What is a Holding Company (HoldCo) in Canada? 

A holding company (often referred to as a HoldCo) is a corporation designed to hold shares of other corporations (OpCo) and/or investments (stocks, real estate). It usually doesn’t engage in daily business operations. It is used to manage and control investments.  

One of the reasons they are so beneficial is because an operating company can generally pay tax-free dividends to a holding company so long as it owns more than 10% of the operating company. Whereas dividends paid to an individual could attract tax as high as 48%. Because of this and among other reasons, holding companies are structures used for tax planning, asset protection, and facilitating the ownership of multiple companies or investments. This article will guide you through whether it might be the right choice for your business or investment portfolio. 

 

Types of Holding Companies 

 

1. Holding Company for Corporate Shares: A HoldCo that owns shares in one or multiple corporations is typically established for asset protection or for business owners who need to manage ownership in several companies. By separating the ownership of shares into a holding company, you can move profits from an operating company to the holding company and protect those assets from potential creditors or litigation.  
2. Holding Company for Investments: Some HoldCos are created primarily to hold investments, including real estate, securities, and other financial assets. This structure can offer tax deferral opportunities (typically when there is already an existing business in a corporation), for liability protection, or if there are restrictions on an OpCo having investments. Example: Many professional corporations (i.e. doctors) cannot invest in rental real estate with their existing professional corporation. So they generally set up another corporation if they are interested in buying real estate. 
3. Hybrid Holding Company: A hybrid HoldCo may hold both corporate shares and investments, giving you flexibility in managing multiple income sources and providing the same benefits of asset protection and tax deferral. 

 

5 Steps to Decide If You Should Set Up a Holding Company 

Step 1: Do You Need Asset or Liability Protection? 

A HoldCo can shield your business profits and assets from potential lawsuits or creditors. This is generally the most common use of a holding company. There are two ways where how this can work: 

First Strategy: OpCo pays dividends to Holdco 

• If a lawsuit or creditor targets your operating company, they can only go after its assets. 
• By moving excess cash or assets (e.g., retained earnings, investments) into a separate HoldCo, those funds are protected.  
• This is called credit proofing—the idea that assets in a legally separate entity are harder for creditors to seize. 
• Generally, if a HoldCo owns at least 10% of the operating company, a tax-free dividend can be paid to the HoldCo. There should generally be no tax on the distribution of excess cash to the Holdco which makes this attractive. But there could be tax on the distribution of an asset other than cash if that asset has appreciated. 
• Sometimes a holding company is used in this manner to split assets into separate companies. For instance, you may use one corporation for the operating business, but the real estate of the business is held in another corporation for liability protection. The holding company may then hold both corporations. This helps isolate the risk or liability of each business so that if someone where to sue the business, creditors may be unable to access the real estate. 
• The holding company may also be set up as a beneficiary of a trust instead of holding the shares of the operating company directly. 

 

Second Strategy: Incorporate a HoldCo and transfer assets to it. 

• This strategy involves taking existing investments (i.e. rental real estate) and transferring them to a corporation. This provides liability protection to the individual in case something was to happen to the investment. As an example, if there was an issue with a tenant and the tenant wanted to sue, the corporation would provide some liability protection so that they would be more restricted from accessing the individual’s other assets. 
• The transfer of the investments can happen without triggering tax through an election called a section 85 transfer. However, if transferring real estate to a corporation, land transfer tax could apply. 
• This strategy could result in more income taxes on the investment income that is earned than if the investments were held personally.  
• Generally, this strategy not recommended except in specific situation or if liability protection is not available in some other way (i.e. insurance). 

 

Decision: 

• Yes, I have substantial assets that I want to protect from lawsuits and creditors: Set up a HoldCo. 
• No, I don’t have substantial assets or my business does not have potential risk from lawsuits or credits: Go to Step 2. 

 

Example: Sarah owns Sarah’s Marketing Inc., which has built up $500,000 in retained earnings. If she leaves that cash in the OpCo and gets sued, creditors could seize those funds. But if Sarah pays the $500,000 as a tax-free dividend to her HoldCo, that money is now protected from OpCo’s future creditors. 

Caveat: While a HoldCo can improve creditor protection, it’s not foolproof. In cases of fraud or personal guarantees, courts can still go after HoldCo assets. There are also situations where the dividend might not be tax-free. This could happen if the operating company has a tax attribute called RDTOH or if it does not have enough of another attribute called safe income. 

 

Step 2: Does Your Business Have Multiple Shareholders? 

A HoldCo can help business owners better manage ownership stakes and profit distribution when there are multiple shareholders. 

