United Kingdom, France, Germany, Asia or Latin America.[68] As a result of this limitation, the credit can ensure that it supports only those artists that have not yet managed to “break” and thereby provide funding to the artists most in need. Such an addition is also an efficient way of avoiding the issues that many claim jeopardize the effectiveness of the private grant system in Canada. Rather than providing support to only those artists or regions showing the most likelihood for economic return, the federal credit can provide a broad range of support to offerings from a variety of artists across the country. This directly accords with the fact that the credit’s primary role is to foster the development of Canadian musical offerings that may not otherwise be shared. Understandably, artists who have reached gold record status are significantly more likely to be able to support their own musical progress than those who have not. From an economic policy perspective, this will also allow to the government to keep their expenditures in support of this program to a reasonable level. In essence, the credit will seek to nurture the creation and dissemination of artist’s offerings until the point when they are ready to be pushed from the nest.
Clearly however, the music industry is about more than just the artists and thus the eligibility of the music companies involved in these projects is relevant as well. After all, the funding and effective control over these projects is often in the hands of the label or other sound recording company working with these musicians. Again the proposed federal credit can take guidance from the CPTC and OSRTC in this regard. To begin with, under the federal film credit an eligible corporation must be a taxable, Canadian-controlled business.[69] Similarly, Ontario’s Taxation Act regulations require that the company producing the sound recording not only be Canadian-controlled, but also that they be operating in the province for a minimum of 12 months prior. Additionally, the regulations oblige the company to have earned more than 50% of its taxable income for the preceding year within the province and to dedicate more than 50% of its business to sound recording activities.[70] Each of these requirements can be adopted on a national scale for incorporation into the federal credit. As one can imagine, these eligibility limitations prevent control over Canadian content creation being handed off to foreign companies or investors. As such, it will encourage domestic entrepreneurship and reinvestment within Canada’s borders. Again, not only does this serve to benefit the Canadian music industry, but it also advances the economic growth function of Canadian tax policy. Moreover, while it has been proposed that the federal credit be extended to include tour production, there is no reason that the same eligibility requirements cannot be extended to companies involved in that regard as well.
What Percentage of Eligible Expenditures Will Be Credited?
The final issue to address in regards to the operation of the proposed federal credit is the rate at which it will be applied. However, a full and proper examination of this matter is beyond the bounds and capabilities of our discussion here. In order to determine an effective rate for a meaningful and sustainable national tax credit, Parliament must conduct the necessary research and deliberation. With this in mind, we can only look to the other cultural credits currently available in Canada and venture an estimate as to the appropriate figure. Beginning again with the model that has provided the most guidance thus far, the OSRTC provides for a credit of 20% to be applied to eligible expenditures.[71] In relation to many of the other cultural credits, however, this rate is comparably low. In that province alone the Ontario Book Publishing Tax Credit (30%), the Ontario Film and Television Tax Credit (35%) and the Ontario Digital Media Tax Credit (40%) each exceed the rate offered to the music industry.[72] Similarly, as we have discussed, the CPTC uses a rate of 25% and in British Columbia the film production credit was recently increased from 25% to 33%.[73] Canadian music is as important a cultural commodity as any of these other industries and deserves a comparable credit rate. Additionally, as has been explored, there is great potential for economic return and job market growth in this industry. If for no other reason than to meet these tax policy goals, it seems that a greater credit rate should be introduced federally than currently exists under the OSRTC.
Why is a Federal Tax Credit Preferable?
As we have discussed in great detail, there currently exists a fairly effective music industry tax credit in the province of Ontario. Thus, this raises the question as to why a federal tax credit rather than provincial credits are preferable. The first answer to this is efficiency. As it stands, the only provinces in Canada with such credits are Ontario and Quebec and thus tax reform would be required in all of the additional provinces and territories in order for musicians and music companies nationwide to reap the benefits. This is not to suggest that the various provinces should not institute credits of their own but rather only to highlight the fact that a centralized system offers simplicity. In the recent report commissioned by CIMA, it was found that of the labels in Ontario not making use of the OSRTC, one of the main deterrents was administrative burden.[74] While the complexities of an effective tax system can only be simplified so much, it seems that a unified and consistent credit that is administered nationally under the Income Tax Act would garner more use. Another reason to support a federal credit is that Ontario has quickly become the centre of the music industry in Canada. Thus, as it stands, Ontario’s sound recording and music publishing revenues account for 78% of the national industry total. At the same time, 78 of the 103 nominations at the 2011 Juno Awards went to artists operating out of Ontario.[75] Thus, the concern is that a view may have developed in the other provinces that it is not worth instituting credits of their own. However, as recent interview research conducted by Nordicity Group Ltd. revealed, Ontario’s success has been due in part to the OSRTC attracting music entrepreneurs and artists away from the other provinces.[76] Consequently, a federal tax credit would serve to equalize the national playing field to some degree. That way, even if a smaller province like Prince Edward Island decides that there is not a sufficient local industry demand to create a provincial credit, the federal arrangement can cover the gap. This will ensure that local artists and entrepreneurs can still reap the benefits of a tax credit without moving their entire lives to Ontario. This is important given that most emerging artists are not in a position early in their career to give up their day jobs and depend exclusively on their music. Thus, by allowing them to access national credits from their home province, those who might have otherwise had to resign their efforts can continue to create content. A hopeful result of this will be the increase of distinctive cultural offerings coming out of these regions. Lastly, the establishment of a music industry credit at the federal level signifies an act of commitment by the nation as a whole to its musical culture. While this culture is diverse and often regional, Canadians could nonetheless take pride in such a unifying accomplishment.
