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What is a Holding Company and When Should I Set One Up?

When thinking about incorporating a business, or evaluating your ownership structure, you may have heard of a “holding company.”  They are said to be used in the corporate structure of a lot of businesses, however, you aren’t sure what a holding company is or why you should want one. Here we will be going over what a holding company is and why it may be beneficial to set one up.

What is a Holding Company?

For starters, a holding company is an incorporated company that is usually used for holding investments, generally shares of another company. A holding company is not primarily used for selling goods or services; its main purpose is to have a beneficial ownership of another business or being a partner in a partnership. This differs from an operating company as they are used primarily for generating active businesses income.

What are the advantages of a holding company?

Holding companies are used for a variety of reasons that can help build or maintain a business. Here we will list some reasons as to why you might want a holding company.

Asset Protection

One advantage that comes with having a holding company is asset protection. Holding companies can be used as an additional level of protection by transferring some of the assets of your operating business to the holding company. Since these assets are separate from your main operating business, they may be protected  from creditors in the event something were to happen.

Additionally,  a holding company provides a layer of separation between the ultimate shareholders and the operating business. In some instances, this may help protect personally owned assets, such as your family home, in the event of litigation against your operating company.

Even if you’re in a low-risk industry, many operating companies are inherently exposed to various risks through activities and having a holding company in Canada may be a useful part in an overall protection plan for your assets.

Tax Benefits

Another advantage of having a holding company is related to multiple tax benefits that come alongside having one. Assuming the holding company owns a certain percentage of outstanding shares of the operating company, the operating company can pay tax-free intercorporate dividends to the holding company. It’s possible to gain tax savings by investing these excess profits corporately rather than personally. Without a holding company, the shareholder would receive any excess profits paid in the form of dividends, pay personal income tax, and have less left over to invest.

The amount of tax savings can differ due to several possible factors that can include personal income, the type of income earned, and the province. Due to some recent changes in rules related to how much investment (or passive) income a corporation can earn, the complexity in achieving these savings has increased but it is still valuable to take any opportunities that arise.

What are the downsides of a holding company?

Compliance Costs

Having a holding company in Canada can be an overall positive thing to possess when trying to grow your business. The most notable disadvantage is the initial set-up cost for a holding company and ongoing compliance.

Holding companies have additional set-up costs and expenses that would come with owning a secondary company, including the costs of annual corporate tax compliance. Given the limited activity in a holding company, these compliance costs may not be significant and in most circumstances, the benefits would outweigh any compliance costs. 

When should I set up one?

When deciding whether you should set up a holding company, you must first consider what your objectives are with creating one. If your operating company is earning excess cash and you want to invest it while potentially delaying some tax,  it may be worth it to have a holding company. If your operating company is in an industry where litigation risk is present, and you have significant personal assets, it may be beneficial to consider a holding company. As long as you have the money to cover the setup costs then the largest disadvantage can easily be covered when it comes to setting up and maintaining the holding company. 

Conclusion

Having a holding company in Canada provides advantages to a corporate group but they may not be a good idea for everyone. It is recommended  to consult your accounting or legal professional for advice related to setting up a holding company in your particular circumstances, due to the number of legal and tax-related decisions you need to consider. With the correct advice, a holding company may just provide you with the financial tools to grow your business while providing tax savings, asset protection and many other possible advantages.
SRJ Chartered Accountants Professional Corporation are Chartered Accountants in Toronto & Mississauga who specialize in helping individuals and corporations reduce taxes and tax planning. For more information on tax credits and consultation for application, contact us at info@srjca.com or 416-898-4235.

Frequently Asked Questions

What is the role of a holding company?

The main purpose of a holding company is to hold investments, whether they are corporations, as a member in partnerships or limited investments. Holding companies may also hold properties like, stocks, real estate and patents.

What are the benefits of a holding company?

The main benefit that comes with having a holding company is being able to receive intercorporate dividends tax free from operating companies, to potentially invest excess corporate profits. Additionally, a holding company provides a layer of separation between the shareholder and operating company, which may prove useful in the event of litigation against the operating company. 

What is an example of a holding company?

One notable example of a holding company is the Sony Corporation, being a well-known brand name affiliated with many products including TV, video games, music and other electronics. Sony has multiple subsidiaries underneath them including Sony Interactive Entertainment Inc., Sony Electronics Inc. and Sony Global Manufacturing Inc.

How do I start a holding company?

To create a holding company you should figure out whether have one is right for your situation and industry by speaking to a professional accountant or lawyer. Once you know if a holding company is right for you then you can go about determining the optimal ownership for who will  own the holding company. 

From there you should consider your financial resources and tools, and decide if you want to incorporate the holding company provincially or federally by asking your accountant or lawyer. Once you have done all this you can start talking about the actual set-up process and how to create a bank accountant for your holding company as well as add assets towards it.