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From media house to charity case

New federal rules allowing news organizations to become non-profits may not be worth the effort for Canada’s struggling media sector Continue Reading From media house to charity case

For more than a decade, the owners of Canadian news organizations have seen a steady stream of the advertising revenues they need to keep their heads above water disappear, with most of it flowing instead to Google, Facebook and other social media platforms.

The depth of the economic shutdown triggered by the COVID-19 pandemic is turning that stream into a torrent, threatening to dramatically raise the toll of media casualties as news organizations, like everyone else, seek financial support from government. The impact is already being felt in the United States and the United Kingdom, where thousands of journalists have lost their jobs or been laid off.

Since 2008, cutbacks in news coverage and staffing have become the norm in Canada, with more than 250 local media outlets closing as only about 9 per cent of Canadians say they are willing to pay for news online to help media organizations make up lost advertising revenue.

That has improved slightly this year as the latest edition of the Reuters Institute Oxford Digital News report 2020, released on June 15, found 13 per cent of Canadians willing to pay for news online.

Over the weeks following federal and provincial orders to shutter large swaths of the economy, media companies had to shed employees and, in some cases, close their doors. In May, Canada’s largest news organizations stepped up their lobbying, pressing Ottawa to impose taxes on Google and Facebook as well as purchase more public service advertising.

“The long-term outlook for the Globe, and many others, has darkened because of the pandemic,” Globe and Mail publisher Phillip Crawley told a House of Commons standing committee, according to The Canadian Press. “Print advertising revenue, once the backbone of newspapers, will go into accelerated decline.”

But, as an old adage suggests, out of chaos can come opportunity. This period should create an ideal climate for small, struggling local media outlets, start-ups, and those with ideas to tap into one component of the $595-milion news media bailout detailed in the federal Liberal government’s 2019 budget.

Is this the moment to transform a media company from a for-profit (or loss) entity into a charitable organization that can issue donation tax receipts to contributors? Such a shift could encourage audiences to donate to save news outlets while providing entrepreneurs the cash to turn their ideas into reality.

Yet evidence from the one major Canadian media organization that has taken this step, as well as discussions with those currently contemplating it, suggests the shift to charitable status is more difficult than it may seem and possibly not worth the effort.

In the United States, millions of dollars of donations have flowed into charitable or non-profit media ventures such as The Marshall Project and ProPublica. As a 2018 Harvard Kennedy School study found, almost US$1.2 billion in grants flowed into news non-profits, although the authors also concluded that “grantmaking remains far below what is needed” and noted that funding tends to be geographically concentrated.

In Canada, there is no tradition of foundations or philanthropic giving to support journalism. Nothing in Canada compares to the Poynter Institute, the Knight Foundation, the Nieman Foundation, or the Gannett Foundation in the United States, where there is a strong interest in freedom of expression and First Amendment rights. These foundations were all created by families that made their wealth from media ownership and now fund media and journalism ventures.

The foundations in Canada that owe their endowment to journalism and media profits include the McConnell Foundation (Montreal Star), the Max Bell Foundation (FP Publications) and the Atkinson Foundation (Toronto Star). While some have recently dabbled in supporting a few journalism and media projects (e.g. Tides Canada’s support of the National Observer), their philanthropy is overwhelmingly dedicated to education, health care, Indigenous issues, community development, and general Canadian social concerns.

That’s because the Revenue Canada/Canada Revenue Agency has long rejected proposals to turn media into philanthropic ventures that could issue tax receipts for charitable donations. This institutional resistance only shifted with the 2019 budget and the CRA guidelines issued in late December 2019 for news organizations interested in making such transitions.

In theory, new charitable media ventures should face less difficulty than The Walrus magazine, whose management team set out to acquire charitable status after they launched it in 2003. They knew that advertising alone couldn’t sustain the publication, but it had a donor willing to give $5 million if they could secure a tax receipt for the contribution.

A two-year battle ensued as the CRA initially stuck to its rules that charitable status was restricted to religious organizations or groups devoted to health, education, arts, international development, the environment, and community and social policy issues. The Walrus and the government finally reached a compromise that would see the creation of an educational foundation that issued tax receipts but also stringent restrictions on the magazine’s operations. The Walrus had to establish an educational review committee of academics as well as a national advisory council, and then guarantee that 80 per cent of its content was educational in nature, and 80 per cent Canadian. Everything that was not a story, including all advertising, could account for a maximum of 20 per cent of the publication’s pages.

No magazine can survive for long with that little advertising. By comparison, newspapers traditionally obtained about 80 per cent of their revenue from advertising.

When Shelley Ambrose stepped in as publisher in late 2006, one of her first tasks was to complete the purchase of the magazine by the Walrus Foundation. Donors received tax receipts, but the Foundation does more than publish the magazine. It operates a national lecture series and a range of other educational and cultural events linked to its original CRA commitment.

The result, in 2020, is that the Foundation receives annual donations totalling $2.4 million – one third of The Walrus’ total revenue. Individual donations account for 55 per cent of the contributions, with the remainder coming from corporations including banks, energy companies, and retailers.

The pitch, Ambrose says, is the same to individuals and corporations: “Help The Walrus make a stronger Canada . . . Corporations want to be associated with that.” But she adds that the pool of corporate donors keeps changing as new managers bring different priorities to corporate social responsibility programs.

