Financial Matters

Holding Companies BC

According to Industry Canada, only 51 percent of small and medium-sized businesses in Canada survive for five years. For those that endure, at least a portion of their success can be attributed to efficient tax planning through the use of holding companies.

A holding company (Holdco) is an intricate tax planning vehicle. A Holdco generally owns the shares of the business owner's operating company (Opco). The Opco carries on the active business and pays out its earnings as a dividend to the Holdco, which then uses the funds to hold diversified investments or pay out income.

article continues below

There are several potential benefits to Holdcos including tax efficiency, creditor protection, income splitting and succession planning.

The advantages can be demonstrated by an incorporated business owner with significant retained earnings. Earnings can be moved over to the Holdco from the Opco on a tax-free basis via an inter-corporation dividend transfer. The Holdco assets are subject to the passive tax rate, but aren't taxed to the individual until distribution.

When an Opco is successful, the business owner will want to take retained earnings out in order to avoid losing their small business status, because 90% of the assets must be used to earn income in the business. Any excess funds in the Opco can be transferred to the Holdco and, if necessary, the funds can be loaned back to the Opco on a secured basis.

Holdcos can also be used for tax deferral purposes. Consider a B.C. small business that earns $500,000 of income and is subject to 13.5% active business income tax. The remaining amount of $432,500 can be transferred to the Holdco for investment purposes. If an individual did not make use of a Holdco and were to instead take the money out as a bonus, it would attract up to 43.7% tax; resulting in only $281,500 available for investment purposes.

Creditor protection is another benefit. Because earnings are transferred to a separate entity, the funds are more difficult for creditors of the Opco to access. Should the owner wish to move funds back to the Opco, the secured status of the funds creates a certain level of protection.

Holdcos can be a useful estate planning tool. Assets can be transferred to heirs through the use of a trust or they can be liquidated at death, thus helping to avoid the possibility of double taxation.

Income can also be spread across family members. If a family member is doing work for the company, income can be paid out through dividends or salary. This allows some of the earnings to be taxed in the hands of the family members, who are presumably in a lower tax bracket. Attribution rules must be taken into consideration though.

Under certain circumstances, Holdcos can help create an estate freeze, enabling accrual of the future growth of the corporation to heirs in a tax-deferred manner. If the estate freeze is done early enough, it can also significantly reduce the amount of taxes payable on death.

The establishment of a Holdco requires careful deliberation, as there are a number of intricacies to consider. They are not suitable for all business owners, so it is imperative to seek advice from a qualified tax professional.

Read Related Topics

© Copyright Bridge River Lillooet News


NOTE: To post a comment you must have an account with at least one of the following services: Disqus, Facebook, Twitter, Google+ You may then login using your account credentials for that service. If you do not already have an account you may register a new profile with Disqus by first clicking the "Post as" button and then the link: "Don't have one? Register a new profile".

The Bridge River Lillooet News welcomes your opinions and comments. We do not allow personal attacks, offensive language or unsubstantiated allegations. We reserve the right to edit comments for length, style, legality and taste and reproduce them in print, electronic or otherwise. For further information, please contact the editor or publisher, or see our Terms and Conditions.

comments powered by Disqus

Question of the Week POLL

Who had the best impeachment moment?

or  view results

Popular Columnists