If you own an operating company, you have likely come across the concept of a holding company. A holding company is used to “hold” investments such as commercial property, residential rental property, marketable securities, bonds, shares of private companies and all other types of assets.
In deciding on whether to utilize a holding company in your existing corporate structure, it comes down to whether the benefits offered outweigh the added costs and complexity associated with incorporating and maintaining another company. A thorough understanding of the potential benefits is critical when making this decision. There will be many instances where a holding company is beneficial and just as many instances where it offers minimal benefit.
One of the most significant advantages of a holding company is the potential tax savings they may offer in the form of tax deferral and income splitting.
One of the most significant advantages of a holding company is the potential tax savings they may offer in the form of tax deferral and income splitting. Sometimes these opportunities are not available under an operating company (e.g. where there are multiple shareholders). Tax deferrals are available when active business income, which is taxed at preferential rates, can be retained in a company. Income splitting is advantageous when dividends can be paid to a family member with lower marginal tax rates.
Other advantages of holding companies include asset protection, preserving your ability to access the $800,000 lifetime capital gains exemption upon the sale of your operating company, and the potential for significant tax savings on the purchase or sale of an operating company.
There can be significant potential benefits when using a holding company, but the decision requires careful planning to be positioned and used effectively. As in all tax planning matters, be sure to talk to an accountant or taxation specialist to see if it may be useful in your situation.
To read the full version of this article and other useful tax articles and insights from MNP’s Business Examiner tax series, go to www.MNP.ca/islandtax
Mike Hughes, CPA, CA is a Taxation Specialist with MNP LLP. Contact Mike at 250.734.4301 or michael.hughes@mnp.ca. Please consult a tax advisor for advice on how the above information should be applied.
