4 reasons to create a holding company
Let's start with when you should not create a holding company
Usually, a holding company doesn't make sense when you do not have sufficient assets to justify the additional tax and legal compliance costs. A simple holding company and operating company structure could cost $5K and upwards a year and would make sense only when the potential tax savings and asset protection exceed that.
Also, this is one of those structures where we highly recommend not to DIY it and use an experienced tax lawyer or CPA to help you structure it as when done wrong it can lead to additional taxes - yes, you read that right.
Reasons to create a holding company
In the complex world of Canadian tax law, the holding company is like that trusted friend who always has your back
1. Shielding Your Assets
"Asset Protection from Legal Liability": Think of your holding company as a financial fortress. It shields your personal assets from the legal battles your operating company might face. In Canada, your holding company can act as a protective moat, making it challenging for creditors to access your personal wealth. It's like having a financial superhero in your corner, ready to defend your assets against potential threats. The way this works is that all significant assets are held by the holding company and then rented or leased to the operating company. And if the operating company gets into trouble - the assets are protected by the holding company.
2. The Tax Shuffle
"Intercompany Dividends and Asset Transfer": One of the holding company's superpowers is its ability to facilitate the seamless transfer of assets from your operating company. How does it work? Through the magic of tax-free intercorporate dividends. This financial maneuver allows you to move assets between the two entities without incurring an immediate tax hit. It's like playing a game of financial chess, where your holding company acts as your queen, strategically moving assets across the board while protecting your wealth from the taxman's checkmate.
3. LTCGE: The Capital Gains Magic Trick
For many Canadian business owners, the Long-Term Capital Gains Exemption (LTCGE) is the golden ticket to significant tax savings. With a holding company, you can access almost ~$1M of capital gains tax-free! How? By transferring assets such as excess cash and investments from the operating company to your holding company. It's like pulling a rabbit out of a tax hat, turning a potentially hefty tax bill into a tax-free treat.
4. Estate Planning
"Securing your legacy": The holding company also plays a starring role in your estate planning endeavours. It's your tool for securing your family's financial future. By transferring your wealth to your holding company, you can ensure a smoother transition to your heirs.
In the intricate world of Canadian tax law, owning a holding company is like having a Swiss army knife in your financial toolbox. It offers asset protection, tax-shuffling capabilities, LTCGE magic tricks, and a secure plan for your estate.