What is a holding company and why would I want one in Ontario?

A holding company (sometimes called a "Holdco") is a corporation that exists primarily to own shares or assets rather than to actively carry on a trade. In a typical structure, you own shares in the holding company, and the holding company owns shares in your operating company (the "Opco"). Profits earned by the Opco can be paid to the Holdco as tax-free inter-corporate dividends (subject to certain rules under the Income Tax Act), where they accumulate and are protected from creditors of the operating business.

This structure offers several advantages. It protects accumulated wealth: if the operating business is sued or fails, assets parked in the Holdco are generally beyond the reach of the Opco's creditors. It can facilitate estate planning by allowing a freeze of the Opco's current value in the Holdco while future growth accrues to other family members. It can also help preserve eligibility for the lifetime capital gains exemption on the eventual sale of qualifying small business shares.

The structure adds legal and accounting complexity, and the tax rules around private corporations and passive income have become more nuanced in recent years. A business lawyer working alongside your accountant can design the right structure for your situation.