How it works
Most owners hold their company’s shares personally, and the company keeps its profits, cash and investments. Every dollar left in the operating company is exposed to that business’s risks: lawsuits, unpaid suppliers, lease obligations and CRA assessments.
With a holding company, you own the holding company and the holding company owns the operating company. Profits the business doesn’t need move up to the holding company, which keeps them, invests them or owns property the business uses.
Set up the holding company
Your lawyer incorporates the holding company. Your operating company shares are usually transferred to it on a tax-deferred basis under section 85 of the Income Tax Act.
Move surplus profits up
The operating company pays dividends to the holding company out of after-tax earnings. Between Canadian companies these are generally received tax-free.
Keep or invest it separately
The holding company invests the money, buys property, or lends it back to the business on secured terms when the business needs it.
Repeat each year
We plan the dividend at each year-end, once the year’s profit is known.
What a holding company can protect
- Profits the business doesn’t need for day-to-day operations
- Investments built up from business profits
- The building your business uses, owned by a separate company and leased to the operating company
- Equipment, vehicles or intellectual property leased or licensed to the business
- Money lent back to the business, secured by a registered general security agreement so the holding company ranks as a secured creditor
The tax side
Dividends between Canadian companies are generally received tax-free, so moving money up doesn’t create personal tax. You pay personal tax only when you take money out of the holding company for yourself, which lets you time withdrawals for lower-income years.
A few rules have to be managed every year:
- Safe income. A dividend larger than the company’s after-tax retained earnings can be turned into a taxable capital gain under section 55(2). We calculate safe income before every large dividend.
- Passive income limit. If your group of companies earns more than $50,000 of investment income in a year, the operating company’s small business limit is reduced by $5 for every $1 over, reaching zero at $150,000. Investment income in the holding company counts.
- Selling the business. Keeping excess cash and investments out of the operating company also helps its shares qualify for the lifetime capital gains exemption, now $1.25 million, if you sell.
What a holding company won’t protect
- Debts you’ve personally guaranteed, such as a bank loan or a lease. The lender can come to you directly.
- Claims against you personally, including your own professional negligence.
- Unpaid payroll source deductions and HST, where directors can be held personally liable.
- Transfers made once a claim is already coming. A court can reverse transfers made to avoid an existing creditor, so the structure needs to be in place before trouble starts.
- Family law claims. A holding company doesn’t take shares out of a separation; that needs a marriage contract prepared by a lawyer.
Is it worth it for you?
A holding company adds a second set of financial statements and a second corporate tax return each year, so it makes sense once the business is keeping profits it doesn’t need. It usually suits:
- Profitable companies building up more cash than they need to operate
- Owners investing through the company
- Businesses that own, or plan to buy, their building
- Owners thinking about selling in the next few years
- Owners planning an estate freeze for their family
We’ll tell you plainly whether the protection and tax deferral are worth the extra cost in your situation. Your corporate lawyer prepares the legal documents; we handle the tax planning, valuations, elections, dividends and the yearly accounting for both companies.
Common questions
Is a holding company worth it for a small business?
Usually once the operating company is keeping profits it doesn’t need. Before that, the cost of a second company each year can outweigh the benefit. We’ll tell you which side of the line you’re on.
Does moving money to a holding company save tax?
It defers tax rather than eliminating it. The dividend moves up tax-free, and personal tax is paid only when you take money out of the holding company, so you can time withdrawals for lower-income years.
Can I move my existing business under a holding company?
Yes. Your operating company shares are usually transferred to a new holding company under section 85, which defers the tax. Your lawyer prepares the legal documents and we prepare the tax election and supporting valuation.
Will a holding company protect me if I’m sued personally?
No. It protects the company’s accumulated assets from the operating company’s creditors. Claims against you personally, and debts you’ve guaranteed, are a separate matter.