Rival fires tax-law query at Black paper

Publisher cites citizenship issue
Tax code requires Canadian control

By RICK WESTHEAD

A newspaper publisher who wants to buy the Sherbrooke Record from Conrad Black is trying to force him to sell by challenging whether the Record qualifies as a Canadian newspaper because Black relinquished his citizenship three years ago.

Jean Yves Durocher, publisher of the Standstead Journal, which competes for readers and advertisers with the Record, says he's prepared to go to Federal Court to try and force Canada Revenue Agency to rule whether the Record still qualifies as a Canadian newspaper.

In a move designed to pressure Black to sell him the Record, Durocher in May asked Canada Revenue Agency to clarify whether the Record, one of Black's 12 Canadian daily newspapers, qualifies as a Canadian newspaper since Black surrendered his citizenship as a precursor to joining Britain's House of Lords.

Under Canada's Income Tax Act, the chairman and 75 per cent of a newspaper's board of directors must be Canadian for its advertisers to claim tax deductions, several tax lawyers said. Similarly, 75 per cent of the paper's shareholders and its controlling shareholder also must be Canadian.

Durocher contends Black, who controls his newspaper assets through a complex web of holding companies, has indicated that he hasn't relinquished his investment in the Canadian newspapers.

"I'm still the chairman of the parent company; I'm still the controlling shareholder," Black told reporters in November.

"Isn't that clear enough that the controlling shareholder is not Canadian?" Durocher asked in an interview.

Durocher first asked Hollinger Inc. to consider selling him the Record in February. "It would be my pleasure to communicate with you over the following weeks to discuss in more detail the question of the Record when the great storm will have passed," Durocher wrote on Feb. 17 to Hollinger official Peter White, making reference to the battle between Black and his enemies within U.S. subsidiary Hollinger International Inc.

Durocher says he offered to pay about $250,000 for the Record, which Black first acquired in 1969 for $20,000. After converting the paper from one that lost $10,000 a month to one that earned $15,000 a month in profit, Black, White and former Hollinger official David Radler in 1977 sold the Record for $865,000. Hollinger reacquired the paper in 1999 in a property swap with Quebecor World Inc.

White steered Durocher to New York investment bank Lazard LLC, which is handling the sale of assets that belong to Hollinger International, publisher of newspapers such as the Chicago Sun-Times and Jerusalem Post.

But Durocher said he's instead hoping Canada Revenue Agency will force a sale because he's losing too many advertisers to the Record and can't afford to wait for Lazard to address Hollinger's Canadian newspapers.

"They get all the national advertising; all the lineage," Durocher said.

In a May 6 letter to Canada Revenue Agency, Durocher wrote: "It's obvious that for around two years from fall 2002, that the Stanstead Journal ... a company that was and is the entirely owned and under Canadian control, was strongly penalized by the fact that the Record received ads whose deductibility does not correspond to the criteria of the law."

A Hollinger International spokesperson said that prior to September, 2001, Hollinger Canadian Newspaper's structure was consistent with Section 19 of the Canada Income Tax Act.

"Following Conrad Black's decision to renounce his Canadian citizenship, the company made changes to its corporate structure to maintain compliance with the act," the spokesperson said.

A Canada Revenue Agency spokesperson said the agency couldn't comment on the matter.

Lorne Saltman, a tax lawyer with Toronto firm Cassels Brock, said he doubted Durocher's attempt to use Canada Revenue Agency as leverage would succeed.

"Conrad gets good advice," Saltman said. "I don't think if he is exposed that it would be that difficult a flaw to fix."

This isn't the first time Black's citizenship has come under scrutiny in connection with his newspaper empire. In 1996, he sold his controlling stake in Australia's Fairfax chain because of foreign-ownership restrictions.

Three years later, when Black bid for a place in Britain's House of Lords, there were reports that advertisers would no longer be eligible to claim tax deductions for ads in the Black-controlled National Post and Southam Inc.'s roster of newspapers across Canada.

Ottawa reportedly went so far as to build a legal team to prepare for a review of Black's Canadian newspaper assets. Yet in 2001, the point became moot when Black agreed to sell Hollinger's 50 per cent stake in the National Post to CanWest Global Communications Corp.