Posts by Jeff Graham, CFP, CLU

When does it make sense to add a holding company?

Holding companies are a common corporate planning tool to hold passive assets, such as real estate, investment portfolios, or life insurance policies. They also will commonly own the operating company shares after a reorganization (Section 85).

So, when is the right time to implement a holding company to your corporate structure?

1. When excess profits (retained earnings) begin to accumulate in your initial corporation (the operating company). These funds are subject to creditors of the business. A properly structured operating company (OpCo), holding company (HoldCo) relationship allows the OpCo to pay tax-free inter-corporate dividends to the HoldCo. This will protect your business’ profits from a lawsuit by a customer, vendor, etc.
2. For tax, succession and legacy planning purposes. There are a myriad of advantages to owning operating company shares via a holding company. Most notably is to maintain eligibility for the lifetime capital gains exemption. Having a surplus of passive assets in the operating company will disqualify you from claiming the $1,250,000 capital gains exclusion on the sale of qualified small business shares. There are other criteria to be met, but keeping investment portfolios and cash value insurance policies outside of the operating company is prudent planning.
3. Another long-term planning opportunity is using a holding company in conjunction with a family trust. This can be a part of a succession plan to bring children into the business or as part of an estate freeze.
4. Lastly, long-term investments, such as real estate, that may outlast the business are best held in a separate corporation from the operating company.

Ultimately, the benefits of a holding company are creditor protection and planning opportunities spanning across tax, succession, retirement and legacy.

NOTE: life insurance policies with cash value should not be held in an operating company. Use a second corporation for these types of policies.

Implementing a holding company needs to be handled by a business lawyer, ideally with input from your tax advisors. Reach out to Jeff Graham if you need a referral to a lawyer specializing in this field, or to get more information if the timing is right to pursue a HoldCo. Jeff can be reached at (604) 363-7549 or jeff@firstoakfinancial.ca.

DISCLAIMER: this commentary is provided for general informational purposes only and does not constitute financial, insurance, investment, tax, legal or accounting advice. Always seek advice from your tax and/or legal advisors prior to implementing any planning strategies.