Holding Companies, What are they and why do I want one?

As a business owner with a successful company have you ever wondered if you might benefit from a holding company?  The answer may well be yes.  Simply put a holding company is a company established to “hold” the shares (or other significant assets such as a building) of your operating company.

Why would you want to do this?  Well, that answer will vary from situation to situation.  Common reasons include:

1) You have one or more partners in your business who also hold shares in the operating company, but each of you have different income and tax planning objectives.  In this situation, if each partner has a holding company then dividends may be paid from the operating company to each of the holding companies.  Then each partner will have the flexibility to take dividends for their personal use when they choose and/or may split income with other family members who take shares in the holding company, but have no direct interest in the operating company.  A family trust may also be integrated if there is any concern about having voting shares in the hands of other family members.

2) Retirement planning – excess income from your company can be paid up to your holding company and accumulated or invested until you need the funds in the future when they may be paid out to you at your discretion.

3) Tax deferral – Your operating company will pay tax on its profits, at a low corporate rate if it is a qualifying Canadian controlled private corporation up to its small business deduction threshold.  Any dividends paid out after this would normally attract tax at the personal level of the shareholder.  In most cases, if paid to a holding company these dividends can be paid tax free, so long as the companies are considered “connected” under the Income Tax Act, thus deferring the personal tax that would otherwise have been paid.   It is important to note that this is a deferral only and tax will ultimately be due when withdrawn by the individual shareholder, which may be in the future (retirement) when income is lower or by another family member who has a lower marginal tax rate, thus achieving significant tax savings.

4) Don’t forget the costs – The downside to these structures is, of course, additional costs for the additional corporate reporting and accounting required for these structures.  In many cases, with a strong and profitable operating company the various advantages and potential tax savings of the structure will make the extra costs a bargain, but this will not be true in every case and should be reviewed as part of your own decision-making process.

If you have any questions or input for the use of holding companies feel free to comment.

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Information contained within this blog or on this website, either expressly or by reference, does not constitute professional advice and is designed strictly for general information purposes. As individual circumstances vary widely anyone seeking assistance with either their accounting or tax situation are strongly encouraged to seek appropriate professional advice.

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