Benefits of Using a Holding Company | 4 Reasons To Consider A Holding Company For Your Business

hi my name is Steve Parr and I'm a

Vancouver business lawyer and today

we're gonna talk about holding companies

what they are and why you might benefit

from having one of them in your small

business structure so holding company is

a little bit different than your typical

operating company so in a holding

company it's not selling anything

they're not is not taking in revenue

doesn't have expenses or payroll it's

not really a business in that sense of

the word instead what a holding company

does is that it holds assets so it holds

assets for tax reasons and for liability

reasons and we're gonna get into all of

that in just a minute so typical assets

of a holding company are other companies

so a holding company may hold one or

multiple different operating companies

or it may hold real estate assets or it

might even hold an investment portfolio

there are four main reasons why you

might want to consider using a holding

company in your small business structure

let's go over each of those right now so

number one asset protection number two

maintaining your eligibility for the

lifetime capital gains exemption number

three for use as an investment vehicle

and number four the timing of dividend

payments out of your company so that's a

lot so we're gonna break it down one by

one so at the top let's go to asset

protection so number one a holding

company is a very effective strategy for

protecting the earnings from your

operating company so typically this is

how a structure would look like if you

just have one shareholder and they're

operating companies so let's take

tim-tim the small business owner

tim owns a t-shirt company and he is the

sole shareholder of his operating

company tim's t-shirts tim's t-shirt had

t-shirts had a great year they made a

million dollars and Tim is trying to

figure out what to do with that cash he

could leave it in the corporate bank

account or he could pull it all out into

his personal account and do whatever he

likes with it whether it's personal

expenses or if it's making his own

investments so the drawback of pulling

it all out is of course taxes he's going

to blue

about half of that income straight is

going to go straight to taxes so whereas

if he leaves it in the corporate bank

account he's going to be subject to the

corporate tax rate and it's gonna be a

lot lower a lot better for Tim but the

problem with leaving all that cash in

the operating account is that Tim's

t-shirts has relationships with

customers with suppliers with the

Landlord where they're renting their

facility to produce the t-shirts so

there's all to cut all kinds of

relationships that center around that

operating company and if something goes

wrong with one of those relationships

his cash which is kept in the corporate

bank account could be exposed to a

lawsuit so far better off for Tim to set

up a holding company at this point where

Tim would be the owner the sole owner of

the of the holding company the holding

company in turn is going to be the owner

of the operating company and the

operating company will dividend out

tax-free all of the cash that it doesn't

need for its ongoing day-to-day

operations - the holding company and

that cash will sit there until Tim

decides it needs to pull it out for

himself or if he wants to use it for

investments or other purposes so let's

turn now to the second reason for

maintaining a holding company and that's

making use of the lifetime capital gains

exemption so every Canadian is entitled

to eight hundred and eighty thousand

dollars of a lifetime capital gains

exemption on the sale of qualifying

small business shares so the important

part is making sure that your shares in

your company maintain those

qualifications - so they can be called

qualified small business shares and

there are a number of important steps

that need to be taken in order to make

that happen and you can discuss those

with your accountant but one of them is

to make sure that there's not any excess

cash in your operating company so your

operating company needs to meet a

certain threshold of how much cash can

be actively used in the business ninety

percent of the of the assets of your

operating company need to be actively

employed in the business otherwise the

shares in that company will not be well

not qualify for the lifetime capital

gains exemption so this is a very

important thing to keep in mind and if


is throwing off a lot of cash is

generating a lot of cash and it's

essential that you set up a holding

company now it's turn to the third

reason for using a holding company is it

can be used as an investment vehicle so

rather than keeping all that cash in the

operating company or pulling it out onto

the personal side and then making

investments from the personal side and

being subject to those heavy personal

taxes a holding company allows you to

get the best of both worlds so the cash

comes out of the operating company into

the holding company and then from there

it's taxed on the corporate rate and can

be used for investment portfolios for

purchasing real estate and for

purchasing shares and other companies

now let's turn to the fourth reason why

a holding company could be beneficial

for you so if your operating company

Timms t-shirts in this case has three

shareholders say so Bob Tim Julia so Bob

Tim and Julia each have a share in the

company they all have different

financial needs and they're gonna want

to take payments or dividends out of the

company at different times but if they

all own the same set of shares the same

class of shares then when a dividend is

issued by the company everybody has to

receive a dividend at the same time and

this might not be tax beneficial because

if there's a hundred thousand dollars of

dividends to go out and so a

thirty-three thousand approx goes out to

each of those shareholders then that

might not produce a favorable tax result

on the personal side so if each of those

shareholders sets up a holding company

in place then timing is not really an

issue because the cash will get taxed on

the corporate side in the operating

company or it will get taxed on the

holding company side it doesn't really

matter where the cash sits so a holding

company can be really useful if you have

an operating company that has multiple

shareholders and each of those

shareholders needs to get the cash

through dividends at different times so

there are four reasons why a holding

company can be beneficial for your small

business structure this is complex stuff

and if you have any questions I strongly

encourage you to talk to your accountant

or reach out to me directly I'm happy to

respond to your questions thanks for