Holding company
A holding company is a corporation whose purpose is to hold assets — commonly the shares of an operating company, along with investments or real estate — rather than to carry on the business itself.
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Key facts
| Category | Corporate tax |
|---|---|
| Also known as | holdco, investment holding corporation |
| Typical structure | Holdco owns the shares of Opco; the owner holds Holdco |
| Dividend between them | Generally deductible on receipt where the corporations are connected |
| Common purposes | Creditor protection, income splitting where rules permit, purification for the capital gains exemption |
| Authority | Canada Revenue Agency; Revenu Québec |
What it means in practice
The usual structure places a holdco above an operating company. Profits the operating business does not need can be paid up to the holdco as inter-corporate dividends, which are generally received tax-free between connected Canadian corporations, and then invested or held there. Owners use the structure for three main reasons: creditor protection, because retained cash sits outside the company exposed to operating risk; access to the lifetime capital gains exemption on a future share sale, which requires the operating company to meet asset tests a holdco can help maintain; and control over the timing of personal tax, since funds can stay corporate until the shareholder actually needs them. A holdco is not automatically worthwhile. It adds a second corporate return, a second set of financial statements and annual maintenance cost, and passive investment income earned inside it can grind down the operating company's access to the small business deduction. The structure should follow a specific reason, not be set up pre-emptively.
Why owners move retained earnings out of the operating company
Cash and investments sitting in an operating company are exposed to its trade creditors and to any litigation the business attracts. Paying them up to a holding company as a dividend puts them behind a second corporate wall while leaving them in the corporate group rather than in the owner's hands, where they would have been taxed personally. The same movement can purify the operating company for the capital gains exemption, which requires most of the corporation's assets to be used in an active business at the time of sale and through a preceding period. A company with a large investment account can fail that test on the day a buyer appears. A holding company is not free. It files its own T2 and CO-17, needs its own bookkeeping, and adds a layer of compliance that only pays for itself above a certain scale.
FAQ
Is the dividend from my operating company to my holding company taxable?
Should I set up a holding company before or after I sell?
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