Killing two taxes with one RPGA
RPGs are “rocket propelled grenades”. As powerfully and precise as they may penetrate a wall of steel, not even they can pierce the almighty corporate veil, which supposedly separates the legal personalities of both shareholder and the corporate person being “held”. What can pierce the corporate veil, however, are the tax benefits that accrue to shareholders who corporately “bonus out” and then personally participate in creditable RPGAs (“Registered Profitable Gifting Arrangements”), instead of merely investing in deductible RRSPs (“Registered Retirement Savings Plans”), RESPs (“Registered Education Savings Plans”) or even RCAs (“Retirement Compensation Arrangements”).
Individuals and corporations seek to generate maximum “income” in terms of absolute dollars, but aim to (hopefully legally) reduce their calculable “taxable income”. Ironically, this mental conditioning of legally reducing one’s declarable income, can stand in the way of corporate owners from maximizing the potential effects when participating in a (RPGA). I will tell you why.
First, corporate tax rates, ceteris parabis, are lower than individual tax rates. Second, RPGAs offer “credits” for individual taxpayers and “deductions” for corporate taxpayers. (Credits are typically valued at the highest combined marginal tax rate regardless of what tax bracket the taxpayer is in. Deductions, on the other hand, are only valued at the “reverse marginal” rate, meaning the rate at which every previously earned dollar is to be, or was, taxed in the hands of the taxpayer.) Together, this means that it is more advantageous when direct participation in such RPGAs is effected individually rather than corporately.
However, upon closer examination, if a business owner were to do the unthinkable, s/he could achieve the unimaginable. If, for example, instead of typically declaring a dividend (which is included in income preferentially) one has their company directly bonus all net earnings to them personally (thereby unthinkably increasing their declarable income maximally and at the higher personal rates yet), two things happen. First, there is nothing at the corporate level to tax. Next, they also increase their personal donation limit (based on 75% of their net income). This will now allow them to take advantage of the shelter to the maximum while also stripping the corporation tax free and repatriating all monies personally (not to mention effecting admirable donations)!
In tax, it is not the size of the projectile that counts but how you aim it. Killing two taxes with one RPGA—a fiscal double-whammy.
