How does a holding company work?
Your operating company runs the business. Your holding company owns shares of it. Profits can move from the operating company to the holding company as dividends, often without immediate tax, and be invested there.
A simple way to picture it: the operating company is the storefront, where the risk is. The holding company is the vault, where you keep what you've earned.
Why do business owners use a holding company?
- Protection: money moved out of the operating company is further from its business risks and creditors.
- Tax deferral: profits taxed at the lower corporate rate can be invested in the holding company instead of being paid out and taxed at personal rates right away.
- Flexibility: it can help with family ownership, estate planning and future investments.
Does every business need one?
No. Holding companies cost money to set up and maintain, with separate accounts, bookkeeping and tax returns. For businesses with modest profits, the costs can outweigh the benefits.
A holding company only works if it's actually used. One that exists on paper, with no bank account or transactions, gives you none of the benefits.
How does a holding company affect selling your business?
It matters a lot. The Lifetime Capital Gains Exemption is claimed by individuals selling their own shares. If your holding company owns the operating company, the way the sale is structured, and what the holding company itself owns, can decide whether you can use the exemption. Plan this with your CPA at least 24 months before a sale.
Frequently asked questions
What is a holding company in Canada?
A holding company is a corporation that owns shares of other companies or investments rather than running day-to-day operations. Canadian owners often use one to hold shares of their operating company and invest profits.
Why would a business owner set up a holding company?
Common reasons are protecting money from the operating company's business risks, deferring personal tax by investing corporate profits, and making family ownership and estate planning easier.
Can I use the lifetime capital gains exemption if I have a holding company?
Often, yes, but it depends on how the sale is structured and what the holding company owns. The exemption is claimed by individuals on qualifying shares, so this needs planning with a CPA at least 24 months before a sale.
