You’ve been going balls to the wall with your creative business and you’re doing really well. Now you’re accumulating excess cash and looking to invest, you want advice on how to manage this growth. 

Incorporating a holding company may be the right decision for you at this point. With the correct advice, a holding company can help you grow your business empire while providing asset protection, tax savings and many other potential advantages.

A holding company is created for the purpose of “holding” various assets 

  • Real estate
  • Shares in stock
  • Bitcoin 
  • and even other businesses. 

It doesn’t have active business income, it passively holds assets that generate passive income.

Here are some of the real life scenarios in which we’ve helped creative professionals in Canada start a holding company:

Example: We work with an award-winning music video producer who invests in movies. They backed some small indie movies that did really well, causing them to need a holding company for the residuals to go to. 

The corporation needs to be set up and funded (usually from the operating company profits) in order to purchase an asset – a contract from indie movie producers in exchange for royalties once it’s finished and distributed.

The corporation owns the contract and rights of this investment. The value is the contract and, in a holding company, it is safe from creditors of the operating company. 

The tax advantage is that 100% of the money contributed by the operating company to the holding company is usually not taxed, leaving all of it to be invested and generate a much higher return. Any money pulled out of the operating company to an owner is first taxed on the personal level creating roughly 50 – 65% of the money available for investment. With the time value of money and compounding interest, the difference could turn into a small fortune.

Example: Another client invests in children’s programming to sell to CBC. His holding company was set up to own some of the shares in children’s programming. 

Some clients have set up holding companies in order to invest in other small businesses.  Think GoFundMe but for businesses. You get an interest payment every month as well as your capital back. 

You (or your holding company) can become a small bank and invest with many other people/corporations in one loan to a Canadian small business owner,  instead of them going to a big bank. All aspects from qualification and interest rate to the monthly payments and payouts to investors are all managed by the platform operators making it a good passive source of income.

The advantages of having a holding company in Canada

Increased Asset Protection 

Having assets in a holding company, rather than an operating company, helps keep them safe from creditors just in case unforeseen circumstances arise. 

As a business owner, you can take risks through the operating company, rather than exposing the holding company, because the holding company doesn’t perform any transactions. You can move cash from an operating company to a holding company on a tax-free basis.  

As the sole shareholder of the new holding company, you can transfer the ownership of the excess operating company funds to the holding company by way of a dividend. Since dividends between Canadian-controlled private corporations (owned by the same person) are tax-free, you can move the money with no negative tax consequences. A holding company is only exposed to risk the amount of its investment in the operating company. 

An operating company is considered a subsidiary if it’s a corporation owned by a holding company. It will hold the bank and supplier debt, and all the other things that expose it to financial risk. It’s liable for all the headaches that can come from running a business.

Multiple tax benefits

The Small Business Deduction in Canada (SBD) allows Canadian-controlled Private Corporations (CCPC) to pay a lower rate of tax on their first $500,000 of active business income. 

For associated corporations, you can allocate a portion of that $500,000 limit to the other corporation, allowing them to take advantage of the lower rate. Your holding company does not have any active business income, but any passive income earned within the holding company might impact access to the SBD for the associated operating corporation. The first 

$50,000 of passive annual income in a group is okay, but anything above that comes with more complex rules and could cause you to actually pay more tax.

The operating company may be able to pay tax-free inter-corporate dividends to the holding company, which the holding company can keep. That profit can be held inside the holding company until sometime later when you actually need the money.  A holding company gives you control over the timing of whether or not you receive that income personally. This flexibility in the timing of income allows for tax deferral.

Also, depending on the percentage of outstanding shares (the number of stocks issued) held by the holding company in the operating company, the dividends paid to the holding company may be tax-free. For a shareholder with a high marginal tax rate, a portion of tax on dividends from taxable Canadian companies may be deferred until dividends are paid by the holding company to the shareholders.

You can lock in the Capital Gains exemption

A valuable tax benefit available to a business owner is the Lifetime Capital Gains Exemption (LCGE), as it gives an individual taxpayer an exemption on the sales of shares, to a third party, of a Qualified Small Business Corporation (QSBC) of up to $892,218 as of 2021. 

