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InsightsIs a holding company right for your business?

August 19, 2024 • 4 MIN READ Author Avatar

For many businesses, establishing a holding company can offer substantial advantages, from asset protection to tax savings. But what exactly is a holding company, and is it the right choice for your business?

What is a Holding Company?

A holding company, often referred to as a “Holdco,” is a business entity that doesn’t produce goods or services. Instead, its primary role is to hold and manage assets, which can include cash vehicles, mutual funds, ETFs, stocks, and real estate. By holding these assets, a Holdco can provide a range of benefits to its owners.

Is a Holding Company Right for Your Business?

The suitability of a holding company depends on your business’s specific circumstances and overall objectives. If your business generates excess cash and you want to invest it while deferring taxes, a holding company could be an ideal solution. Additionally, if you’re in a high-risk industry and need to protect your personal assets, a Holdco can offer significant protection.

Benefits of a Holding Company

  1. Tax Savings and Tax Deferral

Profits earned by your operating company (Opco) are subject to corporate taxes, which are often lower than individual tax rates—especially if you’re in the top marginal tax bracket. After corporate taxes are paid, earnings can be distributed to shareholders as dividends. However, dividends are immediately subject to personal income tax.

With a Holdco, instead of receiving dividends personally, you can reinvest them within the holding company. Tax rules in Canada allow for tax-free dividend transfers between Canadian-controlled private corporations. If you own both the Holdco and the Opco, you can transfer profits from the Opco to the Holdco, deferring personal tax liability until you withdraw the funds. This strategy is particularly beneficial when multiple shareholders are involved, allowing each person to manage their withdrawals in a tax-efficient manner.

2. Asset and Creditor Protection

    A Holdco can provide peace of mind by protecting your assets from creditor claims. By moving assets from your operating company to the Holdco, you can shield them from potential future liabilities.

    3. Income Splitting Opportunities

    A holding company also enables income splitting with family members. By holding shares in the operating company, family members can receive dividends taxed at lower personal rates, reducing the overall tax burden.

    4. Lifetime Capital Gains Exemption

        If you’re planning to sell your business, understanding the Lifetime Capital Gains Exemption (LCGE) is crucial. The LCGE can provide substantial tax savings by allowing you to exempt a portion or all of the profits from selling shares of your Qualified Small Business Corporation (QSBC). If you meet the criteria for the LCGE, you could significantly reduce or even eliminate the taxes owed on your profits.

        A key strategy to qualify for the LCGE is purification—the process of transferring passive assets from your operating company (Opco) into your holding company on a tax-deferred basis. This process ensures that at least 90% of your Opco’s assets are used in active business operations, a critical requirement for LCGE eligibility. Given the complexity of purification, it’s advisable to work closely with a qualified accountant to determine if this approach aligns with your business goals and to execute the process effectively.

        5. Estate Planning Benefits

            A holding company can facilitate a smoother transition of assets across generations. In an estate freeze, the value of the original shareholders’ shares is locked in, with all future growth transferred to the next generation. This can help maximize the use of the lifetime capital gains exemption.

            In addition to facilitating generational wealth transfer, a holding company can streamline estate planning. By freezing the value of company shares, you ensure that future growth benefits the next generation, preserving wealth and minimizing tax implications.

            Final Thoughts

            While the benefits of a holding company are significant, it’s essential to consult with your accountant, tax expert and wealth advisor to ensure it aligns with your individual tax situation and long-term goals.