Intercorporate dividends
The holding company can generally deduct a taxable dividend it receives from a Canadian corporation, so regular income tax doesn't apply on the way up.
Holding Company Planning
Holding Company Planning for Ontario Business Owners
A holding company can separate surplus from business risk and support a future sale. It also adds cost and rules. Your accountant and lawyer set it up, and we work alongside them on the insurance side.
What It Is
What does a holding company do?
A holding company is a corporation that owns assets rather than running a business, usually shares of your operating company. Its job is to hold surplus the operating company doesn't need, away from that company's day-to-day risks.
Personal tax generally applies only when money is paid out to you, so this is a deferral, not a permanent saving. It doesn't lower the tax on your business income, and the same deferral exists if you leave money in the operating company. What a holding company adds is separation.
At a glance
- Separates surplusFrom the operating company's creditors, within limits
- Defers personal taxTax applies when money comes out to you
- Counts as associatedShared $500,000 limit and passive income test
- Affects the exemptionIt can help or hurt a future claim
Moving Surplus
How does money move from the operating company to the holding company?
Usually as a dividend, which can generally pass between connected Canadian corporations without immediate tax when the rules are met.
Part IV tax
Corporations are generally connected when one controls the other, or owns more than 10% of the votes and value. Between connected corporations, refundable Part IV tax generally applies only if the payer gets a dividend refund.
Subsection 55(2)
This anti-avoidance rule can turn an intercorporate dividend into a capital gain. It generally applies when the dividend exceeds the income that contributes to the gain on the share, often called safe income, and one purpose is to significantly reduce a gain or the share's value, or increase the cost of property. Your accountant works this out before a large dividend.
Creditor Protection
Does a holding company protect money from creditors?
It can help, within limits. Shareholders generally aren't liable for a corporation's debts, so surplus properly moved out of the operating company is generally beyond that company's creditors.
Solvency tests
Ontario directors can't declare a dividend if there are reasonable grounds to believe the company couldn't pay its liabilities as they come due, or its assets would fall below its liabilities and stated capital.
Bankruptcy look-back
Dividends paid in the year before a bankruptcy can be reviewed. If the company was insolvent, directors and some related shareholders may have to repay them.
Guarantees
A holding company doesn't help with debts you've personally guaranteed, and its own assets are exposed if it guarantees the operating company's loans.
Capital Gains Exemption
How does a holding company affect the lifetime capital gains exemption?
It can keep operating company shares qualified, or it can get in the way. The exemption is claimed by individuals, not corporations, so who sells matters.
To qualify at sale, generally 90% or more of a company's assets by fair market value must be used mainly in an active business in Canada, and more than 50% throughout the prior 24 months. Investments that build up can fail those tests. Moving surplus to a holding company, often called purification, is one way to keep the operating company qualified.
Who is selling?
If the holding company sells the operating company's shares, the exemption isn't available on that gain. If you sell your holding company shares, the holding company has to pass the tests too, and in a two-company chain one of them generally has to meet the 90% level throughout the 24 months.
A life insurance policy counts at its cash surrender value for these tests before death. For 2026, the exemption limit is $1,275,000. Our business succession guide covers the rest. Talk to your accountant well before a likely sale, because the tests look back 24 months.
Passive Income
Does a holding company get around the $50,000 passive income rule?
No. A holding company that controls your operating company is associated with it, so the two are tested together.
Associated corporations share one $500,000 small business limit, and their passive income is combined under the federal test. The limit drops $5 for every $1 above $50,000 and is gone at $150,000, although Ontario doesn't follow that reduction. See the $50,000 passive income rule.
Investment income in a holding company is taxed much as it is in an operating company, at roughly 50% in Ontario, with part refunded when taxable dividends are paid. If you have a portfolio manager or investment advisor, they stay in place.
Who It Fits
Who does a holding company fit?
- Steady surplusMore than the business needs, year after year
- Real business riskLiabilities you'd want surplus kept away from
- A sale or freeze aheadWith time to plan around the 24-month tests
What to Weigh First
What does it cost, and when isn't it worth it?
Setup cost
Legal and accounting fees to incorporate and move shares, often with a rollover election. Ask your advisors for a quote.
Ongoing cost
A separate T2 return every year, even with no tax payable, plus financial statements, an Ontario annual return and corporate records.
Little surplus
If you use what the company earns, there's not much to move.
A sale is close
Changing the structure late can affect the 24-month tests.
Physicians and dentists
The CPSO and the RCDSO say holding companies may not own shares in these professional corporations.
Where Insurance Fits
Should the holding company own the life insurance?
Start with the need the coverage meets, then ask which company should own it. The answer depends on creditors, sale plans and how proceeds will reach your family.
A death benefit paid to an operating company may be exposed to its creditors, as our key person insurance guide explains. The Capital Dividend Account credit belongs to the company that receives the benefit, so paying it to shareholders can take more than one step. Moving an existing corporate-owned policy can trigger tax, so ask your accountant first.
How We Work With Your Advisors
Your accountant and lawyer set it up
We don't incorporate companies, prepare tax opinions or draft share documents. We work alongside the people who do.
Your accountant designs it
Whether it makes sense, the share structure and the tax.
Your lawyer documents it
Incorporation, share terms and corporate records.
We cover the insurance
The coverage needed, then the paperwork once your advisors confirm the owner.
Common Questions
Questions owners ask about holding companies
Not always. It tends to make sense when there's steady surplus, business risk worth separating or a sale ahead. If you use what the company earns, the cost may outweigh the benefit.
Generally not on business income. It can defer personal tax on surplus, but that deferral also exists in the operating company. Tax applies when money is paid out to you.
Generally no immediate tax applies between connected Canadian corporations, but Part IV tax and subsection 55(2) can change that. Your accountant should check before a dividend is paid.
No. It's for individuals. A holding company that sells operating company shares can't claim it on that gain.
The CPSO and the RCDSO say holding companies may not own shares in medicine or dentistry professional corporations. Confirm the current position with your lawyer.
Related Guides
Strategies that often work together
Business Succession Planning
Selling or passing on a private Ontario business, and funding the plan.
Read the guideCorporate-Owned Life Insurance
Permanent coverage owned by the corporation, for estate liquidity and CDA planning.
Read the guideCapital Dividend Account (CDA)
How the CDA lets certain amounts leave a private corporation as tax-free capital dividends.
Read the guideThis information is general in nature and is not tax, legal, accounting, insurance or investment advice. It is based on current Canadian tax legislation, which can change. Any strategy should be designed and reviewed with your accountant and legal advisors based on your circumstances. Values above the policy guarantees, including dividends, are not guaranteed.
Holding company planning in Burlington, Oakville, Milton, Mississauga and Hamilton
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