Holding companies in BC: what a holdco does and when owners set one up

Once a business is earning more than its owner needs to live on, a common next question is what to do with the surplus. Many owners hear that they should set up a holding company, often called a holdco, without being told what it does or what it costs to maintain.

This guide explains the basic structure, the usual reasons BC owners use one, the corporate steps involved and the tax points your accountant will want to review. It is an overview, not a tax plan: whether a holdco helps depends on your numbers and goals.

What a holding company is

A holding company is an ordinary corporation whose main job is to own things rather than to trade. In the most common structure, you own the shares of the holdco and the holdco owns some or all of the shares of your operating company, the opco that actually runs the business, signs the contracts and employs the staff.

In BC, a holdco is formed the same way as any other company. Under section 10 of the Business Corporations Act, one or more people form a company by signing an incorporation agreement, filing an incorporation application with the registrar and complying with the rest of that Part. Under section 30, a company has the capacity and powers of an individual of full capacity, so it can own shares, invest, lend and hold property. If you are still deciding whether to incorporate at all, start with our article on when incorporating makes sense.

Why owners set one up

Moving surplus out of the operating company

Money left in the opco is exposed to the opco's creditors and business risks. A dividend paid up to the holdco moves that surplus into a separate company that does not carry on the business. Under section 70 of the Act, a company may not pay a dividend in money or property if there are reasonable grounds for believing it is insolvent or would become insolvent by paying it, so the transfer has to happen while the opco is healthy.

Deferring personal tax on money you do not need yet

Under section 112(1) of the Income Tax Act, a corporation that receives a taxable dividend from a taxable Canadian corporation can generally deduct it in computing its taxable income. That is why owners often route surplus to a holdco and invest it there instead of taking it personally. It is not simply tax-free: other rules, including a separate tax on certain dividends and the anti-avoidance rule in section 55(2), can apply. Section 55(2) can treat an intercorporate dividend as a capital gain where one of its purposes is to significantly reduce a capital gain on a share. Your accountant needs to review each dividend.

Holding investments or real estate separately

Owners often use a holdco to hold investment portfolios, or the building the business operates from, so those assets are not sitting inside the trading company. Whether real estate belongs in a holdco, a separate company or your own name depends on financing, property transfer tax, income tax and liability considerations.

Planning for a sale, succession or estate

A holdco can make it easier to bring in family members, set up different share classes or plan for the eventual sale or transfer of the business. Our article on estate planning for business owners covers how company shares fit into a will.

When owners usually consider one

• The business earns more than you need personally. Surplus that would otherwise sit in the opco or be paid out and taxed at personal rates is the classic trigger.
• You are about to buy investments or property. It is easier to choose the right owner before a purchase than to move assets later.
• Risk in the business is rising. New leases, larger contracts or more staff increase the opco's exposure.
• A sale or reorganization is on the horizon. Timing matters, and some planning has to be in place well before a deal.

How a holdco is usually set up

• Plan with your accountant first. Agree on who owns the holdco, which share classes it needs and how the existing opco shares will move.
• Incorporate the holdco. Reserve a name or use a numbered company, prepare articles and file the incorporation application.
• Transfer the opco shares. Owners commonly transfer their opco shares to the holdco in exchange for holdco shares. Under section 85 of the Income Tax Act, where a taxpayer transfers eligible property to a taxable Canadian corporation for consideration that includes shares, the taxpayer and the corporation can jointly elect an agreed amount that sets the proceeds and cost. That election is how the transfer can be made on a tax-deferred basis, but it has conditions and filing requirements your accountant will handle.
• Update both companies' records. Each company needs resolutions, updated share registers and share certificates or statements, and filings with the registrar where required.
• Check existing agreements. Bank covenants, shareholders' agreements and leases may restrict a change in who owns the opco's shares.

The ongoing cost of two companies

A holdco is a second company with its own obligations: its own annual report, minute book, tax return, financial statements and bank account. Dividends from opco to holdco should be properly approved and recorded each time, as our article on paying dividends by resolution explains. Owners who set up a holdco and then treat the two companies as one bank account can undo the protection they were trying to create.

Common traps

• Setting one up because someone else did. The benefit depends on your income, your plans for the money and your family situation.
• Moving shares without the paperwork. A transfer that is not properly documented and elected can have unwanted tax results.
• Ignoring the solvency test. Section 70 does not allow a money dividend where there are reasonable grounds to believe the opco is, or would become, insolvent.
• Letting the minute books fall behind. Two companies means two sets of records to keep current.

Thinking about a holdco? Plan the structure before you move shares

Our business lawyers can work with your accountant to set up the holding company, prepare the share transfer and rollover documents, update both companies' share registers and minute books, and keep the annual records and filings for both companies in order.

Call 604-259-2844 or send us a message to arrange a consultation at our Vancouver office.