Holding company

What a holdco actually is

A holdco is a normal corporation used for a particular job. In a common arrangement, the holdco owns the shares of an operating company, or opco, which earns the business income. The opco can pay dividends up to the holdco, and the holdco can keep and invest that money instead of it going straight to the individual owner.

Because it is a corporation, it files its own T2 return, needs its own records and has its own year-end. Setting one up adds a second set of books and a second filing, so the benefit has to be real.

Dividends between companies

Dividends a corporation receives are reported on Schedule 3 of the T2. Taxable dividends from a connected corporation are subject to a special tax, called Part IV tax, only when paying them gives the payer a dividend refund. Dividends from a non-connected corporation are subject to Part IV tax. Whether two companies are connected turns on technical control tests, so confirm the position before moving money. The mechanics are covered on the intercorporate dividends page.

An illustrative example

Suppose, for illustration, an opco has $200,000 of after-tax profit, and the owner personally needs only $60,000 this year. Paying a dividend to a holdco for the surplus keeps those funds available to invest, rather than leaving them in the operating business. What this achieves depends on the corporate and personal tax positions of both companies and the owner.

Limits worth knowing

Investment income earned inside a corporation is not free of tax. For a Canadian-controlled private corporation, the small business deduction business limit is reduced when adjusted aggregate investment income of the corporation and any associated corporations falls between $50,000 and $150,000. A holdco and an opco are often associated, so a holdco’s investment income can affect the opco’s small business limit. This is one reason to review your structure before building a large investment portfolio inside it. The passive income limit page explains the calculation.

What to discuss with your accountant

Ask what specific problem a holdco would solve for you, what it would cost to set up and maintain each year, and how money would move between the companies. Bring your corporate financial statements, your share structure and a note of any plans to sell the business, bring in partners or invest surplus cash. Compare the position with and without a holdco before you act.