If you run a successful incorporated business in Canada, you may have heard of a "holding company," or "Holdco." While it might sound like a complex tool for big corporations, a Holdco can be a powerful strategy for small and medium-sized business owners to protect their assets and manage their taxes more effectively. At Nunniyer Business, we help our clients determine if this advanced structure is the right fit for their long-term goals. Here’s a simple breakdown of what a holding company is and how it can benefit you.
What is a Holding Company?
A holding company is a separate corporation that doesn’t operate an active business. Instead, its primary purpose is to hold shares of another company (your operating business, or “Opco”) or to hold passive assets like investments, real estate, or excess cash. It acts as a parent company, providing a financial and legal buffer.
Key Benefits of a Holding Company
1. Asset and Creditor Protection This is one of the biggest reasons business owners set up a Holdco. Your operating business is exposed to risk—lawsuits, debts, and unforeseen liabilities. By transferring excess cash and investments from your Opco to a separate Holdco, you are legally separating those assets from the operational risks of your business. If your operating company ever runs into financial trouble, the assets in your holding company are generally safe.
2. Tax Deferral One of the most powerful tax benefits comes from inter-corporate dividends. You can move excess profits from your operating company to your holding company as a tax-free dividend. This means you can pull money out of the day-to-day business without immediately triggering personal income tax. The money can then be reinvested within the Holdco, allowing it to grow with a tax deferral. You only pay the personal tax when you decide to take the money out of the Holdco to use personally.
3. Preserving the Lifetime Capital Gains Exemption (LCGE) If you plan to sell your business one day, the Lifetime Capital Gains Exemption is a massive tax-saving opportunity (currently up to $1.25 million). However, to qualify, your business must be a Qualified Small Business Corporation, which requires that at least 90% of its assets are used in an active business. If you have too much passive cash or investments building up in your operating company, it could disqualify you. A holding company allows you to “purify” your operating company by moving those passive assets out, preserving your eligibility for the LCGE.
4. Income Splitting and Succession Planning A holding company can be a great tool for long-term planning. You can use it to:
Income Split: Pay dividends to family members who are shareholders and in a lower tax bracket (subject to the Tax on Split Income rules).
Facilitate an Estate Freeze: Cap the value of your shares in the operating company and transfer future growth to the next generation, all as part of a tax-efficient estate plan.
Is a Holdco Right for You?
While a holding company offers significant benefits, it also adds a layer of complexity and costs (e.g., additional filing fees, tax returns, and legal costs). It’s generally a strategy for businesses that are consistently generating and retaining a significant amount of excess cash.
The decision to set up a holding company should always be made with professional guidance. It requires a strategic look at your business’s financial position and your long-term goals.
If you’re ready to have a conversation about your business’s future and whether a holding company could be a part of it, please reach out. The team at Nunniyer Business is here to help you build a smarter financial structure.