Should I set up a holding company alongside my Ontario operating company?

A holding company owns shares of your operating company rather than running the business itself. One common reason to add a holding company is to remove after-tax profits from the operating company quickly and with no further immediate tax — dividends paid between two connected Canadian corporations are generally tax-free under the intercorporate dividend rules. Funds can then accumulate and be invested in the holding company, sheltered from liability claims against the operating business.

This structure does not eliminate tax. It defers personal tax on investment returns until you draw money out of the holding company personally. The passive income rules that can reduce the operating company's small business deduction apply across the associated group, so holding company investment income still counts.

Holding companies also add administrative cost: a separate corporate tax return, a separate bank account, possible bookkeeping fees, and transfer pricing considerations if the two companies deal with each other. For businesses generating consistent profits above personal needs, the asset-protection and investment-deferral advantages often outweigh the cost. For lower-income businesses the overhead may not be worth it. Get advice on whether your profit level justifies the structure.