Conclusion
Despite pressures brought on by technological changes in recent years, the Canadian music industry remains an important source of cultural development. At a time when the world is becoming ever smaller, it is this culture that not only unites Canadians but also distinguishes us as a nation. As such, it is time that the government resolved the glaring deficiencies in federal support to this industry. We began our examination by considering the financial predicament faced by today’s artists and music companies as well as the inadequacies of existing assistance programs. What became clear is that what this industry needs is a financial commitment from the nation’s government in the form of a new federal tax credit. Specifically, what is proposed is a credit that will function to serve not only the needs of this cultural market but the very principles of Canadian tax policy as well. Through investment in arguably the most interconnected of Canada’s cultural industries we can hope to promote economic growth, create jobs and achieve economic returns through income taxes, corporate taxes and sales taxes. Rather than a bailout, the proposed credit would function as a partnership between the government and the Canadian music industry to reach both of their goals. It is important to our nation’s identity that we continue to create content and not become passive consumers of foreign culture. As a country with a small population spread over a vast landscape, we depend upon the government to encourage and sustain this development. While other cultural industries such as film and television receive generous federal and provincial credits, the music industry remains largely neglected. It is time for Canada to realize and capitalize on the potential of this important cultural market. It is time to give credit where credit is due.
[1] Alex Cosper, The History of Record Labels And The Music Industry, online: Playlist Research <http://www.playlistresearch.com/recordindustry.htm> [Cosper].
[2] Centre for Discrete Mathematics & Theoretical Computer Science, Technical Report, 99-11, “The Size and Growth Rate of the Internet” (February 1999) at 19.
[3] Ibid.
[4] Donald S. Passman, All You Need To Know About The Music Business 6th ed. (New York: Free Press, 2006) at 151.
[5] The NDP Group, Press Release, “Amazon Ties Walmart as Second-Ranked U.S. Music Retailer, Behind Industry-Leader iTunes” (May 26 2010), online: The NDP Group <http://www.npd.com/press/releases/press_100526.html>.
[6] Analysis of the Impact of the Ontario Sound Recording Tax Credit, online: Ontario Media Development Corporation <http://www.omdc.on.ca/AssetFactory.aspx?did=7166> at 9 [Impact of the OSRTC].
[7] Ibid. at 56.
[8] Ibid. at i.
[9] Radio Regulations, S.O.R./ 86-982, ss. 2.2(8), 2.2(3)(b) [Regulations].
[10] Ibid. s. 2.2(9).
[11] Broadcasting Act, S.C. 1991, c. 1, at ss. 3(1)(l)-(m)(i).
[12] Impact of the OSRTC, supra note 6 at 30.
[13] Ibid. at 11.
[14] Ibid. at 15.
[15] Ibid. at 16.
[16] Ibid. at 12.
[17] Income Tax Act, R.S.C. 1985 (5th Supp.) c. 1, s.125.4 [ITA].
[18] Canadian Film or Video Production Tax Credit – Guide to Form T1131, online: Canada Revenue Agency <http://www.cra-arc.gc.ca/E/pub/tg/rc4164/rc4164-11e.pdf> at 7 [CPTC].
[19] Canada Music Fund Fact Sheet, online: Canadian Heritage <http://www.pch.gc.ca/pgm/fmusc-cmusf/fcm-cmf-eng.cfm#cmdp>.
[20] Canada Music Fund Creators’ Assistance Program: 2011-12, online: Society of Composers, Authors and Music Publishers of Canada <http://www.socanfoundation.ca/pdfs/CreatorsAssistance_2011-12_E.pdf> at 1.
[21] Ibid. at 2.
[22] Ibid. at 1.
[23] About Us, online: Foundation Assisting Canadian Talent on Recordings <http://www.factor.ca/AboutUs.aspx>.
[24] FACTOR Annual Report 2010-2011, online: Foundation Assisting Canadian Talent on Recordings <http://www.factor.ca/docs/AnnualReports/FACTOR_Annual_Report_2010-2011.pdf> at 7 [FACTOR].
[25] Ibid.
[26] Regulations, supra note 9, s. 15(4).
[27] FACTOR, supra note 24 at 7.
[28] MuchFACT, online: MuchFACT <http://muchfact.ca/> [MuchFACT].
[29] Ibid.
[30] FACTOR, supra note 24 at 12.
