Hold it!
Woodbridge corporate and securities lawyer, Joseph Chiummiento, of Core Lawyers, discusses strategies used by high net worth entrepreneurs when structuring their affairs using “holding” companies.
Having a plan to build and grow your business and understanding your exit strategy over the long term should be the basis to how you structure your corporate and personal holdings. There are legal structures available that can be used to tax plan, transfer wealth and maximize protections available in law; an example is a holding company.
What is a Holding Company?
In Canada, there are businesses that carry on “active” business, and businesses that are “passive”, and each are taxed differently. A holding company is designed to be a passive holder of assets and is a corporation that was set up for the purpose of holding/owning:
- shares of another company,
- an interest in a partnership,
- an interest in a joint venture or
- an interest in land
- an interest in some other asset like contracts, mortgages, equipment etc.
What Can I do with a Holding Company – An Example
A husband, Jack and wife, Diane own a series of cleaners called Krazy Cleaners, throughout the city of Toronto and each location is a separate corporation. Each Krazy Cleaners files its taxes annually, and the only shareholders (owners) of each location are Jack and Diane. At some point, they want to be able to use funds they have saved up in each of the cleaner corporations to purchase a building or distribute some of the funds to their children aged 18 and 21.
Both Jack and Diane can choose to transfer their controlling shares of each cleaner corporation into a holding company on a tax deferred basis (normally, if you sell shares, the Income Tax Act requires you pay any capital gains tax on the sale, but sections 85 and 86 allow for a rollover of the shares (or assets) to a holding company owned by the same people).
Jack and Diane decide they will be the controlling shareholders of the Holdco – ie. have all the voting rights and control the holding company while their children can become non-controlling shareholders of Holdco. Each of the Krazy Cleaners would be owned by Holdco, and each location can send money to Holdco tax free (or tax deferred). Jack and Diane can then decide how to use the funds in the Holdco which can include purchasing real estate, investing in other Krazy Cleaners locations or declaring a dividend for the shareholders of Holdco (ie. Jack, Diane and their children).
Ask your Accountant or Lawyer
Every business owner meets with their Accountant at least annually and should take the opportunity to ask whether a holding company fits with their long term plans. You may also consult a lawyer. Don’t be afraid to ask; there are no stupid questions.
Direct Line: 905.851.8180 ext. 2
Email: joseph@corelawyers.ca