Common Cents – Holding Companies for Investment Purposes

As a small business owner, you may be wondering if a Holding Company (HoldCo) makes sense for you. This is a complex topic that is worth exploring with a tax professional.

If your business is accumulating excess cash and you are considering investing, or if you already have an existing investment portfolio owned by your Operating Company (OpCo), a HoldCo may be advantageous. A HoldCo is an incorporated company that exists mainly for the purposes of “holding” assets such as investments and real estate which are typically “passive” and provide passive income.

Potential benefits of a HoldCo are:

The Lifetime Capital Gains Exemption. The LCGE is claimed by Canadian “qualified small business corps” (QSBC) on the sale of shares of the business. In 2022, individuals who qualify may be able to claim up to a $913,630 capital gain exemption. There are two tests to determine if a business qualifies. The first test confirms that at the time of sale or death, 90% of the corporation’s assets are used to earn active business income. The second test looks at the 24 months prior to the sale and confirms that 50% of the corps assets were used in active business. Various “purification” strategies can be used, including the use of a HoldCo to reduce the amount of assets in the OpCo, not being used for active business.

Flexibility. A HoldCo can provide flexibility in the timing of income, allowing for tax deferral. Shareholders may not want a dividend payment at the same time. The OpCo may be able to pay tax-free inter-corporate dividends to the HoldCo. Those dividends can then remain inside the HoldCo until a future date, giving shareholders flexibility.

Future Sale of Business. A business owner may want to hold real estate or investment assets in separate HoldCos if they are considering selling their business. Buyers of the business may be interested in renting the property rather than owning it.

The decision whether or not your business needs a HoldCo is certainly a complicated one. Individual situations vary so tax and legal professional advice is always recommended.

This information, including any opinion, is based on various sources believed to be reliable, but its accuracy cannot be guaranteed and is subject to change.

Jessica O’Brien Cameron is a Wealth Advisor with CIBC Wood Gundy in Victoria. The views of Jessica O’Brien Cameron do not necessarily reflect those of CIBC World Markets Inc. Clients are advised to seek advice regarding their particular circumstances from their personal tax and legal advisors.

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