Holding company

How BC law treats it

A holding company is an ordinary company, usually incorporated under the Business Corporations Act, SBC 2002, c 57 (BCBCA). Corporate law treats it as a separate person from its shareholders and from its subsidiaries (Salomon v Salomon & Co Ltd, [1897] AC 22 (HL); Kosmopoulos v Constitution Insurance Co, [1987] 1 SCR 2). That separation is what keeps the holding company's assets away from the operating company's creditors, as long as transfers are made for proper reasons and not to defeat existing creditors. Owners often move existing operating company shares into a new holding company on a tax-deferred basis under section 85 of the Income Tax Act, RSC 1985, c 1 (5th Supp). Taxable dividends between connected Canadian corporations are generally deductible under section 112, although Part IV tax under section 186 can apply to dividends from portfolio investments or connected companies that obtained a dividend refund. Section 55(2) can recharacterize a dividend as a capital gain where it reduces a gain on the shares, and section 84.1 targets surplus stripping on transfers by individuals to related corporations. Holding companies are a common building block in estate freezes, family trust structures and reorganizations before a sale. They also bring extra cost: separate financial statements, tax returns, annual reports and minute books. Whether a holding company helps depends on the owner's plans for the cash, the business and succession, and should be planned with an accountant.

What it means for your business

For profitable BC owner-managed businesses, a holding company can protect retained earnings from operating risks, fund investments with pre-tax corporate dollars and set up an estate freeze or family trust. It is not a cure-all. Poorly timed transfers can be attacked as fraudulent conveyances, anti-avoidance rules can turn tax-free dividends into taxable gains, and extra entities add compliance cost. The structure works best when set up before a lawsuit, a sale or a large cash surplus arrives. Example: The founder of a profitable Langley manufacturer transfers her operating company shares to a new holding company under section 85. The operating company then pays surplus cash to the holding company as a dividend, keeping it away from operating creditors while she decides how to invest it.

Risks and common mistakes

Moving cash to a holding company after a claim is threatened, which invites a fraudulent conveyance challenge. Paying intercorporate dividends without checking section 55(2), which can recharacterize them as capital gains. Assuming the holding company protects assets of the parent rather than shielding surplus from the operating subsidiary's creditors. Neglecting the holding company's own annual reports, minute book and tax filings. Setting up a holding company without a clear plan for how the surplus will be used or distributed.