Here’s why: 

• Without a HoldCo, dividends must be paid proportionally to all shareholders of the same class. 
• With a HoldCo, a shareholder can own their shares through their personal HoldCo. This means that their HoldCo would receive the dividends. They can choose to invest in their HoldCo or pay it to themselves personally.  
• It allows the owner to control when they receive dividends personally. 
• This strategy is commonly used for succession planning. A parent may be transitioning their business to a child. The parent may ‘freeze’ the value of their shares and allow the future growth to go to the child. The parent may consider setting up a holding company to be paid out the value of their ownership without triggering personal taxes. 

Decision:  

• Yes, I have multiple shareholders and want flexibility in profit distributions: Set up a HoldCo. 
• No, I don’t have multiple shareholders, or I don’t want flexibility in profit distributions: Go to Step 3.  

 

Example: Imagine you and two partners own Tech Innovators Inc. as equal shareholders. One partner wants to reinvest earnings while another needs cash for personal expenses. 

• Without a HoldCo: The business must pay dividends equally to all three partners, limiting flexibility.
• With a HoldCo: Each partner can receive dividends at different times, reducing personal tax burdens. 

 

Step 3: Do You Plan on Selling a Business?  

If you plan to sell your business, you may qualify for the Lifetime Capital Gains Exemption (LCGE), which allows you to sell your business tax-free on the first $1.25M of gains (2024 limit). However, there are certain requirements that need to be met. Two of these requirements are: 

• At least 90% of your corporation’s assets must be used in active business. 
• At least 50% of your corporation’s assets in the previous 24 months prior to the sale must be used in active business. 

 

If your business holds too much cash, investments, or real estate, you may lose LCGE eligibility. A HoldCo can “purify” your business by moving excess cash and investments out, ensuring that the business meets the 90% and 50% active asset test before sale. 

A holding company could also be used to strip out other assets which a buyer may not want.  This can be further enhanced with a trust.

 

Decision: 

• Yes, I plan on selling my business and there is a potential need to purify it: Set up a HoldCo. 
• No, I don’t plan on selling my business or there is no potential need to purify it: Don’t set up a HoldCo. 

 

Example: Jimmy owns an ecom business. He has made a lot of money in the past and used it to purchase GICs.  He plans to sell his business soon and wants to claim the LCGE as part of the sale. He sets up a holding company owning 10% and distributes the GICs to the holding company to purify his corporation. Now, it is eligible for the LCGE on a sale. 

Caveat: It might be useful to have different classes of shares in order to pay dividends to the holding company without dividends being paid to the individual owner. The holding company should still own more than 10% to ensure dividends are generally tax-free. There is also a rule that says if there is not enough safe income (tax retained earnings) allocated to the shares of the holding company, there may be some tax on the dividend. 

 

Step 4: With A Holding Company, Can You Benefit from Income Splitting? 

The TOSI rules penalize you if you pay dividends to family members. That family member will be taxed at the highest rate. With a HoldCo, you may distribute dividends to family members in lower tax brackets, but TOSI could still apply.  

Simply setting up a holding company does not automatically get you out of the TOSI rules. But in some scenarios, your HoldCo may be exempt from TOSI.  

How Income Splitting Works: 

• A HoldCo receives tax-free dividends from OpCo. 
• The HoldCo invests those funds and generates second-generation income. 
• Second-generation income from the investment income can be paid to certain family members without violating TOSI so long as it doesn’t constitute a business. 
• Alternatively, if the investment income does constitute a business, then they could look at another exception called the ‘excluded shares’ exception. 

 

Caveat: There is risk with this strategy because while the CRA has given the above comments, there is case law that suggests any income a corporation earns would constitute a business. This also only makes sense if your eligible family members are at a significantly lower tax brackets than you. 

There could also be other avenues where TOSI can be exempted with the use of a holding company. If you are interested in income splitting, contact CoPilot Tax here.  

 

Decision:  

• Yes, I can benefit from income splitting with a Holdco: Set up a HoldCo. 
• No, I cannot benefit from income splitting with a Holdco: Go to Step 5. 

 

Example: 

• Sarah owns a business and has a HoldCo. 
• She pays dividends to her HoldCo and reinvests them. 
• Later, the HoldCo pays dividends to her adult child from second-generation income, potentially avoiding TOSI. 

 

Step 5: Is Your Corporation Restricted from Making Investments That You Wish to Make?  

Some businesses, like professional corporations (PCs), have restrictions on holding investments. Some businesses may also have shareholders’ agreements that prevent certain investments from being made.  

