Set up a holding company

What is a holding company in Canada?

"Holding company" is not a separate legal form in Canadian corporate law. It is an ordinary business corporation, incorporated under the federal statute or a provincial one, whose purpose is to hold assets: mainly the shares of one or more operating companies, and sometimes investments, real estate or intellectual property. It usually has no employees, no customers and no day-to-day operations.

The operating company (often called "Opco") runs the business: it sells, hires, signs contracts and takes the commercial risks. The holding company ("Holdco") sits above it as a shareholder. A founder who owns Opco through a holding company owns the shares of Holdco, and Holdco owns the shares of Opco.

How a holding structure works

1. 1You own the holding companyYou, and sometimes family members or a family trust, hold the shares of Holdco.
2. 2The holding company owns the operating companyHoldco holds all or part of Opco's shares, alongside any other shareholders.
3. 3Profits move up as dividendsWhen Opco pays a DividendDividendShare of profits paid to shareholders by board resolution.See definition →, it goes to Holdco rather than to you personally. The tax treatment of these dividends depends on rules that an accountant reviews case by case.
4. 4The holding company invests or redistributesHoldco can keep the funds, invest them, lend them back under proper documentation, or pay dividends to its own shareholders.

Founders and their advisers look at this structure for several reasons. The most common are listed below; none of them applies automatically, and each one depends on the facts and on the tax rules in force when the structure is used.

• Separating risk: surplus funds moved out of the operating company are generally no longer exposed to the operating company's creditors in the same way.
• Several shareholders: each founder can hold their stake in Opco through their own holding company, with its own decisions on what to do with the dividends.
• Investments: a holding company can hold investments or real estate separately from the business that generated the funds.
• Selling the business or passing it on: a holding structure can be part of a sale, a succession or an estate freeze, which are planned with an accountant and a lawyer.

Steps to set up a holding company

1. 1Validate the plan with your accountantBefore incorporating, an accountant checks whether a holding company fits your income, your plans and the other shareholders, and how the shares should move from you to Holdco.
2. 2Choose the jurisdictionThe holding company can be federal or provincial, and it does not have to be in the same jurisdiction as the operating company. Many founders keep both in the same place to simplify filings.
3. 3Incorporate the holding companyThe articles set the name or number, the directors and the share classes. A numbered companynumbered companyCorporation named after its registry number (e.g. 12345678 Canada Inc.). Skips the name search.See definition → is common for a holding company, since it does not deal with the public.
4. 4Connect it to the operating companyIf Opco does not exist yet, Holdco can subscribe for Opco's shares when Opco is incorporated. If Opco already exists, your shares are transferred to Holdco; a transfer without immediate tax may be possible, but it follows precise tax rules and filings that your accountant handles.
5. 5Update the corporate recordsBoth corporations update their share registers and their registers of individuals with significant control, and pass the resolutions that document the transfer.
6. 6Tax and banking set-upHoldco gets its own business number, bank account and fiscal year. Federal corporations receive their business number at incorporation: BN and RC account issued automatically on federal incorporationsource.

Government fees to incorporate a holding company (sourced)

A holding company pays the same incorporation fee as any business corporation in its jurisdiction. The table shows the registry fee, the usual processing time and the director residency rule in the most common jurisdictions.

• Saskatchewan: $255source.
• Manitoba: $350source.
• New Brunswick: $262 (e-filed, incl. $12 Royal Gazette)source.
• Nova Scotia: $200 incorporation feesource.
• Prince Edward Island: $215 online incorporation feesource.
• Newfoundland and Labrador: $270 onlinesource.
• Yukon: $300source. Online filing: Not available: original signatures requiredsource.
• Northwest Territories: $300source. Online filing: Not available: original signed forms by mail or in person onlysource.
• Nunavut: $300source. Filing by email: Yes: most filings can be e-mailed as PDF attachmentssource.

Each corporation then files its own annual return. Federal annual return: $12 onlinesource, due Within 60 days after the anniversary datesource. A holding structure therefore means two sets of corporate filings, two tax returns and two sets of financial statements.

Questions to review with your accountant

Incorpo does not give tax advice, and a holding structure is first a tax decision. These are the questions founders commonly bring to their accountant before incorporating a holding company:

• Can dividends from my operating company move to the holding company without immediate tax, and which rules could change that?
• How should my existing shares be transferred to the holding company, and which elections must be filed?
• Does holding investments in the holding company, or in the operating company, affect any tax benefit on a future sale of my shares?
• Should family members hold shares, directly or through a trust, and what rules limit income splitting?
• Do the extra annual costs (bookkeeping, two tax returns, two annual returns) make sense for my current income?
• Should the holding company be in the same jurisdiction as the operating company?
• How do I take money out of the holding company for personal needs, and how is it taxed?

Running a holding company after incorporation

A holding company has little activity, but it is still a corporation with its own obligations. Keeping it in good standing matters: a holding company that is dissolved for missed filings no longer owns anything in its own name until it is revived, which can complicate a sale, a bank loan or an estate.

If the operating company has several shareholders, a shareholders' agreementshareholders' agreementContract governing relations between shareholders: voting, share transfers, exits, disputes.See definition → at the Opco level usually needs to reflect that some shareholders hold through a holding company: who signs, who controls the holding company, and what happens if the holding company's ownership changes.

How Incorpo sets up your holding company

1. 1Guided questionnaireYou indicate the jurisdiction, the name or number, the directors and the share classes your accountant has planned.
2. 2Articles and filingWe prepare the articles from your answers, you review them, then we file with the registry and pay the government fee for you, shown separately on your quote.
3. 3Digital minute bookYou receive the certificate and a digital minute bookminute bookOfficial record holding a corporation’s articles, by-laws, resolutions and registers.See definition → with the organizational resolutions and registers, ready to sign online.
4. 4Share subscription or transfer documentsWe prepare the corporate resolutions and register entries for Holdco's subscription or the transfer of your Opco shares, based on the structure your accountant has defined.