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
your
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
watching
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