A holding company is a corporation that does not really do anything on its own. Instead of selling products or services, it holds things: shares of other corporations, real estate, investments, cash. People often call it a holdco, as opposed to the operating company, or opco, that actually runs the business.
It sounds exotic, but the idea is simple. Here is how a holding company works in Canada and when it is worth setting one up.
What a holding company is
A holding company is a normal corporation. It is incorporated the same way as any other, federally or provincially. What makes it a holding company is what it does, or rather does not do: it holds assets rather than operating a business. The classic structure is a holdco that owns the shares of an opco.
Why people use one
There are a few common reasons, and they tend to matter more as a business grows.
- Asset protection. Profits the operating company does not need can be moved up to the holding company, out of reach of the risks the operating business carries day to day.
- Tax deferral. Dividends can often move between connected Canadian corporations without immediate tax, letting you park earnings in the holdco rather than pulling them into your personal income right away.
- Investment and estate planning. A holding company can own investments or be used in succession planning to pass a business to the next generation.
How the structure works
In the typical setup, you own the holding company, and the holding company owns the operating company. The opco earns income, pays what it owes, and can pay dividends up to the holdco. Because both are Canadian corporations, that dividend can frequently flow between them without triggering tax right away, which is the deferral people are after. The exact treatment depends on the relationship between the corporations and the type of income, which is where an accountant earns their fee.
Is it worth the overhead?
A holding company means a second corporation: a second incorporation, a second tax return every year, and more administration. That overhead is easy to justify once there are real profits to protect or defer, and hard to justify for a business that is barely breaking even. This is genuinely a numbers question, and it is worth a conversation with a qualified accountant before you build the structure.
Where Korporex fits
A holding company is incorporated the same way as any corporation, and holdcos are often numbered corporations since the name does not face customers. Korporex files federal and Ontario incorporations online, so once you and your accountant decide on the structure, setting up the corporation is quick.