Holding Companies in Canada: Tax Planning Advantages
- Arshya Mittal
- Aug 17
- 3 min read
Updated: Aug 17
As your business grows and wealth builds, you may start hearing about the benefits of a holding company. But what exactly is it, and how can it help you save taxes, protect assets, and plan for the future?
At Mittal CPA Professional Corporation, we guide entrepreneurs, investors, and families through the process of setting up and using holding companies effectively.
What is a Holding Company?
A holding company is a corporation that owns shares or investments in other companies, rather than running day-to-day operations itself.
For example:
Your operating company runs your business, earns revenue, and pays expenses.
Your holding company sits on top, owning shares of the operating company and receiving dividends.
This separation allows for tax deferral, asset protection, and long-term planning.
Key Advantages of a Holding Company
1. Tax Deferral & Lower Rates
Dividends paid from your operating company to your holding company are generally tax-free inter-corporate dividends.
This lets you keep profits inside the corporate group instead of withdrawing them personally, deferring personal taxes until later.
2. Asset Protection
By moving excess cash or investments into a holding company, you protect them from risks in the operating company (lawsuits, creditors, or business failure).
3. Estate & Succession Planning
Shares in a holding company can be restructured to help with income splitting, passing wealth to children, or using the Lifetime Capital Gains Exemption (LCGE) when selling a business.
4. Investment Flexibility
A holding company can hold real estate, stocks, or other investments, often at lower corporate tax rates compared to personal taxation.
5. Dividend Sprinkling (with Rules)
Holding companies can sometimes be used to distribute income strategically among family members, though you must follow CRA’s Tax on Split Income (TOSI) rules carefully.
Example: How a Holding Company Saves Taxes
Scenario 1: Business Owner Without a Holding Company
Operating company earns $500,000 profit.
If owner withdraws all funds personally, taxed at personal marginal rates (up to 53% in Ontario).
Scenario 2: With a Holding Company
Operating company pays a tax-free dividend of $300,000 to the holding company.
Funds remain invested corporately, deferring personal tax until withdrawn later.
Owner only takes what is needed personally, taxed strategically through salary/dividends.
Result: Better cash flow, deferred taxes, and asset protection.
Common Misconceptions About Holding Companies
“It saves me from paying taxes completely.”
Not true — it helps with deferral and planning, but taxes are owed when funds are withdrawn personally.
“Only large corporations use them.”
Even small business owners and real estate investors can benefit.
“It’s too expensive to set up.”
While there are legal and accounting fees, the tax savings and asset protection usually outweigh the costs.
FAQ: Holding Companies in Canada
Do I need a holding company for my small business?
Not always. If your business is generating profits beyond what you need personally, a holding company may be worth considering.
Can a holding company own real estate?
Yes, many investors use holding companies to buy and manage rental properties for tax and liability reasons.
How does a holding company help with selling a business?
Proper structuring may allow you to claim the Lifetime Capital Gains Exemption (LCGE), which shields up to $1 million of capital gains from tax on qualifying shares.
Are dividends from my operating company to my holding company really tax-free?
Generally yes, due to inter-corporate dividend rules, but the structure must be set up correctly.
What are the downsides?
More compliance (corporate filings, tax returns) and setup costs. A holding company should only be used when the tax and planning benefits outweigh these costs.
How Mittal CPA Can Help
At Mittal CPA Professional Corporation, we:
Assess if a holding company is right for your situation.
Structure your corporation for tax efficiency and asset protection.
Guide you on inter-corporate dividends, LCGE, and estate planning.
Provide ongoing corporate tax compliance and advisory services.
With the right planning, a holding company can be a powerful tool to protect your wealth and lower your tax bill.
Considering a holding company? Contact Mittal CPA Professional Corporation today to discuss whether this strategy fits your business or investment goals.
