Holding companies are not for everyone. Before deciding to create one, you should weigh the risks and benefits. If you’re looking for an asset protection strategy, you may want to consider other options. We can help you make a great decision about whether or not a holding company is right for your particular circumstances.
When not to use a holding company?
You may want to use a holding company if:
- You’re a large business owner, who might benefit from the lower tax liability that can result from transferring assets through the holding company.
- You are looking for different avenue to reduce your income taxes by placing assets into the name of your corporation and then paying yourself dividends.
You should not use a holding company if:
- You have an asset that’s worth less than $50,000 (in most cases), as there are no significant tax savings available in such cases.
We hope this blog has given you some insight into how using a Canadian holding company can help you save on taxes while protecting your assets.
What is a holding company?
A holding company (or Holdco) is a corporation that owns other companies. These may be subsidiary corporations or other business entities. The holding company does not engage in the active business of its subsidiaries, but rather owns them as investments, or for other purposes such as consolidating tax liabilities.
The use of holding companies can be beneficial if you want to optimize your tax situation and achieve certain financial goals. For example, if you want to protect personal assets from business liabilities, a holding company can act as a shield between these different areas of your life.
What is the economic rationale for holding companies?
Holding companies can be used for several economic purposes, and the reason why an individual or a business would want to use a holding company is:
How do I create a holding company in Canada?
- Find an appropriate name for your holding company.
- Register the name of your holding company with the provincial government where you’ll be setting it up (usually where you live), which is typically done online or by mail in person at your local courthouse or municipal office building (i.e., city hall).
- “Open bank account(s) at financial institutions”. This step takes place after completing steps #1-#3 above since banks won’t allow anyone access into their system unless they have first been verified legally – those who don’t comply may face serious penalties including jail time.
Holding companies come with risks and costs
Tax planning is one of the main benefits of setting up a holding company. However, establishing a holding company involves significant risk and cost. Before deciding if it’s right for you, consider these factors:
- Holding companies can be expensive to set up and maintain. They also require ongoing work to ensure they remain compliant with tax legislation, which can add significant costs to your business.
- There are many rules around how holding companies are taxed in Canada—and these rules can change over time as governments try to close loopholes or make it more difficult for people to use them for tax avoidance purposes. If you’re not careful about keeping your holdings within the law, you could end up paying fines or facing other penalties from the CRA (Canada Revenue Agency).
Conclusion
When you’re thinking about creating a holding company in Canada, it’s important to weigh the costs and benefits of doing so. It can be a useful tool if you want to protect your assets and investments from creditors or invest in other businesses without paying taxes on profits, but there are also risks involved with this type of structure.
