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We obtained the Conservatives' internal strategy on Trudeau's tax changes. Here's what's wrong with it.

They wouldn’t give us an interview, so we ran the numbers on a copy of the Conservatives’ political strategy that landed in our inbox.

by Justin Ling
Sep 15 2017, 3:53pm

The Conservative Party is doubling down on its bombastic rhetoric around the Trudeau Liberals’ proposed tax changes, but a fact-check on their actual claims show that few of the opposition’s talking points are based in reality.

VICE News has obtained strategy documents, prepared for the Conservative caucus, detailing how Members of Parliament are to go after the government on the tax changes.

Included in the documents are slides from a powerpoint presentation prepared by finance critic Pierre Poilievre to Conservative MPs, detailing the changes and outlining the party’s tactics. The Conservative Party did not dispute the veracity of the documents.

VICE Money wrote a crash course to understanding the tax changes earlier this week.

The talking points encourage MPs to tailor their message to working-class voters, and to avoid getting bogged down in discussions about “wealthy family doctors.” But details in the powerpoint suggest that the Conservatives know these changes will primarily affect the rich, not the middle-class farmers they plan on courting.

This is at odds with leader Andrew Scheer’s outreach to farmers and working class Canadians around the tax changes.

VICE News made consistent attempts to schedule an interview with Finance Critic Pierre Poilievre or Deputy Leader Lisa Raitt throughout the week but were refused. (The party sent a media advisory entitled “Poilievre available to discuss Liberal tax hikes,” inviting journalists to reach out to his office to schedule interviews, his office failed to return emails and finally informed VICE News on Thursday that Poilievre was not, in fact, available.)

The magic 70.12% tax rate

Inside the documents is a particularly sensational claim. It takes aim at the Liberals’ attempt to limit Canadians’ ability to park investment income inside their personal corporation, thus paying the — substantially lower — small business tax before investing the money.

The powerpoint lists two reasons why these changes would likely prove the most controversial.

“1. Big money,” it reads, without further explanation.The second point is that the changes are “indefensible” given they are “double taxation.”

The claims, however, aren’t exactly accurate.

As it stands, income into small businesses faces a 15 percent tax rate. If that after-tax income stays inside the corporation and is, say, placed into mutual funds, any revenue generated from that investment faces a roughly 50 percent tax, depending on the province. If the owner of the investment withdraws it from the account, they will pay the remainder of their personal tax rate on the entire amount.

“It’s not wrong, but it’s not right.”

This is currently advantageous because, by paying the lower rate at the beginning — as opposed to the top personal marginal income tax rate of around 50 percent — they have more money to invest and therefore earn more. To fix this, Ottawa is suggesting either creating a refundable 35 percent tax on the income from the investment, returning it to the business if that money is used to purchase equipment or hire staff, or taxing the investment profit before it is paid from the company to its owner.

The takeaway is that, yes, the tax on the investment profit (not the entire investment) could face a rate upwards of 70 percent, but doing so would create equality between how that investment income is treated inside that corporation as opposed to just a personal savings account.

So it is not the case, as the powerpoint contends, that “family farmers will have a tax rate higher than anyone else.”

One economist summed up the Conservatives’ rationale behind the 73 percent figure: “It’s not wrong, but it’s not right.”

The rich farmer

The talking points about the passive income investment go on to say that: “Some won’t be able to save, others will lay off workers and many more won’t even both to start up in the first place.”

This, however, is patently false. Ottawa’s changes are specifically designed not to apply to investment income which is re-invested in the company — meaning if the revenue goes into hiring workers or buying equipment, it is either tax exempt or the tax will be refunded.

Furthermore, in direct contradiction to their insistence that these changes hurt the blue collar workers the most: The only way their 73 percent figure makes sense is if you assume the farmer in question is in the top tax bracket, and therefore making more than $200,000 per year.

The document also shows a fundamental misunderstanding of how this loophole works.

“All the money they take out is eventually taxed at the same rates as everyone else, so the government will get it in the end anyway,” it reads. “But Trudeau needs it now because he wants to spend it now.”

That’s incorrect. The loophole is effective because it is tax deferral — meaning that businesses, by virtue of having a registered corporation, can opt to pay low taxes on the initial profit but pay the remainder when they withdraw.

The corporation owner makes more money because they skip the taxes on the front-end, and the personal dividend tax on the back end does not currently account for that, meaning the corporate owner is walking away with more money only because they registered a corporation.

Wealthy family doctors

When it comes to income sprinkling — paying dividends to your family members to lower your personal tax burden — the Conservatives offer a more reasonable defence.

“The reality is that our farms and local businesses are family ventures,” the powerpoint reads. “Everyone chips in. The teenager daughter does shifts at the cash register. The son might run daily errands. The spouse might do the bookkeeping. So they all share ownership in the company’s success.”

“WARNING: Avoid getting caught up in the extreme examples about wealthy family doctors.”

That’s certainly true. However, tax law currently allows the owner of a company to pay their family members for the work being done. Even under these proposals, companies can pay dividends to family members, so long as they are actually part of the business operations. One metric touted has been to require that for a family member to earn dividends, and thus be a shareholder in the company, they must have put in a capital contribution.

Interestingly, however, the powerpoint offers caution for Conservative MPs.

“WARNING: Avoid getting caught up in the extreme examples about wealthy family doctors. This is not the issue. It is a distraction from the red tape and higher taxes that the Liberals are imposing on family farms and local businesses.”

Finance Canada expects that just 50,000 individuals in the country employ this practise of sprinkling to lower their tax bill, to the tune of about $250 million in lost tax revenue. (There are roughly 1.8 million private Canadian-controlled corporations in Canada.)

Reverse Robin Hood

There is a third section to the PowerPoint, regarding a trick that allows some corporations to convert their income into capital gains by trading shares of their company within their own family — thus slashing their tax bill by half.

But there are no talking points regarding that government proposal.

Instead, the documents go into talking points regarding Trudeau’s economic message.

While the Conservatives note that Trudeau’s tax-the-rich messaging is, according to polling data, “a powerful message,” Scheer’s party lays out how they plan on going after his credibility on the file: By beating him at his own game.

It reads that the party should focus on blue collar small business owners and farmers, and continues: “Elsewhere we must focus our message on the examples of Liberals targeting the poor and working class with higher taxes, and massive sums to wealthy elites.”

They take aim at the fact that Trudeau promised to cut Canada’s 15 percent small business rate (already the lowest in the G7) but has thus far opted not to do so, and that he has provided government bailouts to struggling manufacturer Bombardier.

A whopper

The Conservatives have publicly contended, as their website puts it, that the changes amount to “a massive new tax hike that would hurt every single local business in the country.”

This might be the largest mistruth of all.

Even if you were to assume that the changes were to impact every corporation that pays dividends to family members, every corporation that reports passive income, and that the practise of converting profit to capitals gains was widespread: That would amount to less than a one-third of Canadian-controlled businesses being affected.

As the Conservatives seem to admit in their own internal documents, these changes impact on the most profitable companies that withdraw company profits back into their own personal bank accounts.

To that end, despite their rhetoric, the Conservatives’ campaign is really more designed for the wealthy family doctor and “big money” than the blue collar farm owner.