Whether you’re a small business owner or hold a portfolio of investments, it’s important to evaluate whether establishing a holding company, or “Holdco,” is beneficial for your circumstances. Holding companies have long been a popular strategy for entrepreneurs looking to manage assets, optimize taxes and protect their business wealth from operational risks. But are they still the right choice for today’s business owners? In this article, we explore the evolving benefits that Holdcos offer to help you determine if they align with your financial and business goals.
What is a holding company?
To understand what a Holdco is, it helps to compare it to an operating company. Your primary business – the one that sells products or services to clients – is an operating company. It generates revenue, incurs expenses and is subject to its own taxes and regulations.
A Holdco, on the other hand, serves as a financial vessel, grouping a company’s passive income and assets such as investments, real estate or dividends under a separate entity. Its primary function is to hold and protect these assets, assisting business owners in areas such as tax optimization, estate planning and succession.
How much does a holding company cost?
If you’re thinking of starting a Holdco, it’s advisable to consult an expert to understand the associated costs that come with it. These costs can vary depending on the size, structure and complexity of assets in your company. For example, managing investments for a small local business differs from managing multiple properties and international stocks – resulting in cost and fee variations. Some of these costs include:
- Accounting and legal fees: Legal fees (external link) and other costs associated with incorporation, professional consultations, bookkeeping or tax planning (external link).
- Ongoing compliance costs: Annual registration fees, tax filings and government reporting requirements, which vary by province and corporate structure.
Before establishing a Holdco, it’s important to consult with an advisor to evaluate the potential tax benefits, asset protection and long-term financial advantages, as well as the ongoing expenses, to determine whether it’s an appropriate strategy for you. It’s a good idea to seek advice from both a lawyer and an accountant to obtain a thorough understanding of a Holdco and how it may benefit your business.
Learn more
If you’re interested in exploring different company structures and determining which is best suited for your business needs, the following articles offer valuable insights:
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What are the benefits of a holding company?
Holdcos have traditionally been used as a tool for tax efficiency and asset management. While tax laws have evolved over time, Holdcos still offer several key advantages depending on your situation. In the current Canadian environment, establishing a Holdco can be advantageous for certain individuals and businesses.
Here are some key scenarios where forming a Holdco might be beneficial:
Asset protection
As a business owner, it’s important to consider how you structure the ownership of your assets, such as land, buildings and vehicles, as well as how you conduct your business operations. In reality, economic shifts and unforeseen events can affect even the best of businesses. Life can throw unexpected challenges your way, and although it’s great to be optimistic, being prepared for these challenges is key. By setting up a Holdco, you can gain more control by protecting assets such as investments and real estate from any risks associated with business operations.
As for individual shareholders, a Holdco also offers greater control over their share of profits. Since each shareholder may have different financial goals, this structure allows them to:
- Manage investments strategically: Funds in a Holdco can be reinvested in new business ventures, real estate or financial markets with their own unique taxation.
- Plan for retirement: Shareholders can decide when and how to draw down their investments when it’s time to retire, potentially optimizing their tax burden over time.
- Enhance decision-making power: Shareholders can have greater control over how and when their profits are accessed or reinvested.
A Holdco can offer greater autonomy in financial planning, making it a valuable tool for both long-term wealth protection and strategic investment opportunities.
Long-term tax efficiency
Taking the time to sit down with your advisor can help you map out the future and plan the best tax optimization strategy for your business. Things can change for you both personally and professionally, so when strategizing the structure of your income for long-term efficiency, it’s important to consider future milestones such as your retirement or the transfer of your business.
Good to know: Tax regulations evolve over time. Be sure to check the latest guidelines from the Government of Canada to better understand tax regulations on a Holdco.
Simplifying the sale of your business
If you’re thinking about selling your business in the near future, it might be a good idea to hold any real estate in a separate Holdco. This will allow potential buyers who are only interested in the core business assets to easily acquire them without the added burden of owning the property. In fact, some buyers may prefer to rent the property used for the business rather than purchasing the land or building, meaning you could attract a wider range of buyers.
Lifetime Capital Gains Exemption
Some business owners may qualify for the Lifetime Capital Gains Exemption (LCGE), which allows them to deduct a significant portion of the capital gains from taxable income – potentially saving thousands of dollars in taxes. This works well if your business primarily generates active business income. However, if your company has substantial passive income streams – such as rental income, investment earnings or excess cash – it may not qualify for the capital gains deduction.
Succession planning
One great benefit of setting up a Holdco is that it allows for estate freezes and succession planning. An estate freeze is a strategy where the current value of a company’s shares is locked in for the original shareholders, and any future growth in value is passed on to the next generation. This can be combined with the Lifetime Capital Gains Exemption (LCGE), enabling business owners to claim any eligible LCGE at the time of the estate freeze. The business owner’s ability to claim the LCGE remains unaffected by the company’s future direction. Essentially, an estate freeze can be used to transfer the future growth of a corporation to the next generation, ensuring that the company’s increase in value benefits them directly.
Is a holding company still right for you?
If you’ve been running your business for several years, it’s worth reassessing whether a Holdco could serve your business goals. Tax regulations and fiscal policies evolve over time, affecting many businesses, and what worked in the past may no longer be the most effective strategy today. It’s important to note that while a Holdco can contribute to a powerful business structure, its benefits depend on your specific situation. Consulting a financial advisor can help you determine if maintaining, restructuring or dissolving your Holdco is the best decision for your business and long-term wealth management.