Is a Time Bomb Buried In Hollinger's Late Filing?

By: Mark Fitzgerald Back in 2001 when Conrad Black announced he would renounce his Canadian citizenship to accept appointment as a British lord, Hollinger International was quick to scoff at any suggestion that suddenly having a foreigner as its chairman and controlling stakeholder would hurt business at its Canadian newspapers.

Under Section 19 of the Canadian Income Tax Act (ITA), Canadian businesses that advertise in Canadian-owned newspapers and magazine 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.

Canadian community papers also get a sweet deal on postage: Any paper published weekly or less frequently can be mailed for about a fourth of the regular rate. Canadian-owned newspapers can also take advantage of grants and subsidies from Heritage Canada and other governmental agencies.

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.

But in 2001, Hollinger International's then-executive vice president, Jack Boultbee, had a quick and blunt answer when E&P asked what effect Black's renunciation of citizenship would have on the National Post, the paper the mogul created in 1998.

"Nothing," Boultbee said. When pressed, he said Hollinger had a year to fix the problem, and it would. Maybe, he mused, Black could transfer his stake to his wife, Barbara Amiel-Black, a Hollinger director who also wrote a conservative political column for the chain's papers.

What a difference four years make.

Black, known as Lord Black of Crossharbour since Halloween of 2001, has been forced out as chairman of Hollinger International. His old company, and the U.S. Securities and Exchange Commission (SEC), is suing him, alleging he and other top executives "looted" more than $400 million from Hollinger over a seven-year period. Boultbee was fired after refusing to resign in the wake of those allegations. Amiel-Black is gone as a director, too, and the National Post doesn't belong to Hollinger anymore.

And now we learn from Hollinger International's belated filing this week of its 2003 financial report to the SEC that the company may not have fixed its Canadian ownership problem -- and could be on the hook for millions in compensation to advertisers and to Canada's equivalent of the IRS.

Tucked away in the 205-page SEC filing is an acknowledgement that the ownership issue has not been settled: "The Canada Revenue Agency (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.

"Although the Company believes that it has a structure in place that meets the ITA Canadian ownership rules for at least a portion of the period since June 2001, that structure may be challenged by the CRA. Should any challenge be successful, advertisers might seek compensation from the company for any advertising costs disallowed or otherwise seek a reduction of advertising rates for certain Canadian newspaper publications."

This could be d?j? vu all over again for Chicago-based Hollinger, which this summer revealed its flagship Chicago Sun-Times had fraudulently overstated its circulation when Black crony David Radler was publisher. The paper has been sued by nearly a dozen advertisers and has put aside $27 million to settle claims for compensation.

So far there's been no real buzz among Canadian advertisers about the ownership issue, said Bob Reaume, vice president of policy and research for the Association of Canadian Advertisers, during a telephone interview from Toronto Wednesday.

But that could change if the CRA should determine the papers were not Canadian-owned, Reaume added: "If it comes to that, you can bet a number of advertisers and perhaps our own organization would want to fight on behalf" of compensation.

Hollinger's SEC filing goes on to state that its Canadian properties also benefited from an unspecified government program, and that Canada might "seek the return of these funds as a result of Black?s renunciation of his Canadian citizenship."

The filing is bringing some overdue attention to an issue Hollinger has kept obscured for too long, argues Jean-Yves Durocher, publisher of the Stanstead Journal. The 3,500-circulation weekly competes with the Record in next-door Sherbrooke, a 5,000-circulation daily owned by Hollinger. "For us ... who have been trying to raise this issue, it is vindication of what we have said all along," Durocher said.

Durocher has tried unsuccessfully to buy the Record, and said he has been unable to get a straight answer from Canadian authorities about whether the Hollinger properties are considered Canadian-owned or not. "This is a political landmine, and Revenue Canada doesn't want to step into this," he said. Durocher noted that Black renounced his citizenship when former Prime Minister Jean Chretien tried to block him from accepting the British peerage. Paul Martin, who also opposed Chretien, is the current prime minister.

Revenue Canada Director of Communications Shane Diaczuk said the agency cannot talk about specific individuals or companies because of privacy laws. He said he also could not talk about whether any other publication in the past had ever been challenged on the ownership issue.

As with much else in the ongoing Hollinger saga, it's unclear how this particular chapter will turn out. Reading such voluminous documents as this week's SEC filing or the 500-plus pages of Hollinger's internal investigation into the alleged looting reminds Publisher Durocher of nothing so much as a novel, he said.

"It is unfolding like a Flaubert novel of the 19th century," he said. "They're always changing something in the plot, and you don't know where they're going."