Is Andrew Scheer really promising a tax cut of $50K for millionaires?

As part of our federal election coverage, CBC News is assessing the truthfulness and accuracy of statements made by politicians and their parties.

The Claim: “Mr. Scheer, you are promising a tax cut of $50,000 for multi-millionaires.”

— Liberal Leader Justin Trudeau during this week’s French-language leaders’ debate

The Facts: 

The Liberal campaign recently rolled out a new talking point and Trudeau has been keen to repeat it whenever the opportunity arises.

The Liberals are pushing the message that Conservative campaign promises would give some of the richest Canadians a major break on their tax bills.

The party even printed the message on a faux Tory election sign displayed during a news conference Wednesday morning.

Trudeau also brought it up during both leaders’ debates this week, drawing pointed rebukes from Conservative Leader Andrew Scheer.

“That’s a lie,” the Tory leader shot back in a heated exchange during the French-language debate Thursday night.

Despite Scheer’s protests, it’s clear the line will be central to the Liberals’ strategy in the final stretch of the campaign.

But while the claim makes for a memorable campaign message, the facts are far more complicated than the Liberals’ version of them.

Divisive tax policy

Last month, Scheer pledged to scrap a host of deeply polarizing tax changes for incorporated small businesses that were brought in by the Liberals in 2017 and 2018.

Scheer vowed to go after measures that target incoming sprinkling and put a cap on the value of “passive investments” a private corporation can hold before its access to the nine per cent small business tax rate starts to erode.

The changes provoked a political firestorm when they were floated by the Trudeau government. The Conservatives fiercely opposed them, as did some small business owners and organizations that advocate on their behalf, such as the Canadian Federation of Independent Business.

Critics said the Liberals were attacking small businesses — collectively the biggest source of employment in Canada — and making it tougher for them to grow and save.

The Liberals, however, argued they were cracking down on well-off Canadians using the advantageous tax structure of private corporations to shield income from taxation.

Trudeau’s campaign says that rolling back the measures would amount to a “tax cut” for the wealthiest Canadians. While it’s true that high-income earners undoubtedly would benefit from the Tory proposals, the reality is not so simple.

Let’s break it down.

To sprinkle, or not to sprinkle?

Income sprinkling is a tax strategy that diverts income to family members with lower personal tax rates. It allows a small business owner to avoid having their income taxed at a higher rate by splitting it up among family members who own shares in the corporation.

Before the changes made by the Trudeau government, income could be divided among family members who had no discernible role in a particular business. The Liberals imposed stringent conditions on how and why income could be split up within a family.

At the time the measures were floated, the government estimated they would affect about 45,000 private corporations across the country, or about 3 per cent of all small businesses.

Meanwhile, a March 2018 analysis by the Parliamentary Budget Officer looked at what types of families would be affected, based on their total annual taxable income.

Conservative Leader Andrew Scheer has said that Liberal changes to income sprinkling disregard the notion that family members often contribute to small businesses in subtle ways. (Nathan Denette/The Canadian Press)

The report found that 26 per cent of families affected by the changes earned total taxable income of between $150,000 and $250,000 each year, while 46 per cent earned between $250,000 and $500,000 annually. A further 15 per cent of affected families brought in between $500,000 and $1 million in taxable income each year.

The PBO also noted that about 900 Canadian families making less than $100,000 annually would end up paying more income tax as a result of the Liberal government’s tax changes.

Tammy Schirle, a professor of economics at Wilfrid Laurier University, said that Canadians who gained the most from income sprinkling tended to be in the top 10 per cent of income earners.

“So those are people who are definitely pretty well-off,” she said.

There are scenarios which could see a family avoid upwards of $50,000 in income tax in any given year if the Liberal measures were rolled back. Whether those people actually qualify as “multi-millionaires” — as the Liberals imply in their messaging — depends on their individual circumstances.

Limiting passive income

In addition to re-introducing income sprinkling for some small business owners, the Conservatives also have said they would “repeal Trudeau’s tax on small business investments.”

This is where passive investments and passive income come into play.

Passive income is generated from interest earned on passive investments, which tend to be in stocks or bonds rather than, say, new equipment or land for a new factory that a small business might purchase.

The Liberals’ changes mean that after a business starts earning more than $50,000 in passive income, a larger share of its regular income is subject to the general corporate tax rate of 15 per cent, rather than the more favourable small business tax rate of nine per cent.

A business would need $1 million in passive investments, earning at a modest 5 per cent rate of return, to reach that $50,000 threshold where the higher corporate rate kicks in.

The Department of Finance estimates that, as of 2015, only about 2.9 per cent of Canadian small businesses — about 50,000 of them — met that threshold. In fact, more than 80 per cent of small businesses in 2015 did not have any passive investments at all.

It should be noted that opponents of the Liberal measures have argued that the $50,000 passive income threshold was too low.

After all, $1 million in savings might not do much to help a business salt away money for a large capital purchase or plan for a rainy day.

Taken together, bringing back income sprinkling (as it existed before) and eliminating passive investment fairness measures would leave some small business owners paying considerably less in tax.

Are they all millionaires? Some absolutely would be, while others would not.

Is it an across the board “tax cut” of $50,000, as Trudeau puts it? No — but it would mean some multi-millionaire small business owners avoiding taxes in ways not available to most other Canadians.

Verdict: It’s complicated.

Sources: It’s time for Canada’s small business owners to get ahead, Conservative Party of Canada; Archived – Backgrounder: Income Sprinkling Using Private Corporations, Department of Finance Canada; Backgrounder: Tax Fairness for the Middle Class and Opportunity for All Canadians, Department of Finance Canada; A week of tax promises that are more about politics than policy, CBC News; Key Small Business Statistics – January 2019, Government of Canada; Budget 2018, Government of Canada; Income Sprinkling Using Private Corporations, Parliamentary Budget Officer

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