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What is a Holding Company?

Holding company

Ever been in a chat where the term “holding company” or “HoldCo” popped up and felt a bit lost? Fret not! Let’s dive deep into the HoldCo world, so next time, you’re leading the conversation.



The Basics of Holding Companies

Alright, so picture this: You have a container – this container doesn’t make or sell anything. It just… holds stuff. This container is what we call a “holding company” or HoldCo. The main business activity of a HoldCo is to possess controlling shares or interests in other companies, essentially making them the “parents” to these subsidiaries.



Types of Holding Companies

HoldCos aren’t one-size-fits-all. Here’s a quick run-down:

  • Holding non-operating company: The HoldCo classic! It owns shares of other companies (subsidiaries) and typically doesn’t do much else.

  • Holding operating company: Think of this as a HoldCo with a side hustle. It owns shares in other companies and has its own day-to-day operations.

  • Subsidiary holding company: This HoldCo not only owns shares in other companies but is also owned by another company.


How Do Holding Companies Work?

  1. Owning shares: The go-to approach! A HoldCo owns all or a big chunk of shares in other businesses.

  2. Owning assets: Beyond shares, a HoldCo can also possess other assets such as real estate and financial instruments.

  3. Multi-layer structure: Here, a HoldCo owns another HoldCo, adding more layers to the structure.


Advantages and Disadvantages of Holding Companies

Every coin has two sides, and so does the HoldCo concept.


The Sunny Side (Advantages):

  • Tax planning: Shifting funds between operating and holding companies can lead to potential tax savings.

  • Limited liability and asset protection: In simple terms, this is like your asset’s bodyguard.

  • Lifetime capital gain exemptions: When selling a business, you can potentially save a lot on taxes with this neat perk.

  • Ease of operation: Having a HoldCo can streamline and centralize your business activities.

  • Facilitate Future Expansion: Looking to grow? A HoldCo can be the structure you need for future ventures.

The Not-So-Sunny Side (Disadvantages):

  • Increased costs: Setting up and maintaining a HoldCo does come with its own administration. You will have legal and accounting fees to consider.

  • Complex structure: Not the easiest thing to wrap your head around, especially as the layers increase.

  • Regulatory restrictions: There are certain do's and don’ts for HoldCos.

Got more questions? If things get too overwhelming, we're here to help.


About

Nex CPA is a boutique Canadian digital accounting firm that provides online accounting solutions by combining technology and forward-thinking businesses. Tailored for the modern entrepreneur, we provide an easy, automated and client-focused service so you can focus on working 'on' the business and not 'in' the business.


For more information, please contact us at info@nex.cpa.


FAQ


What business size should have a HoldCo? No size restrictions here, but weigh the pros and cons based on your unique situation.


How to create a Holding Company? It’s like incorporating any other business in Canada. Just decide if you’re going federal or

provincial.


Holding Company VS Operating Company? HoldCos focus on assets and investments. Operating companies are the ones hustling daily to provide goods and services.


Can a holding company own real estate in Canada? Absolutely! But let’s chat to see if that aligns with your business goals.


How are Holding companies taxed in Canada? They’re subject to taxation on their taxable income, but with a few exceptions.


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