  • Must sell shares of company – at time of share sale, must have 90% of assets within company
  • Pass the Holding Period Test – held the shares for at least 24 months
  • Pass the Holding Period Asset Test – over 50% of assets must have been used in an active operating business

If an operating company has too much in the way of passive investments it won’t qualify for the LCGE in a sale situation. If you get too close to the limit, set up a holding company so that you can trigger the capital gain while you qualify so that it won’t be triggered later when you don’t. This is known as ‘purifying’ the corporation so that it can qualify for the LCGE when sold as long as the time tests above are met.

Transfer the shares to the new holding company at fair value, trigger a capital gain on that transfer, then use the LCGE to make the capital gain on transfer tax-free. At that point, the exemption is locked-in as the “cost” of those shares then becomes the fair value.

It can ease estate planning

Holding companies can help ease succession planning, the transferring of assets or the ownership of a business to the next generation. 

For example, Dad Entrepreneur would like to bring his daughter into ownership of the business, while still maintaining control. Dad can carry out an estate freeze with the help of a holding company. Freezing Dad’s shares in the company allows him to make his daughter a shareholder and shift all the future growth to her. Dad can remain in control of the business for now, and shift it to his daughter over time.

The disadvantages of having a holding company in Canada

Compliance Costs

Holding companies require set up costs, such as the incorporation fee, as well as other ongoing compliance expenses, including the costs of preparing annual financial statements and corporate tax returns. 

Unless your shares are of sufficient value, a holding company may not be worth the money and effort. Also, you may have to amend Articles of Incorporation of the Operating Company if the share structure wasn’t set up properly for a Holding Company.

Setting up a holding company in Canada can be advantageous if you have an operating company with excess cash and you’re looking to invest. Contact us for advice relevant to your particular circumstances, as there are various tax-related decisions you need to consider. 

With the correct advice, a holding company may help you to grow your business empire while providing asset protection, tax savings and many other potential advantages.

The registration process for a holding company is the same as any other company in Canada. 

To get started, you’ll need to decide whether the company will be registered at a regional or a federal level. If you want the company to have an official name, you will have to order a NUANS report to ensure that the proposed business name is available and not used by other people as a trademark or a corporate name. It is not necessary to have an official name, though. 

Instead, the corporation will be recognized by a unique number assigned to it by Corporations Canada. RBC Venture’s Ownr can enable you as you start, manage, and grow your business. Whether you’re registering or incorporating your first company or want to automate legal work for an existing business, Ownr has the tools your business needs. It has all the legal tools needed for growing businesses, including share management, employment agreements, corporate company updates and more.

Your accountant should know your business well enough to tell you when you need to set up a holding company 

Many people will be reading this blog for advice, wondering why their own bookkeeper hasn’t told them about it already. 

A good bookkeeper should be helping you get ahead of problems and identify opportunities –  and that comes with asking questions and giving advice. 

For example, a simple insight could be, “Hey I noticed you haven’t yet cashed your paycheque from last week”. Or, they may give suggestions on how to cut costs. Knowing when it’s the right time to set up a holding company is one of those areas you want your bookkeeper to flag up and give advice on. You want to get advice based on your particular circumstances, so you can consider all the various tax-related decisions and be certain it’s going to be advantageous (or not). 

If your bookkeeper doesn’t ask questions and give advice about your particular day-to-day realities and business needs, then you may want to look for a new one. It doesn’t make them a bad person. It might just mean they’re not right for you and not equipped to grow with you

We’ve written down the 8 things to consider to decide if your bookkeeper is right for you. You can read through them on our blog here: How to Tell if your Bookkeeper Knows What They are Doing

Setting up a holding company in Canada can be advantageous if you have an operating company with excess cash and you’re looking to invest. Contact us for advice relevant to your particular circumstances, as there are various tax-related decisions you need to consider. With the correct advice, a holding company may help you to grow your business empire while providing asset protection, tax savings and many other potential advantages.