FAQ Series: My business is growing; should I have a holding company?

‘Should I have a holding company?’

Is a common question that I get from a lot of business owners.

 

Whether you are just starting up a new corporation or if you are growing your business and looking at how to invest some excess cash, it is important to think about how a holding company might benefit you (or not benefit you) before setting one up. Thanks to Canadian tax law changes in the last few years, the traditional holding company tax plan doesn’t always look the same as it used to. Here’s what you need to consider:

 

Do you have excess cash from an operating company?

One of the most common reasons for setting up a holding company is that you have an actively operating business that is generating excess cash that you don’t need in the business (or personally), and you want to be able to invest it outside of your business. By having a holding company own the shares of your operating company, you can pay dividends from your business to your holding company without incurring any further tax, which allows you to keep more cash for investment purposes. By comparison, if you paid the same dividends to yourself directly you could be paying an extra 15% to nearly 50%, depending on your income level. That can add up to a lot of extra cash for investment in your holding company!

 

What is your plan for the future?

If you’re planning to sell your business sometime in the foreseeable future, then having a holding company might not be the best plan for you because you could potentially miss out on up to $883,384 of capital gains exempt money if your business meets the criteria as a Qualified Small Business Corporation (and many small to medium sized businesses do!). In some cases, this could mean a roughly $200,000 tax savings!

 

On the other hand, if you have no plans to sell your business or you think it is likely that you will pass your business on to the next generation as you retire, then having a holding company might be a fantastic plan for you because you can build up assets inside the corporation and draw them out slowly in retirement which will produce a larger tax savings. And potentially even income split with your spouse when you are over 65, to save even more in taxes.

 

It’s a tough question

In the end, there is no quick and easy rule that determines whether or not you should have a holding company. It’s a case by case determination, and it really is determined quite a bit by your own personal situation and your plans for the future which is why it’s always a good idea to talk it through with your tax advisor.