Holding Company Setup In Canada

For many business owners, setting up a holding company can mean reducing tax burden and reducing shareholder liability 

In this article, we review what a holding company is, as well as any tax requirements business owners need to be aware of and what the process looks like for a holding company setup in Canada.

How To Set Up A Holding Company

When setting up a holding company in Canada, working with a corporate lawyer can provide much-needed guidance for the process.

Here is what the process could look like.

1. Decide which jurisdiction and structure would work best for your holding company

There are several jurisdictions to consider in Canada, and every one has certain requirements and benefits. It would be best to work with your lawyer to determine which jurisdiction would be a good fit for your holding company. This includes whether you will be registering your company on a provincial or a federal level.

2. Pick a name for your holding company that is not used elsewhere and suits your business

Ensure that your planned business name has not already been used, and register it accordingly in the jurisdiction of your choice.

3. Begin the process of compiling the articles of incorporation

Your articles of incorporation are vital when it comes to documenting your company name and address, as well as the names of directors (if chosen already). Having incorporated hundreds of businesses for clients, Parr Business Law can simplify this process.

4. Acquire all needed licenses and permits

Make sure that you know which regulations apply to your business and which licenses and permits you will need.

5. Choose your shareholders and directors

Your directors will be in charge of managing your holding company, whereas your shareholders will indicate who owns your holding company.

6. Ensure that you open a business – and not a private – account

Always keep your personal and business transactions separate – this will help you maintain transparency and keep your records accurate and up to date.

7. Register your holding company for taxes

Registration is vital for you to get a business number, as well as helping you understand which tax responsibilities you need to prepare for.

8. Keep your business reporting up to date

Make sure that your financial records are always up to date and that you know which tax deadlines will apply to your business.

What Is A Holding Company?

A holding company, which is often referred to as a Holdco, typically is a non-operational business unit. This means that unlike regular company structures where services are provided or products are manufactured and sold, a holding company does not deal with these processes.

Rather, a holding company serves as a financial vessel that takes ownership and control of assets. These companies have no income streams and “hold” investments, which could include interest in other companies (called subsidiaries), or even stocks or real estate. They are usually called holding non-operating companies.

Holding companies can be seen as parent or “umbrella” companies that actively partake in the management of their subsidiaries’ policies. They do not, however, handle any daily operations that would be typically seen in traditional company structures.

These types of companies also aren’t affected when their subsidiaries suffer any losses, and they will not be hold responsible in any way.

An important note here is that together with non-operating holding companies, there are two additional types of holding companies, namely holding operating companies and subsidiary holding companies.

Operating holding companies, together with owning all or most of the shares that they manage, also run their own business operations and could earn revenue streams.

On the other hand, a subsidiary holding company not only has control over shares, but this company itself is also owned by another company.

The Cost To Set Up A Holding Company

Your holding company will have several costs related to setting it up and operating it. Notably, there will be annual legal and tax filings that need to be made. You should consult your attorney and your accountant to get a better handle on the costs.

Canadian Holding Company Tax Rate

Holding companies are not exempt from tax responsibilities. The tax they will be liable for will depend on the income that they have earned. This often translates to investment income.

A basic rate of Part I tax for corporations in Canada is 38% of taxable income, 28% after federal tax abatement.

Also, holding companies are still responsible for filing annual tax returns, which makes it important to consult with a financial adviser on how to approach filing to ensure that everything is above board.

Advantages Of a  Holding Company?

• Asset Protection

• Tax Savings

• Estate Planning

Watch the video below to know the Benefits Of A Holding Company.

Disadvantages Of A Holding Company

• Costs associated to setting up and maintaining a holding company

• Added complexity

Holding Company Examples

Several big - and familiar - business names operate as holding names. These include Goldman Sachs, Nestle, Alphabet (owners of Google) and JP Morgan.

In the case of Google, this familiar business became a subsidiary of Alphabet in 2015 , with Sundar Pichai of Alphabet Inc. becoming Google’s new CEO.

Interestingly enough, well-known beauty brand Johnson & Johnson also operates as a holding company, tasked with research and development, as well as the manufacturing of goods, as well as sales of consumer products.

Another famous example is Berkshire Hathaway which owns assets in companies such as Dairy Queen, Fruit of the Look and The Coca-Cola Company, among others. 

Summary

• A holding company, also called a Holdco, is a non-operational business unit. 

• A holding company usually does not provide services or products, or manufacture goods.

• You can start a Holdco at any time.

• A Holdco can reduce your liabilities and provide tax benefits.

FAQ

Have a look below at some of our most frequently asked questions – do not hesitate to get in touch if you have any further queries!

1. What is the purpose of a holding company?

A holding company is used to protect assets and reduce liability through asset management.

2. What are the benefits of a holding company?

Over and above tax benefits, a holding company can play a key role in asset protection plus in succession planning.

3. What are the disadvantages of a holding company?

Together with a potential lack of transparency, a holding company could also be susceptible to unsavory busy practices, such as exploiting subsidiaries to conduct their business in a certain way or trade with other subsidiaries at elevated costs.

4. What does the structure of a holding company look like?

The parent company – that is the holding company - will be in charge of subsidiary assets and have several business units.

5. When can I consider starting my holding company?

There is no set time for starting your holding company. It is a worthwhile move when you want better asset protection or if you want to branch out your business.

 6. What are holding company tax requirements in Canada?

In Canada, holding companies are taxed on their taxable income earned, similar to other types of corporations. Dividends paid out by subsidiaries are exempt from tax, and holding companies must file a tax return annually within six months of the fiscal year-end. Any taxes owed must be paid within two months

7. How do you set up a holding company in Canada?

As a starting point, you need to decide on a business name and whether you will register your business on a federal or provincial level. Next, you will need to proceed with getting the needed permits and licenses as called for in the jurisdiction where you will be operating.

https://www.nbc.ca/business/advice/money-and-finances/holding-company.html

https://www.wallstreetmojo.com/holding-company-examples/