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Google's new Canadian engineering headquarters in Kitchener-Waterloo, Ontario. The proposal to deny tax deductions for foreign digital advertising has been advocated by Canadian News Media Association and Friends of Canadian Broadcasting.

PETER POWER/REUTERS

Google Canada is vigorously opposing a proposed tax change that would make it cheaper for Canadian companies to advertise on domestic websites at the expense of foreign platforms.

Canada's embattled media industry estimates the proposed change would bring it hundreds of millions in additional revenue a year.

But Google Canada's head of policy and government relations, Jason Kee, said the proposal does not take into account the reality of the Internet, in which advertisers pay to be seen by potential clients, not to appear on specific sites.

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"It's unclear how any of this would actually play out," Mr. Kee said in an interview. "There is no way for advertisers to know if their ads are showing up on Canadian websites or not, all they care about is … reaching a certain audience."

Read more: Ottawa facing growing calls to bolster media industry

The controversy comes as the federal government is engaged in broad consultations to see whether and how it should support media groups that are struggling to adapt to a new digital era.

The advertising debate is related to Article 19 of the Income Tax Act, which prevents Canadian companies from deducting expenses related to advertising in foreign publications or television stations. As it stands, the measure does not apply to foreign websites, which means all Internet advertising is tax-deductible, whether the ad is on a Canadian website or U.S. Internet platform.

The proposal to deny tax deductions for foreign digital advertising has been advocated by the Canadian News Media Association and Friends of Canadian Broadcasting.

"To level the playing field, Ottawa should close the loophole that permits advertisers to deduct the cost of ads placed on foreign internet media platforms such as Google and YouTube," said Ian Morrison, spokesman for Friends of Canadian Broadcasting.

In a report released this week, Friends of Canadian Broadcasting said Internet advertising is now a $5.6-billion market in Canada, and that changing the law "would represent an influx of $250- to $450-million annually in incremental advertising revenue for a Canadian media sector that is under serious threat."

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The report by communications lawyer Peter Miller and consultant David Keeble also concluded the move would bring in $1-billion in annual tax revenue, as Canadian companies would no longer obtain deductions to advertise abroad.

The association that represents a majority of newspapers in Canada has also called on Ottawa to encourage Canadian firms to advertise at home.

"This could be in the form of tax credits or in the form of penalties for using foreign firms. Non-Canadian legacy media are limited by the Income Tax Act, but this has not been applied to digital enterprises," Bob Cox, chair of the Canadian News Media Association, told the House of Commons Canadian Heritage Committee last year.

However, Mr. Kee said the tax change would harm small- and medium-sized advertisers, which don't have the means to engage with a large number of individual publishers. While acknowledging the debate remains speculative, he predicted the tax change would only benefit the biggest publishers and broadcasters in Canada.

"The larger players are actually better suited to weather this than the smaller guys," Mr. Kee said.

The Public Policy Forum, an independent think tank, will release a report on Thursday on "news, democracy and trust in the digital age" that is expected to provide a road map for government to bolster professional journalism as a key component of the political process. The report is expected to feature a dozen recommendations on ways to fund innovation in the industry, change advertising models and redefine the mandate of the CBC in the news landscape, among other issues.

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