July 5, 2016 Business Law
Many business people consult us to evaluate the benefits of setting up a management corporation, commonly known as a holding company. First and foremost, a holding company allows for the transfer of surplus cash accumulated in the business (the operating company). This transfer is made through the payment of intercorporate dividends, which are generally exempt from taxes.
The accumulation of surplus cash in the holding company allows for this capital to grow, sheltered from the operating company’s creditors and their potential lawsuits in the event of a setback (subject to certain exceptions). The capital in the holding company may also be invested according to personal and family investment objectives, all while offering great flexibility for the sharing of revenue among shareholders who are, most of the time, family members.
The holding company offers several estate planning options, including the deferral of a portion of the tax, through an estate freeze, that would otherwise be payable upon a shareholder’s death.
Additionally, the capital accumulated in the holding company generally allows for the acquisition of assets such as real estate and stock market investments without contaminating the operating company nor jeopardizing the possibility for its shareholder to benefit from an exemption on the first $824,176 in capital gains from the sale of shares in the operating company (so long as his shares constitute qualified small business corporation shares) (this amount is updated to March 24, 2016). If the investments are already in the operating company, it is generally possible to transfer them to the holding company to avoid said contamination.
Finally, it should be noted that there will be more capital available for investment in the holding company than if it had been distributed to the shareholder owner to be invested (besides in RRSPs). The transfer of surplus cash from the operating company to the holding company is generally not subject to an additional tax compared to distributions to a shareholder owner. Therefore, the additional capital in the holding company makes it possible to more quickly free up the necessary amounts for investments (for example, for the down payment on a rental property).
The establishment of a holding company is not suitable for all situations. The costs and benefits must be analyzed and considered in light of your reality and that of your business. However, when your operating company is clearing surplus cash, the holding company constitutes, in many cases, a preferred tool for the growth and security of your patrimony.
This bulletin provides general comments on recent developments in the law. It does not constitute and should not viewed as legal advice. No legal action should be taken on the basis of the information contained herein.Back to the list of publications - Business Law