There are many benefits of creating a holding company. A few benefits of a holding company include:
In this article I will outline and describe the above points to help you decide if you want to form a holding company.
An incorporated business can choose to create a creditor proofing plan. This plan allows an owner to reduce risk and protect their business assets from any possible claims brought up by another party. Having a creditor proofing plan integrated with a holding company can relieve you of some of your debt. It should be noted that this plan should only be created when your business is able to meet debts, generally when they are due. If any asset transfers are made to a holding company with the intent to slow down or defeat existing creditors, the transfers may be overturned. The point of a creditor proofing plan is to structure your business operations to minimize liability for future creditor claims, not current ones.
Transferring Shareholder Assets to a Holding Company
The shareholders of your operating company can transfer their shares to your newly incorporated holding company and make an election under section 85 of the Canadian Income Tax Act. The operating company then declares and pays a dividend in favour of the holding company. Any of the dividend proceeds received by the holding company, which are needed by the operating company, are then loaned back to the operating company. This loan is secured by a general securing agreement covering the operating company’s personal property.
This process can be replicated over time as additional profits are earned by the operating company and in turn paid out to the holding company as dividends and then loaned back. While this method may serve to creditor proof the profits of your operating company, it does not cover the real estate, equipment, intellectual property or other valuable assets which remain with your operating company.
Income Splitting with Multiple Shareholders
You can set up a holding company for the purpose of splitting income so long as your family members are shareholders of the company. This is accomplished by having the holding company pay dividends to each family member who is also a shareholder. The costs of setting up and maintaining a holding company would be equal to setting up a family trust.
Depending on how your board is made up, you as the owner may have less control over the holding company. Also, the $800,000 lifetime capital gains exemption would not be available to the holding company on the sale of shares of the operating corporation.
To Act as a Parent of a Group of Companies
It is possible for a holding company to own multiple subsidiary companies. For example: your holding company could own the shares of your operating business and the shares of a real estate company. The real estate company would normally own the facility from where your business operates. In this setup, the operating company pays rents to the real estate company and any excess profits are paid up to the holding company.
Another example is where your holding company owns the shares of multiples operating companies, each of which conducts a separate business. The reason for setting up a holding which acts as a parent of a group of companies is to streamline and organize business operations and transactions.