[31] MuchFACT, supra note 28.
[32] Greg Ipp, “An Open Letter To Canada’s Music Industry and Grant System: Why Does Metric, MSTRKRFT and ‘Well-Funded Mediocrity’ Get All The Support?” The Daily Swarm (13 July 2009), online: The Daily Swarm <http://www.thedailyswarm.com/swarm/open-letter-canadas-music-industry-grant-system-why-does-metric-mstrkrft-and-well-funded-mediocrity-get-all-support/>.
[33] FACTOR, supra note 24 at 7.
[34] Mathieu Drouin, “Broken Social Scene: Metric’s Manager Responds to Greg Ipp’s Daily Swarm Open Letter To Canada’s Music Industry” The Daily Swarm (24 July 2009), online: The Daily Swarm <http://thedailyswarm.com/swarm/broken-social-scene-metrics-manager-responds-greg-ipps-daily-swarm-open-letter-canadas-music-industry/>.
[35] Broadcasting Public Notice CRT 2006-158, online: Canadian Radio-television and Telecommunications Commission <http://www.crtc.gc.ca/eng/archive/2006/pb2006-158.htm>.
[36] Ibid.
[37] Ibid.
[38] Ibid.
[39] Nick Patch, Outgoing MuchFACT chair doesn’t support Much cutting funding to Canuck artists, online: 1310 News Radio <http://www.1310news.com/entertainment/article/171161–outgoing-muchfact-chair-doesn-t-support-much-cutting-funding-to-canuck-artists>.
[40] Bernie Finkelstein steps down at MuchFACT, online: CBC <http://www.cbc.ca/news/arts/music/story/2011/01/18/finkelstein-muchfact.html>.
[41] Tim Edgar, Daniel Sandler & Arthur Cockfield, Materials on Canadian Income Tax, 14th ed. (Toronto: Thomson Reuters Canada Ltd., 2010) at 65 [Materials].
[42] Stubart Investments Ltd. v R, [1984] 1 SCR 536 at 55.
[43] Materials, supra note 41 at 73.
[44] ITA, supra note 17, s. 127.3.
[45] Ibid., s. 125.4.
[46] Ibid., s. 18(1).
[47] Stewart v The Queen, [2002] SCC 46 at para 50.
[48] Kaegi v R, [2008] TCC 566.
[49] Graham v R, [2008] TCC 580.
[50] Thomas E. McDonnel, “REOP Revisited” Tax for the Owner-Manager 3:3 (July 2003) at 8.
[51] Materials, supra note 41 at 635.
[52] ITA, supra note 17, s. 118(1)(c).
[53] Impact of the OSRTC, supra note 6 at v.
[54] Ibid. at 2.
[55] Ibid. at 3.
[56] Ibid. at i.
[57] Ibid. at 39.
[58] Ibid. at v.
[59] Ibid. at vi.
[60] Stuart Johnston, 2012 Pre-budget Submission by the Canadian Independent Music Association (CIMA) to the Standing Committee on Finance, online: Canadian Independent Music Association <http://www.cimamusic.ca/Storage/46/3878_CIMA_Prebudget.Federal.2011.pdf> at 3.
[61] Turning The Corner – Music Industry Hits It Big In Ontario, online: Government of Ontario <http://news.ontario.ca/mtc/en/2011/04/turning-the-corner—music-industry-hits-it-big-in-ontario.html> [Turning The Corner].
[62] 2010 Ontario Budget: Ministry of Finance Sector Highlights – Entertainment and Creative Industries, online: Ontario Ministry of Finance <http://www.fin.gov.on.ca/en/budget/ontariobudgets/2010/sectors/entertainment.pdf> at 1.
[63] Impact of the OSRTC, supra note 6 at 22.
[64] Ibid.
[65] David Kusek & Gerd Leonhard, The Future of Music: Manifesto For The Digital Music Revolution (Boston: Berklee Press, 2005) at 7.
[66] Louis Hau, Another Record Year for the Concert Industry, online: Forbes <http://www.forbes.com/2008/01/04/concert-revenues-2007-biz-mediacx_lh_0104bizconcert.html>.
[67] Ontario Regulation, O. Reg. 37/09, s. 36(3) [Ontario Regulation].
[68] Ibid.
[69] CPTC, supra note 18 at 11.
[70] Ontario Regulation, supra note 67, s. 36(4).
[71] Taxation Act, S.O. 2007, c. 11, s. 94(2).
[72] Impact of the OSRTC, supra note 6 at 51.
[73] Tara Parker, “BC Minister of Finance Announces Increased Tax Credits For Film and Interactive Digital Media” Goodmans LLP Update (9 February 2010), online: Goodmans LLP <http://www.goodmans.ca/files/file/docs/02.09.2010%20Entertainment%20Update.pdf>.
[74] Impact of the OSRTC, supra note 6 at 20.
[75] Turning The Corner, supra note 61.
[76] Impact of the OSRTC, supra note 6 at 47.
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