Holding Companies 101

Also called a parent company, a holding company is a company that owns part, all, or a majority of other companies' outstanding stock. (shares)  A holding company may or may not be used for holding other assets and leasing them to an operating company. 

The main advantages of holding companies are:

Ø  A holding company offers the ability to segregate earnings from the main operating company.

Ø  With proper planning you can creditor-proof the assets of the business.

Ø  Can be used for Income Splitting Purposes.

Ø  Generally, if set up properly, you can issue dividends from an operating company up to a holding company on a tax-free basis (Onshore and Offshore)

Ø  Easy to move money between Holding company. and Operating companies via dividends and loans, etc.

The main disadvantages of holding companies are:

Ø  Requires more cost and time, as you now have more than one corporation.

Ø  Requires more planning to be able to effectively use your Holding Company.

Ø  Holding Companies don’t qualify for the Lifetime Capital Gains Exemption on qualified small business shares.

Holding companies should be used in conjunction with a family trust where possible.  The advantages of having a holding company far outweigh the disadvantages, so if you are considering implementing a holding company in your structure please do contact us.  We are here to assist you with all your structuring needs.

Please check back next week and we’ll discuss how Joint Ventures work. 

Utilizing Dividends

If you were a shareholder of your private Corporation then you may be able to receive Dividends from your Corporation. Canadian Dividends are a very tax advantageous type of income due to the large Dividend Tax Credit that comes with them. The Corporation can only issue dividends in the amount of positive retained earnings. Retained Earnings is simply the sum of profits and losses, less dividends, throughout the life of the Corporation. Dividends are paid out after the Corporation pays its Corporate Tax, which is currently 14% for Private Corporations making under $500,000 active net income in Alberta. If Dividends are your only source of income you may be able to make up to $35,000 without paying any personal tax. If you have other tax credits and tax deductions, then this number continues to get larger, paying no personal tax. You also pay no CPP or EI on dividends. Dividends are issued to Shareholders 18 or older, and may be issued to Holding Companies tax free, and to Trusts that are Shareholders.