Guide
Holding companies in BC: how they work and when they help.
A holding company owns shares of your operating company, or holds investments, instead of you owning them personally. Used well, it protects surplus, adds flexibility and supports a future sale.
How money moves
Dividends paid from your operating company to your holding company are generally received tax-free, so profit can move up for investing or protection without personal tax. Part 4 tax and the safe income rules can apply in some cases, so each dividend is checked first.
Why owners set one up
- Protection: surplus moved out of the operating company is shielded from its business risks
- Investing: surplus can be invested without personal tax first
- Sale: keeps excess cash out of the operating company so its shares can stay eligible for the lifetime capital gains exemption
- Estate planning: supports freezes and succession to the next generation
Investment income inside a corporation
Passive investment income is taxed at a high rate upfront, and part of that tax is refunded when the corporation pays taxable dividends. Tracking those refundable tax accounts matters. Capital gains have an untaxed portion that can often be paid out tax-free through the capital dividend account.
If your associated companies earn more than $50,000 a year of passive investment income, the operating company's small business deduction shrinks by $5 for every $1 over, and it disappears at $150,000. Investment choices and timing can manage this.
Setting one up
A lawyer usually incorporates the holding company and reorganizes the shares, often with a tax-deferred rollover under section 85 of the Income Tax Act. We model the tax side with your lawyer before anything is signed.
When it isn't worth it
If your company doesn't generate surplus beyond what you take out each year, a holding company adds another set of filings and fees without much benefit.
Have a question about your situation?
Book a call