Incorporating a holding company is a strategic financial move that offers a plethora of benefits for business owners in Canada. By the end of this post, you’ll have a solid understanding of what a holding company is and why you should use one. We’ll delve into common scenarios, demonstrating why someone would opt for incorporating a holding company in Canada. Furthermore, we’ll discuss potential drawbacks to ensure you have a well-rounded understanding.

What is a Canadian Holding Company?

A Canadian holding company is a versatile entity established to consolidate a diverse range of assets, including real estate, shares, assets, or even other companies, under one figurative umbrella. These assets are controlled by another company, which, in turn, holds dominion over them. In Canada, there are numerous types of holding corporations that can be registered, the most common of which is an investment holding company. Corporations Canada formally recognizes the legitimacy of holding companies.

A holding company, quite simply, is an incorporated entity primarily dedicated to holding investments. Unlike operating companies, which actively engage in business operations, holding companies exist solely to manage investments. These kinds of investments can take many different forms, including:

• Interest Earning Investments: Such as cash, GICs, term deposits, or bonds.
• Real Estate: Whether residential or commercial properties or vacant land.
• Shares in Public Companies: Such as tech giants like Apple or Facebook.
• Shares in Private Companies: Such as local incorporated businesses.

Holding companies serve as guardians of these investments, protecting them from potential creditors and offering a range of strategic advantages.

Procedure to Establish a Holding Company in Canada

Creating a holding company in Canada entails numerous steps:

• Determine the Purpose: Understand why you want a holding company. Typically, they are established for asset protection, tax advantages, or strategic business structuring.
• Choose a Name: The name of your holding company must end with a legal suffix like “Ltd.”, “Inc.”, “Corp.”, or the French equivalents.
• Register with the Provincial Government: Each Canadian province has its process for company registration. Determine in which province you want to establish and follow its specific procedure.
• Purchase an Articles of Incorporation: This is a legal document that specifies the company’s structure and operations.
• Establish a Board of Directors: A holding company requires a board to oversee its operations.
• Open a Business Bank Account: To handle the company’s financial transactions, you need to setup a seperate business bank account.

Why did you set up a Holding Company in Canada?

There are compelling reasons for utilizing a holding company in the Canadian business landscape:

Tax Savings

In some scenarios, corporations enjoy lower tax rates than individuals. By holding investments within a corporation, rather than personally, substantial tax savings can be achieved.

Example: High-earning professionals can significantly reduce their tax burden by incorporating a holding company to manage their investments, thereby optimizing their tax strategy.

Asset Protection

Incorporating a holding company provides a safeguard for your assets. By holding assets within a holding company rather than an operating company, you shield them from creditors, ensuring that they remain safe, even if unforeseen challenges arise.

Example: Consider a local construction company sued for installing faulty electrical equipment. By transferring excess cash to a holding company, the assets can be protected from legal claims.

Tax Deferral

Holding companies offer flexibility in income timing, allowing for tax deferral. This means you can choose when to realize income, which can result in lower overall tax liabilities.

Example: By deferring income from one year to the next, individuals can strategically manage their tax obligations and potentially reduce their tax bills.

Making a Claim for the Lifetime Capital Gains Exemption

The Lifetime Capital Gains Exemption (LCGE) allows for tax-free capital gains of up to $913,630 for business owners.  However, specific criteria must be met. A holding company can help meet these criteria, facilitating significant tax savings.

Example: Suppose a business owner wants to sell their company and qualify for the LCGE. If their company hasn’t met certain asset tests, they could face substantial tax bills. Incorporating a holding company and meeting the LCGE criteria can result in substantial tax savings.

Estate Planning

Holding companies play a crucial role in succession planning. They provide for a smooth transfer of assets from one generation to the next, maintaining corporate continuity.

Example: A business owner looking to pass the company to their offspring can implement an estate freeze, allowing the next generation to gradually assume control while preserving the founder’s interests.

Drawbacks of Holding Company in Canada

While the advantages of holding companies are evident, it’s important to be aware of potential drawbacks:

• Ongoing Costs: Maintaining a holding company requires annual legal filings, corporate tax returns, and potentially bookkeeping services, incurring additional expenses.
• Incorporation Costs: Starting a holding company involves expenses, such as legal fees for drafting incorporation documents. It’s crucial to weigh these costs against the anticipated benefits.
• Complexity: Utilizing a holding company can add complexity to your financial structure. Managing multiple holding companies can lead to convoluted corporate structures and reliance on costly professionals.
• Tax Implications: In some situations, a holding company may result in higher tax payments compared to owning investments personally. Careful planning is essential to minimize tax liabilities effectively.
• Administrative Burden: Just like operating companies, holding companies entail administrative responsibilities, which demand the attention and time commitment of their owners.

Conclusion

Incorporating a holding company in Canada can be a powerful financial strategy, offering asset protection, tax advantages, and effective estate planning. However, it’s essential to carefully assess the costs and complexities involved to determine if it aligns with your financial goals. If a holding company is the right choice for you, explore the possibilities and consult with professionals to optimize your financial strategy.