One of the most significant advantages of a holding company is the potential tax savings they may offer in the form of tax deferral and income splitting opportunities where this can’t be accomplished within the operating company itself (i.e.
where there may be multiple arm’s length shareholders of the operating company, for example).
In addition, in most cases the annual investment income earned inside the holding company will be subject to a similar tax rate as you would pay personally so there is no significant disincentive to earning investment income inside a corporation.
As illustrated above, holding companies are quite beneficial where you have a number of shareholders owning one or more operating companies.
This is a question clients who already own (or may be looking to buy) one or more operating companies, often ask their MNP tax professional.
Unfortunately, like most things in life, there is no clear answer and it really depends on the client’s unique situation and, often, personal preference.
Structuring of this type of partial buy-in is delicate, to ensure that the interest expense is offset against taxable income as opposed to tax-free inter-corporate dividends, which could nullify the immediate tax benefit.
The timing of the withdrawal of the funds from the holding company, again in the form of dividends, can be controlled by the individual shareholder and taken out years into the future on a gradual basis to benefit from both the tax deferral and potential tax savings if they (or other family member/shareholders) are in a lower tax bracket at that time.They also allow other family members to share in the operating company profits, perhaps by holding non-voting shares of the holding company.This way, there is no impact on the operation or control of the operating company, or any of its other shareholders.Since the capital gains exemption is only available to individuals and not holding companies, proper structuring of the shareholdings of the operating company is essential to allow for this ongoing purification on a tax-deferred basis using the holding company, while still providing the individual shareholders potential access to the capital gains exemption on a sale of the operating company shares.In many cases, family trusts may be utilized in the corporate structure to facilitate this.Holding companies also play a key role in business acquisitions and divestitures.