Corporate tax information

You may have heard about or considered incorporating a holding company. But what is it for? And how could it be beneficial to you and your business? See below.

A holding company is an incorporated company that is primarily used for holding investments. Examples of these investments are shares in public or private companies, interest earning investment, real estate etc.

The structure for most corporations is to have an operating company, in which they conduct their business and then have a holding company that owns the shares in this operating company and handles the investments.

It also maybe beneficial for a person to have a holding company if they also have investment income.

But what are the benefits of having a holding company?

  1. Dividends and Tax Deferral/Minimization
    1. If your holding company is an associated company to your operating company and a CCPC, dividends between them are tax-free
    2. If a person is to receive a dividend but has a large amount of income for that year, they can receive the dividend their holding company instead and defer taking that income until the following year
    3. A person can also put other investments in the holding company name instead of their personal name to reduce their taxes, as corporations are taxes at a lower rate
    4. The tax-free dividends can also allow for an accumulation of funds and reinvestment in assets while still qualifying for the small business deduction
  2. Lifetime Capital Gains Exemption
    1. The Lifetime Capital Gains Exemption provides owners of CCPCs with tax-free capital gains up to $866,912. If they qualify, a business owner could sell their business for this amount and not pay taxes
    2. To qualify, corporations must past the asset test (90% or more of the company’s assets must be active at the time of the sale), basic asset test (50% of the company’s assets must be active for the 24 month period prior to the sale) and the holding period test (the owner of the business must have held shares for the 24 month period prior to the sale)
    3. By having a holding company, it can be easier to meet the asset tests by moving excess cash to the holding company through a tax-free dividend
  3. Asset Protection
    1. Reduce the risk of losing assets if the operating company is sued by transferring some of the assets in the operating company to holding company
    2. Investments held in the holding company would be protected as it would be harder for the plaintiff to fund the funds in another legal entity

Keep in mind there are costs in incorporating another corporation and keeping it active for holding purposes and individuals interested should consult an accountant to create a tax plan. Visit us at Jibe Accounting for tax planning, incorporating a holding company and filing T2s for associated companies

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