A holding company is a registered company that is primarily used to hold investments. This is different from the operating company. Operating companies are used to run active businesses, such as accounting firms or hardware stores.
File your corporate income tax return or your t2 tax return with the help of a tax consultant near me.
Investments owned by a holding company can take many forms, including:
- Shares in public companies such as Apple or Facebook
- Interest-bearing investments such as cash, GICs, term deposits, or bonds
- Real estate including residential or commercial real estate or land
- Shares in private companies, such as a registered local plumbing company
- Holding companies hold investments, as opposed to operating companies used for business.
What is a holding company for?
There are a number of reasons to use a holding company in Canada.
- Asset protection – holding assets in a holding company instead of an operating company. This helps protect them from creditors in case something happens to the operating company.
- It helps to claim Lifetime Capital Gains Exemption – There are specific criteria that must be met in order to claim LCGE. A holding company can help entrepreneurs meet these criteria.
- Tax Savings – In some situations, corporations have a lower tax rate than individuals. Holding investments in the company instead of personally can help you save on taxes.
- Tax Deferral – Holding companies can provide flexibility in the timing of income by allowing tax deferral.
- Estate Planning – Holding companies can help facilitate succession planning (the transfer of assets or business ownership to the next generation).
File your corporate income tax return or your t2 tax return with the help of a tax consultant near me.
Protection of assets through the holding company
Operating companies are exposed to risk as a result of day-to-day business activities. Transferring some of the assets of an operating company to a holding company can provide a layer of protection in case creditors go after those assets.
Help us apply for a lifetime capital gains exemption
The Lifetime Capital Gains Exemption provides owners of Canadian private companies (most small businesses registered in Canada) with tax-free capital gains of up to $913,630. This means that entrepreneurs can sell their company for a profit of $914,000 and pay no taxes!
In order to claim the lifetime capital gains exemption, companies must meet specific criteria. Here is a simplified version of these criteria:
Asset Test – 90% or more of the company’s assets must be used in active assets (i.e. not holding passive investments) at the time of sale.
Basic asset test – 50% of the company’s assets must be used in active assets (i.e. not holding passive investments) for the full 24 months prior to the sale.
Holding period test – The business owner must have held the stock for at least 24 months prior to the date of sale.
Tax savings from a holding company
There are some opportunities for tax savings when investments are held in a company rather than personally. Recent changes to the rules for earning passive investment income in a company have added some complexity, but there are still opportunities for savings.
The amount of tax savings depends on a number of factors, including the province of residence, level of business and personal income, and type of income.
Tax deduction from the holding company
The use of holding companies can provide flexibility in terms of the timing of income. This means that income, and therefore taxes owed, can be deferred from one period to another.
Holding vs operating company
A holding company is a company that is not active. They hold investments such as company shares, interest-bearing investments, or real estate. Operating companies directly manage an ongoing business. For example, ABC Inc. is the operating company that manages our accounting firm. The holding company would be something like XYZ Holdings Inc. which owns the shares of the operating company – ABC Inc.
Frequently Asked Questions
What is the purpose of a holding company?
The main purpose of a holding company is to hold investments such as shares of other companies. This is done to obtain investment income, facilitate tax planning, or minimize risk.
What is the advantage of a holding company?
The main advantage of the holding company is that it minimizes the risk of losing business. For example, if the holding company owns valuable assets, this minimizes the possibility that the operating company will lose those assets through litigation or become insolvent. Holding companies also offer additional flexibility when it comes to tax and estate planning.
How do you set up a holding company?
In Canada, you just need to set up a company and you can use it as a holding company. Talk to us to understand this more.
Can a holding company own real estate in Canada?
A holding company can own many different types of assets, including real estate, publicly traded securities, bonds, and interests in private companies. While it is possible to hold a property in a holding company, it is not always the best option. Consult your tax advisor to find the best solution for your situation.
Do holding companies file tax returns in Canada?
Yes, holding companies must file tax returns every year just like operating companies. Your tax return is due six months after the year-end date, but any taxes you owe will be due two months after the year-end.
How are holding companies taxed in Canada?
Holding companies pay taxes on the taxable income they earn. Holding companies often earn investment returns. This means that the tax rate charged can be significantly higher than that of the operating company.
Bottom line
While a holding company also comes with its drawbacks like more regulations, you would still find many more reasons to create a holding company for added benefits. File your corporate income tax return or your t2 tax return with the help of a tax consultant near me. As far as creating a holding company is concerned, talk to us so we can help.