Accountants often encourage the formation of a holding company.  If you have wondered if it is right for you, read on.

A holding company is incorporated but is used only to hold investment, but not to operate any type of business.  The holding company can own shares in any public company, real estate, shares in private companies, or other interest-producing investments like bonds.

 There are some very valid reasons to use a holding company.

 Asset Protection

If something happens to the operating company, the assets are kept safe from creditors.  As an example, your operating company is sued and that puts all the assets held in the operating company at risk.  If the profits from the operating company were transferred to the holding company and invested through that holding company, it would be much more difficult for the plaintiff to access that money should the operating company lose the lawsuit.

 Tax Savings

Under certain circumstances, corporations have a lower tax rate than individuals.  Recently there have been changes in the tax law that can make it advantageous for the individual to earn passive income through a holding company.  Some of the details surround the province, the amount of both corporate and individual income, and the type of income earned.

 Estate Planning

Passing assets, especially family-owned businesses, from one generation to another can be easier by using a holding company. Using a tactic called estate freeze will allow the owner to make a successor a shareholder and move any future growth of the company to the successor.  At the same time, it allows the owner to remain in control of the business operations.  It has the added effect of limiting the income tax liability at the time of the owner's death.

 Lifetime Capital Gains Exemption

Most small businesses in Canada fall under the Canadian Controlled Private Corporation.  If the company is sold there is no tax on a gain of up to $867,000.  There are some very specific rules to follow like 90% of the business's assets are used to run the company; 50% of the assets must be used to run the company in the two years prior to the sale, and the owner must have held the shares for at least two years prior to the sale.  A holding company can be beneficial under the right circumstances. 

 Tax Deferral

This centers around the timing of when income is earned.  This means that some of the tax can be deferred to put off from one period to another, saving money.

All of this probably sounds great, but, just like anything, there are some downsides like incorporation and ongoing costs, complicating your current operations, and the administration of two companies.

As you can tell, there are a lot of rules and details around using a holding company.  If you think it might be a solution for you, consult with your accounting firm.  They will be able to analyze your personal and corporate circumstances and help you decide whether a holding company will be an advantage or not.

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- The Capex Team