With a holding company, they can then make those investments. However, some provinces restrict holding companies from owing shares of professional corporations. It this situation, the professional corporation may have to lend the funds to a holding company. Doing so could also have some succession planning benefits as well since shareholders of a professional corporations have restrictions whereas a holding company doesn’t. 

Decision: 

• Yes, my business is restricted from making investments that I want to make: Set up a HoldCo. 
• No, my business is not restricted from making investments that I want to make: Don’t set up a HoldCo. 

 

Example: In Ontario, doctors cannot hold rental real estate inside their professional corporations. But they can set up a HoldCo to invest in real estate separately. They lend the money from their professional corporation to their holding company. 

 

Other Benefits of a Holding Company 

Succession/Estate planning: Succession planning is the planning of transition of a business or investment to the next generation. A holding company can be used in conjuction with another strategy called an estate freeze. For instance, if a parent is transitioning a business to the kid, they might freeze the value of their shares and have the future growth go to a child. The parent may set up a holding company to allow the value of their shares be paid or redeemed through a tax-free dividend. 

U.S Estate Tax: Individual that own U.S. investments including US stocks may be subject to U.S. estate tax when they pass away. U.S. estate tax could be as high as 40% of the value of the U.S. investments. However, if a holding company owns the U.S. investments, there would be no U.S. estate tax. Some individuals may set up a holding company and move their investments to the holding company to avoid U.S. estate tax. 

Life Insurance Planning: Individuals may set up a holding company to purchase a life insurance policy on themselves. There are various reasons why someone may want to consider this. 

Pooling Income from Multiple Businesses: If a business owner has multiple businesses, they may set up a holding company to hold corporations for the different businesses. They may then use the holding company as a treasury function. If one business has profits, they may pay dividends to the holding company who then uses it to fund another business. 

Flexibility: Some professional corporations may be able to invest in marketable securities through their professional corporations but would still set up a holding company to invest. This is because it allows for flexibility in future tax planning. Whereas their professional corporations will have more restrictions on who can be shareholders, their holding company would not which would allow them to pursue more tax planning.

 

Disadvantages of Setting Up a Holding Company 

1. Additional Costs and Compliance: Operating a holding company comes with additional costs and complexities, including:
2. Incorporation fees
3. Legal fees for structuring
4. Accounting fees for managing multiple corporations
5. Additional corporate filings and annual returns
6. Potential Loss of Lifetime Capital Gains Exemption (LCGE): While holding company can help you claim the LCGE, it could also jeopardize your ability to claim the LCGE on the sale of shares. If you transfer all your shares to a holding company and then use the holding company to invest, you could potentially lose your ability to claim the LCGE.
7. Automatic Tax Savings: Many people believe that investing through a holding company leads to lower taxes, but this isn’t always true. In some cases, investing within a corporation could result in higher taxes than investing personally. However, if you have a corporation that earns business income, then you can benefit from tax deferral and the low taxed income to investment. A holding company also does not automatically allow for income splitting. TOSI could still apply.  

 

How Do You Open a Holding Company? 

1. Incorporate the HoldCo: Start by incorporating your holding company. Ensure that the share structure is designed to meet your current and future needs, taking into account income splitting or estate planning. 
2. Transfer Existing Assets /Shares to the Holdco, if any:
   If you already hold shares or investments that you want your HoldCo to own, you’ll need to transfer these assets into the holding company. This process is treated as a sale for tax purposes, meaning it could trigger capital gains. However, there is an election called a Section 85 rollover available for this situation. The rollover allows you to defer income taxes when transferring assets to a corporation. 

 

Final Verdict: Should You Open a Holding Company? 

A HoldCo is a powerful tool for asset protection, tax planning, and business structuring, but it adds complexity and costs. 

If you answered “Yes” to one of the five steps, contact CoPilot Tax to see if a holding company is right for you. 

for tax deferral, asset protection, income splitting, or succession planning.

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Frequently Asked Questions (FAQs) about Holding Companies in Canada

1. What is a holding company in Canada?

A holding company in Canada is a corporation that exists primarily to own assets, typically shares in other companies or investments like real estate and securities. It doesn’t usually carry on any business operations itself but is used for tax deferral, asset protection, income splitting, or succession planning.

2. Is it worth setting up a holding company?

It depends on your situation. A holding company can offer tax deferral, asset protection, and help with income splitting and LCGE planning. But it also comes with added costs and compliance requirements. It’s most beneficial if you have retained earnings in your business, are planning a business sale, or want to structure family ownership or investments.

