Why do Ontario business owners set up a holding company to own shares?

A holding company (or "holdco") is a corporation whose primary purpose is to hold shares in another corporation rather than carry on an active business itself. Ontario business owners commonly use holding companies for several reasons.

First, tax deferral: a Canadian-controlled private corporation (CCPC) operating company pays a reduced corporate tax rate on the first portion of its active business income. If the after-tax profits are paid up to a holding company as an inter-corporate dividend — which, in most cases, flows between related Canadian corporations on a tax-free basis under the Income Tax Act — those funds can be invested and grow inside the holding company rather than being taxed immediately in the owner's hands as personal income.

Second, asset protection: holding the operating company's shares in a holdco can insulate retained profits from the risks of the operating business. If the operating company faces a lawsuit or insolvency, assets already moved to the holdco may be protected.

Third, estate and succession planning: a holdco can be structured to facilitate an eventual sale or transfer of the business, including by using different share classes at the holdco level.

There are complex tax rules surrounding inter-corporate dividends, refundable taxes, and passive income, and a holding company structure adds administrative cost. But for many profitable Ontario businesses, the benefits outweigh the costs. A corporate lawyer and tax advisor should be involved in the design.