When Should You Set Up A Holding Company?
Updated: September 2026
Business owners, landlords, and investors often consider various structures to optimize their financial and tax situation. One popular strategy is the establishment of a holding company or holdco.
Understanding Holding Companies
A holding company is a type of business entity that primarily exists to own stocks, real estate, interests in other companies, or other assets.
Unlike operating companies or opcos that engage in business activities and generate business revenue, a holding company's main purpose is to own and protect its holdings. The advantages of having a holding company can include tax benefits, asset protection, and improved succession planning.
Key Reasons to Set Up a Holding Company
1. Tax Deferral and Withdrawal Flexibility
A holding company can offer significant tax deferral for owner-managers. Instead of the earnings being distributed as personal dividends and being taxed personally before investing, corporate earnings can flow to a holding company as a generally tax-deferred intercorporate dividend. Although the holding company can normally deduct the dividend, Part IV tax and other tax rules may apply depending on the circumstances.
This can result in more after-tax funds being available for investment in the holding company compared to if those funds were paid as a personal dividend and invested personally. The holding company can also provide more flexibility over when shareholders withdraw money personally and pay the resulting personal tax.
This may allow personal income and tax to be spread over time. However, dividends paid to a spouse or other family member may be subject to the Tax on Split Income (TOSI) rules, so a holding company should not be viewed as an automatic income-splitting strategy.
2. Creditor Protection
A holding company can be used to own assets such as land or a building that are essential for the operating company to use. By placing such assets into a holding company, there may be an added layer of protection against creditors and potential liabilities arising in the operating company.
Along with key assets, the operating company can flow excess retained earnings to the holding company as a generally tax-deferred intercorporate dividend to help create some separation between those earnings and creditors. These funds may be meant for the owner-manager’s retirement and not for use by the opco.
Creditor protection is not guaranteed and can depend on when and how assets are transferred, existing liabilities, personal guarantees, and applicable provincial law. Legal advice should be obtained before relying on a holding company for asset protection.
3. Lifetime Capital Gains Exemption
Individuals who sell qualified small business corporation (QSBC) shares may be able to claim the lifetime capital gains exemption (LCGE). Several conditions must be met, including tests relating to share ownership and the corporation’s use of its assets during the 24 months before the sale, as well as a requirement that generally requires at least 90% of its assets be used in an active business in Canada at the time of sale.
Excess cash or investments in the operating company may put it in jeopardy of meeting these tests, so flowing excess cash out to the holding company may help preserve the operating company’s eligibility for the lifetime capital gains exemption. This may reduce the shareholder’s personal tax when qualifying shares are sold.
4. More Flexibility to Sell a Business
By having a holding company that owns assets such as land or a building, this may make the operating company more attractive to buyers who are only interested in the operating side of the business. Keeping those assets outside the operating company may allow a buyer to acquire the business without also purchasing the underlying real estate, potentially reducing the purchase price, and simplifying the transaction.
The holding company can continue to rent the land and building to the buyer or to someone else, or the property could be sold separately in the future.
Potential Disadvantages of a Holding Company
A holding company also creates additional costs and complexity, including incorporation and legal costs, annual corporate tax returns, bookkeeping, and corporate record-keeping. Investment income earned in the holding company may be taxed at relatively high corporate rates and can affect access to the small business deduction for associated corporations. The potential benefits should therefore be weighed against the ongoing costs.
In Conclusion
Establishing a holding company in Canada can offer numerous advantages, particularly in terms of asset protection, succession planning, and tax efficiency.
However, the decision to set up such a structure should be made with careful consideration of individual circumstances, and in consultation with tax professionals and legal advisors.
Understanding when and how to best utilize a holding company as part of your business strategy can lead to significant long-term benefits.
Book a complimentary introduction call with us to learn more about holding companies and how they can help achieve your corporate financial goals.
This article is intended for educational purposes only and does not constitute personalized advice. The strategies and information discussed may not be suitable for your individual situation or may not be up-to-date and current. Please seek guidance from a licensed professional for advice specific to your circumstances.
