The Canadian taxation system allows for the establishment of holding companies. The registration process is the same as any other company. You can register at a regional or federal level. If you wish your company to have an official name, ensure that the proposed name is available for use by doing a search through NUANS. Your corporation can alternatively be recognized by a unique number assigned to it by Corporations Canada.
What is a holding company?
A holding company is an entity created for the purpose of gathering various assets under one umbrella (real estate, shares, stocks, GICs, term deposits, bonds, other companies). This type of company doesn’t conduct any operations, ventures, or other active tasks for itself. There are several types of holding companies (pure, mixed, immediate, intermediate).
- A Pure holding company is formed for the sole purpose of owning stock in other companies.
- A Mixed holding company (also known as a holding-operating company) not only controls another firm but also engages in its own operations.
- An Immediate holding company is one that retains voting stock or control of another company, in spite of the fact that the company itself is already controlled by another entity.
- An Intermediate holding company is a firm that is both a holding company of another entity and a subsidiary of a larger corporation.
What are the advantages of having a holding company in Canada?
- Increased Asset Protection: A holding company helps keep assets safe from creditors in the event that something happens to the operating company. The operating company can take risks without exposing the holding company because the holding company performs no transactions and therefore does not move cash and other assets. The only risk is the extent of the holding company’s investment in the operating company.
- Tax Benefits: Since dividends between Canadian-controlled private corporations (owned by the same person) are tax-free, you can move money from an operating company to a holding company with no negative tax consequences.
- Lock in the Capital Gains Exemption: There are specific criteria that need to be met to claim the Lifetime Capital Gains Exemption (LCGE). A holding company can help business owners meet these criteria.
- Estate planning: Shares in an operating company can be transferred to younger family members through a holding company by way of an estate freeze that is structured to cap a person’s tax liability upon his or her death and transfer any future growth to family members.
- Limited Liability: Companies frequently get sued by employees (wrongful termination), by suppliers and vendors (breach of contract) and by customers (product liability). Holding companies can protect an individual’s personal assets, shielding the individual from debt liabilities, lawsuits, and other risks.
What are the disadvantages of having a holding company in Canada?
- Costs: Holding companies require set-up costs (incorporation fee, lawyers fee) and yearly compliance expenses (financial statements, corporate tax returns).
- Complexity: A holding company adds a level of complexity that requires reliance on professionals.
Holding companies are not right for all organizations. If your business is accumulating excess cash and you’re looking to invest, incorporating a holding company may be the right decision for you. Establishing a holding company is complex, so consult a Chartered Professional Accountant to discuss the pros and cons. Ideally, a holding company provides tax savings, helps you reach your estate planning goals, assists in growing your business, provides asset protection and limits your liability.
Interested in establishing a holding company? Looking for business advice? Contact Cook and Company Chartered Professional Accountants. We are based out of Calgary, Alberta, serving clients across Canada and the United States. We provide high-quality tax, assurance and succession planning services for a wide variety of privately-owned and managed companies. Contact us for a complimentary consultation.