What is a holding company? Ordinarily, it means a corporation which is established to hold and own shares of another company. In most cases, a holding company does not carry on an active business.
If you are operating a business in Ontario, there are a number of potential legal and tax benefits of establishing a holding company, some of which are discussed below:
- Creditor-Proofing – While the protection of personal assets is a key concern for most people when they start a business, over time if the owner is successful in operating their business then the corporation which he/she has established to run the business will itself accumulate assets and property that may be significant and valuable. It may be possible that a holding company can be used to limit the amount of assets in the operating company and protect assets from the claims of creditors by distributing dividends of excess cash and other assets that are held in the operating company to the holding company.
- Potential Tax Advantages:
- Tax Deferral - One potential tax advantage of a holding company is that where it owns more than 10% of the shares of a private corporation carrying on an active operating business, if the operating company pays dividends to that holding company the dividend income is generally not taxed in the holding company when it is received and is instead taxed when it is distributed or paid to the shareholders of the holding company. If the shareholders of the holding company do not need that dividend income, in the year that it is paid, then if the dividends are retained in the holding company there may be a deferral of taxes until the dividend income is withdrawn and paid to the shareholders of the holding company. By deferring taxes in this manner, this also means that there may be more monies available in the holding company to invest and earn investment income.
- Tax Savings – There may be opportunities to save taxes if a holding company receives dividend income which is distributed to shareholders over a period of time when the shareholders may have lower income levels.
- Income Splitting – It may be possible that holding companies can be used to split income with adult family members which may result in tax savings. You should be aware that there may be tax law changes in the future which will limit or eliminate altogether income splitting through holding companies.
- Estate Planning and Diversified Ownership – A holding company may allow a shareholder to introduce family members as indirect shareholders of an operating company. They can also be a useful tool for succession and estate planning purposes allowing business owners to potentially transfer ownership to their children or their next generation.
- Ownership of Several Companies – Where a business owner has ownership interests in several corporations, he/she may be able to use a holding company to consolidate their ownership under one company.
You should be aware that there are added legal and accounting costs of having a holding company. There may be other tax implications of holding companies that should be reviewed carefully with an accountant/tax adviser.
Please note that this is just a very short summary of some of some potential benefits of setting up a holding company in Ontario. It is not meant to be a complete or thorough analysis of all of the advantages or disadvantages of holding companies and is not intended to be legal or tax advice or an opinion on any matter. Also, changes in laws may affect the information included in this article. You should consult with a lawyer and accountant/tax adviser to review whether a holding company is advisable in your particular circumstances.
If you are interested in getting more information or have any questions, please contact us.
The foregoing should not be considered to be legal advice and should not be relied upon as such. Please consult a lawyer to get advice and an opinion on your unique circumstances.