The Walrus can pitch corporations because it has been around for almost two decades. Small publications and start-ups have none of those advantages or relationships. That’s just one of the challenges facing small publications hoping to convert their operations, Ambrose says.

Shifting corporate priorities means that donors come and go, often after just three or four years. Yet the pool of potential funders is small and doesn’t grow. Fundraising in that environment takes time, money, and special skills. Small publications or start-ups typically don’t have the resources to cultivate corporate donors, especially if they’re also targeting individual donors.

Those are the challenges facing the team at Artsfile – a free online Ottawa publication started by former iPolitics owners James and Sarah Baxter – as they consider charitable status.

The new rules should mean applicants won’t face the fight that greeted The Walrus. But extensive new rules and requirements remain daunting.

Artsfile aspires to fill a gap created by shrinking mainstream media, and after the Ottawa Citizen eliminated its entertainment and arts coverage and laid off its arts reporters. It concentrates on cultural institutions – stories about personalities and reviews of Ottawa cultural events and exhibits. Former Citizen reporters and editors provide the content. In two-and-a-half years, Artsfile has built a loyal and influential audience, with more than 700 subscribers to its newsletter.

With about $2,000 in monthly ad revenue and $3,500-$4,000 in expenses (a part-time editor/reporter and freelance payments to four regular contributors), Artsfile’s annual losses are between $15,000 and $20,000.

When the Baxters sold iPolitics to Torstar in 2018, they kept Artsfile and converted it to a not-for-profit corporation. Now they are exploring charitable status to take advantage of the new CRA policies. That change would allow Artsfile to receive contributions from qualified donees, including foundations. It may also open the door to funding from government organizations such as the Canada Council for the Arts.

So how does a media organization become a charity these days? Artsfile must first register with the CRA as a qualified Canadian journalism organization (QCJO). The agency will review the application and make a decision in consultation with an advisory board. A stamp of approval from the national revenue minister would give Artsfile a QCJO number.

Applicants must be corporations, partnerships, or trusts; resident in Canada; with Canadians accounting for at least three-quarters of their board. The publication’s content must generally be designed, edited, and published in Canada, with “original news” accounting for at least half of all overall content. The federal finance department modified that restriction in mid-April by dropping the requirement to be “primarily engaged” in the production of original news, allowing for greater production of content to promote goods and services.

The policy further specifies that the content must primarily focus on “matters of general interest and reports of current events, including coverage of democratic institutions and processes.” It should be original, geared at a general reader, and can include local, national, international, and social news, business, sports, culture, science, and technology. The regulations require such news organizations to observe “journalistic principles and processes.” As well, qualifying organizations must employ two or more journalists not related to the owners. They can be full-time or part-time, but they can’t be freelancers.

Would Artsfile qualify? That will likely require a CRA ruling.

In fact, the regulatory devil is in the details. For example, the rules talk about “the coverage of democratic institutions.” The Baxters argue that Artsfile covers public institutions like the National Gallery. But the CRA regulations define democratic institutions as legislative bodies.

Then there’s the definition of news. Artsfile is packed with reviews but are these news or opinion? If reviews make up more than 50 per cent of the content, is a publication eligible?

Even if Artsfile clears those eligibility hurdles, it’s still not ready to issue tax receipts.

To get that charitable designation, Artsfile must become a “registered journalism organization” (RJO). To preserve that status, RJOs must follow a long list of rules including keeping detailed financial records, issuing tax receipts that satisfy CRA regulations, filing annual returns, establishing an arm’s length board of trustees, and ensuring operational independence. Nobody, obviously, can personally benefit from the fundraising and single donors can’t contribute more than 20 per cent of total gifts, with limited exceptions.

Could a small publication afford to do all this without assurance that it will raise enough money to cover both operational and compliance costs?

In many respects, the administrative burdens of being a charitable organization compared to a non-profit are like those of a publicly-traded company. The upshot is that, despite the new rules, it’s still expensive and time consuming for media organizations to become charities.

Case in point: La Presse announced in mid-2018 that it had become a non-profit and is accepting online donations. Still, its website states that donations, for now, are not eligible for tax receipts. Its competitor Le Devoir has established a non-profit foundation, Les amis du Devoir, but to date it hasn’t qualified for QCJO status and thus can’t issue tax receipts.

Beyond the compliance issues, the big unknown is whether media organizations could attract donations if they issue tax receipts.

Those that have sought to raise money through crowdfunding find that supporters will donate small sums to a specific project with an identifiable outcome. They are even more willing to give if they get something in return, such as a coffee mug or t-shirt, as well as recognition.

However, audiences are much less likely to donate to cover operating costs. That’s why the Walrus Foundation engages in so many other activities (e.g., Walrus Talks, the Walrus Editorial Fellowship Program, or the Walrus Gala) to generate additional revenue. Ambrose advises that if a media organization applies for charitable status, it should detail all potential activities up front instead of seeking permission to add new ones later. “The last thing you want to do is knock on the CRA’s door,” she says.

Lastly, local news and start-ups tend to have their own idiosyncrasies, and the CRA’s standard rules won’t fit all comers. That means media outlets seeking charitable status may need to seek CRA rulings, which consumes more time, with no guarantee of success.

In the end, the decision to pursue charitable status comes down to a cost-benefit analysis. Except for a very few – those with sizable donors already lined up like The Walrus had – it may be difficult to make the case to proceed, even under the new CRA rules.

This article was originally published by The Philanthropist Journal and appears here with permission.