3. What are the tax advantages of a holding company in Canada?

• Tax-free intercorporate dividends (if the corporations are connected)

• Potential to defer personal income tax

• Possibility of income splitting (e.g., through second-generation income)

• Use of Paid-Up Capital (PUC) to return investment capital tax-free

• Purification of an OpCo to preserve eligibility for the Lifetime Capital Gains Exemption (LCGE)

4. Can I move money from my operating company to my holding company tax-free?

Yes, generally, if your HoldCo owns at least 10% of the shares in your OpCo, dividends can flow to the HoldCo without triggering tax. However, if the OpCo has earned passive investment income and claimed a dividend refund, some of those dividends may be taxable under Part IV tax. Also, there is something called safe income that you need to be on the lookout for.

5. What is a dividend refund, and how does it affect my HoldCo?

A dividend refund is a tax mechanism that allows a corporation to recover part of the tax it paid on investment income when it pays out dividends. If your OpCo receives a dividend refund, any dividends paid to the HoldCo could be subject to Part IV tax, reducing the tax deferral advantage.

6. Can a holding company protect my assets?

Yes. By transferring excess cash or other assets from your OpCo to a separate HoldCo, you can shield those assets from creditors or lawsuits related to the operating business. This is often called creditor-proofing or asset protection.

7. How does a holding company help with the Lifetime Capital Gains Exemption (LCGE)?

To qualify for the LCGE, at least 90% of your OpCo’s assets must be used in active business. If your company holds too much passive cash or investments, it could become ineligible. You can use a holding company to purify your OpCo by moving non-active assets out of it, helping preserve LCGE eligibility.

8. What is purification in tax planning?

Purification is the process of cleaning up the balance sheet of your operating company by moving passive or non-qualifying assets (like excess cash or investments) to a holding company. This helps meet the 90% active asset test needed to claim the LCGE on a future sale.

9. Can I income split using a holding company?

Possibly but beware. While the Tax on Split Income (TOSI) rules severely limit income splitting, CRA has acknowledged that second-generation income earned in a HoldCo may not be subject to TOSI if the HoldCo is not carrying on an investment business. However, there’s a risk: historically the courts have ruled that any income a corporation earns is considered a business.

10. What’s the risk of second-generation income in a HoldCo?

CRA has stated that second-generation income (income earned on reinvested profits) may be exempt from TOSI. However, if your HoldCo is seen to be carrying on an investment business (e.g., managing properties or trading stocks actively), this exception may not apply. The rules are not black and white, so professional advice is essential.

11. Can I buy a business with a holding company?

Yes, and it can offer strategic tax advantages. Buying through a holding company allows you to structure the Paid-Up Capital (PUC) in a way that allows you to withdraw the purchase price tax-free later. Without a HoldCo, this opportunity is often lost.

12. Can I transfer existing investments or shares to a holding company?

Yes, but doing so triggers a deemed disposition (a sale), which can create a tax liability. To avoid this, you can file a Section 85 rollover, which allows you to defer the capital gains tax when transferring assets into a corporation. Whether this is a good idea for you depends on a few things and you could look to the flow chart to guide you.

13. Can doctors or professionals have holding companies?

In some provinces, professional corporations (like doctors, dentists, lawyers) face restrictions on who can own their shares. In some cases, a HoldCo may not be allowed to hold shares of the professional corporation, though a separate HoldCo can still be used for other investments. Always check provincial regulations.

14. Do holding companies pay less tax on investments?

Not necessarily. In fact, investing through a corporation may result in higher overall tax than investing personally. Corporations pay high tax rates on passive investment income, and there’s a second layer of tax when profits are distributed to shareholders. The advantage is deferral, not always reduction.

15. What are common myths about holding companies?

• Myth: Holding companies always lower your taxes
  Reality: They can defer tax, but in some unusual cases, it may increase overall tax

• Myth: Holding companies automatically allow income splitting
  Reality: TOSI limits this; only specific strategies like second-generation income apply

• Myth: Holding companies are required for LCGE
  Reality: They can help with purification, but are not mandatory

• Myth: You need a holding company to plan for succession
  Reality: Many succession plans can be executed without a HoldCo

16. How much does it cost to maintain a holding company?

Costs vary, but generally include:

• $1,000–$3,000 to incorporate (one-time)

• $1,000+ annually for tax filings and accounting

• Extra legal fees for rollovers or restructuring

17. Who should consider setting up a holding company?

• Business owners with retained earnings

• Families looking for estate planning or income splitting opportunities

• Buyers of businesses who want to structure PUC tax-efficiently

• Investors who want to manage assets within a corporate structure (with caution)

• Partners in a corporation who want flexibility in dividend planning