Hollinger Tax Time Bomb Ticks Louder

By: Mark Fitzgerald After paying more than $20 million in cash and make-goods to advertisers because of a circulation scandal at its flagship Chicago Sun-Times and other papers, Hollinger International now faces the prospect of paying back untold sums to Canadian advertisers.

The owner of an Edmonton, Alberta, alternative weekly newspaper is suing Canada Revenue Agency (CRA), alleging the Canadian equivalent of the IRS should have long ago ruled that Hollinger newspapers are not owned by a Canadian company -- a declaration that would have huge implications for the papers and its advertisers.

For good measure, the lawsuit also demands C$5 million (U.S. $4.25 million) from Hollinger and the holding company Hollinger Inc. for alleged misrepresentation and other anti-competitive behavior.

Under Section 19 of the Canadian Income Tax Act (ITA), Canadian businesses that advertise in Canadian-owned newspapers can deduct the full cost of ads from their income taxes. There's no such allowance for advertising in papers deemed to be foreign-owned.

But to be considered Canadian, a newspaper company must have a Canadian as chairman, and Canadians must comprise three-fourths of the board of directors and control at least 75% of its stock.

Community and alternative papers have complained that Hollinger International hasn't been a Canadian company since 2001, when ousted Hollinger International Chairman Conrad M. Black renounced his Canadian citizenship so he could accept appointment to the House of Lords in Great Britain -- on Halloween of that year -- as Lord Black of Crossharbour.

Ron Garth, owner of Vue Weekly, said he decided to sue after two years of "unsatisfactory responses" to his inquiries to CRA, and after a far longer time in competition with See Magazine, a paper controlled ultimately by Hollinger.

"Our battle with Hollinger has not been short and sweet -- it's been f---ing long and bitter," he said in a telephone interview Tuesday.

Back in 2001, Hollinger International's then-executives -- most of whom have been swept out by the financial scandals of alleged looting by Black and others -- scoffed at the idea that Black's renunciation would have any effect on its Canadian properties.

But this January, when Hollinger finally was able to make enough sense of it tangled finances to file its annual report for 2003 with the U.S. Securities and Exchange Commission (SEC), the company acknowledged that it could be on the hook for significant payments to the tax man, and to advertisers who would retroactively lose their ad deduction -- and would seek compensation from the papers.

"The [CRA] may find that, as a consequence of Black's renunciation of his Canadian citizenship in June 2001, certain of the company's Canadian newspapers are no longer considered to be Canadian-owned for purposes of the ITA," Hollinger said in the report. (See "Is a Time Bomb Buried in Hollinger's Latest Filing?"

The lawsuit to force the issue was filed last Thursday by Garth in Alberta's Court of Queen's Bench.

In addition to the damages he's seeking from Hollinger, Garth is suing the CRA for C$750,000 (U.S.$638,000).

A spokesperson for the CRA, Beatrice Fenelon, said confidentiality laws prohibited the agency from commenting on specific cases.

Spokespersons for Hollinger International and the holding company Hollinger Inc., which is also named in the lawsuit, did not immediately respond to e-mail messages seeking comment.

"Nobody likes to have to go to court to get what you need, but it appeared to be the only way to get resolution to this thing," Garth said. "And it needs resolution, otherwise they are taking unfair advantage."

Garth said he is also fighting to preserve the independence of his own paper, and, more broadly, to preserve the Canadian media.

"This hopefully will give some teeth to the laws that are on the books to help maintain Canadian voices," Garth said. "It's not to say we don't need other newspapers and sources of news, that's not it. But I think Canadian newspapers should be Canadian-owned."

The publisher also freely acknowledges another motive for his lawsuit: He finds it "galling" that Conrad Black or chains such as Hollinger publish alternative newspapers. They are the antithesis of true alternatives, he said.

"The notion that Conrad Black should be involved in an alternative to big media is not simply oxymoronic," Garth said, "it's just moronic."