A Scarborough Holdco Plan That Arrived Weeks Too Late

The situation

Thalia and Kostas had built their company over six years into a steady operation servicing industrial and commercial equipment across the east end of the city, combining Thalia's background in IT systems support with Kostas's trade as a millwright. Between them they had figured out a niche most competitors ignored — keeping the automated control systems and the mechanical equipment they governed running together as one contract rather than two separate service calls. The business had grown to roughly $2.8 million in annual revenue, and it had done what a lot of successful small companies do: it kept its profits. Rather than paying out large dividends every year, the two founders had left most of the surplus sitting inside the company as retained earnings, building up to about $550,000 in the corporate bank account, mostly because neither of them had gotten around to deciding what to do with it.

A colleague had mentioned, almost in passing, that keeping that kind of cash inside an operating company was risky — if the business were ever sued, or a supplier or the tax authority came after it for money owed, that cash sat right there as the first thing available to satisfy a judgment. The colleague suggested a holding company structure: a separate corporation that owns the shares of the operating company and can receive its surplus cash as tax-free dividends between connected corporations, keeping that money one legal step removed from the operating company's day-to-day risks. Thalia and Kostas came to Treadstone Law wanting exactly that — a holdco, set up properly, as soon as possible, before anything happened that made it too late.

What the review found

Before drafting any incorporation documents, our team asked the standard due-diligence questions: was the company aware of any outstanding claims, demand letters, or disputes with customers or suppliers? Kostas mentioned, almost as an aside, that a customer had sent an email about six weeks earlier complaining that a piece of equipment had been damaged during a service call, and that the customer's operations manager — Jasleen — had since followed up in writing suggesting the company should cover the cost of a replacement, running to roughly $95,000.

That single fact changed the shape of the engagement. A holding company structure works by moving cash out of the operating company through dividends, and that is entirely legitimate when done for genuine planning reasons before any liability exists. But Ontario's Fraudulent Conveyances Act allows a payment or transfer of assets to be set aside by a court if it was made with the intent to defeat, hinder, delay, or defraud a creditor — and a formal complaint that had already identified a dollar figure and threatened legal action counted as exactly the kind of claim that provision exists to protect. Moving the $550,000 in retained earnings into a new holdco now, after that email, would not have been ordinary tax planning. It would have looked like an attempt to move the company's only real asset out of reach the moment a creditor appeared, and Jasleen's lawyer would have had a strong argument to unwind the transfer and put the money back within the operating company's reach — with the added risk that a court could take a dim view of the directors' conduct in the process.

The retained earnings that had already accumulated, in other words, could not be fully protected. But the company kept operating and kept earning, and every dollar of profit made from that point forward was a different story.

What we did

1. Separated the past from the future. We were direct with Thalia and Kostas about what could and could not be salvaged. The $550,000 already sitting in the company needed to stay available to deal honestly with the claim, either through settlement or a defended dispute. Trying to shield it now would create legal risk of its own without any real chance of succeeding.
2. Incorporated the holding company under the Ontario Business Corporations Act. We set up a new corporation for Thalia and Kostas, with each founder holding shares in the holdco in the same proportion as their existing ownership of the operating company.
3. Completed a tax-deferred share exchange. Using a rollover mechanism available under the Income Tax Act, Thalia and Kostas exchanged their personally held shares in the operating company for shares of the new holdco, which then became the direct shareholder of the operating company. This preserved their original tax cost and avoided triggering an immediate personal tax bill on the exchange.
4. Put a dividend policy in writing. We drafted board and shareholder resolutions setting out that, going forward, surplus cash generated by the operating company beyond a working-capital buffer would be declared as an intercorporate dividend to the holdco on a regular schedule, rather than left to accumulate indefinitely inside the company that carried the operating risk.
5. Coordinated the claim separately. Working alongside litigation counsel, we treated Jasleen's claim as a live matter to be assessed and negotiated on its own terms, using the funds still held in the operating company, rather than letting the restructuring project become entangled with it.
6. Documented the sequence carefully. Every step — the incorporation date, the share exchange date, and the first dividend declared to the holdco — was dated well after the claim had been identified and after a genuine settlement reserve had been set aside, so the new structure would hold up if anyone ever asked why it was created.

The outcome

The claim from Jasleen settled a few months later for close to $85,000, paid from the operating company's funds — a modest reduction from the amount first raised, reached after some negotiation over the actual cost of the replacement equipment. That payment came directly out of the retained earnings that had already accumulated before the restructuring began, exactly the outcome our team had flagged as unavoidable from the outset. Roughly $465,000 of the original $550,000 remained in the operating company afterward, still exposed to the ordinary risks of running the business rather than sitting safely in the holdco.

What the holdco structure did protect was everything after it. In the first full year following the reorganization, the operating company generated close to $210,000 in surplus cash beyond its working-capital needs, and that amount moved to the holdco as a tax-free intercorporate dividend on schedule, out of reach of any future claim against the operating business. Thalia and Kostas now had a structure that would keep doing that work year after year — just not one that could reach back and rescue money that had already been earned and left exposed before anyone thought to protect it.

Neither founder was happy about the settlement, but both understood, once it was explained, why trying to move the older money would have made things worse rather than better. A court unwinding a late transfer does more than put the cash back — it can cast doubt on the entire restructuring and invite closer scrutiny of the founders' conduct as directors. Accepting the loss on the older funds, while locking in real protection for everything earned afterward, was the more defensible position, and it left the company with a clean structure to build on rather than a contested one to defend.

What you can learn from this