How to Set Up a Holding Company in Canada (Ontario Example)

There's no special registration for a holding company in Canada. A holding company, or holdco, is an ordinary corporation whose main job is to own shares of another corporation (your operating company, or opco) and other investments. You register it exactly like any business: in Ontario, file Articles of Incorporation through the Ontario Business Registry for $300, or incorporate federally for $200 online. What makes it a holding company is what it owns and how the shares are set up. This guide explains why owners use a holdco, how to register a holding company in Ontario step by step, what it costs to run, and when it isn't worth it.

What is a holding company?

A holding company holds assets rather than trading with customers. Typically it owns the shares of your operating company and receives dividends from it, then keeps that money as cash or investments. The operating company does the actual business: it signs contracts, hires staff and carries the commercial risk.

A common Ontario structure looks like this:

• You own the shares of the holding company.
• The holding company owns all or part of the shares of the operating company.
• The operating company runs the business and pays dividends up to the holding company.

Partners often each set up their own holdco, and the holdcos own the opco together. Some families put a family trust above the holdco for succession or income-splitting reasons; trusts have their own tax rules and filing obligations, so they're a decision to make with a lawyer and accountant.

Why set up a holding company?

Moving profits out of the operating company with tax deferred

The main attraction is that dividends between related Canadian corporations can usually move without immediate tax. Under section 112 of the Income Tax Act, a Canadian corporation that receives a taxable dividend from another taxable Canadian corporation can deduct it when calculating taxable income. And if the holdco is connected to the opco (it controls the opco, or owns more than 10% of its voting shares and more than 10% of their value), the CRA says the dividend is subject to Part IV tax only when paying it generates a dividend refund for the opco. In a simple structure where the opco earns active business income, that means profits can often move up to the holdco without tax at that stage. Tax applies later, when the holdco pays dividends to you personally.

There's an important anti-avoidance rule: subsection 55(2) can treat a large intercorporate dividend as a capital gain when one purpose is to reduce a gain on the shares. Before paying significant dividends to a holdco, especially before a sale, have an accountant check that they fit within the rules.

Protecting retained earnings from business risk

Cash left inside an operating company is exposed to its creditors and lawsuits. Paying surplus profits up to a holdco moves that cash out of the business that carries the risk. This isn't a shield against everything, and transfers made to defeat known creditors can be challenged, but it's a standard way to separate what you've earned from what the business owes.

Keeping the operating company ready for a sale

When you sell shares of a qualifying small business corporation, you may be able to claim the lifetime capital gains exemption. One condition, per the CRA, is that all or most (90% or more) of the corporation's assets, by fair market value, are used mainly in an active business carried on primarily in Canada at the time of sale, with a 50% test over the previous 24 months. Surplus cash and investments sitting in the opco can fail that test. Moving them to a holdco, sometimes called purifying the company, helps keep the opco eligible. The rules are technical, so plan this with a tax advisor well before any sale.

Investing and estate planning

A holdco gives you a separate place to invest surplus profits, buy property or fund other ventures without mixing them with the operating business. It can also make succession easier, because you deal with one set of holding company shares rather than several businesses.

How to register a holding company in Ontario: step by step

If you're starting a new business, it's simplest to set up the holdco first and have it subscribe for the opco's shares from day one. If your operating company already exists, the share transfer (step 7) needs an accountant, because the CRA election has to be prepared and filed correctly.

You can register a holding company with us online, with the share structure set up for holding purposes.

Ontario or federal for a holding company?

For an Ontario owner whose holdco simply holds shares and investments, an Ontario corporation is usually the simpler choice. See our breakdown of Ontario incorporation costs for every fee in detail.

Share structure basics

A holding company can be as simple as one class of common shares owned by you. Many owners, though, set up more than one class from the start because it gives flexibility later:

• Voting common shares for control.
• Non-voting shares that can be issued to family members or a trust, subject to the tax rules on income splitting.
• Preferred shares, often used in estate freezes and reorganizations.

The opco's share structure matters too, since the holdco will be one of its shareholders. Changing share classes later means filing Articles of Amendment ($150 in Ontario), so it's worth getting the structure right before you file.

Ongoing costs and filings

A holding company is a second corporation, with its own obligations every year:

The biggest recurring cost is accounting: two sets of statements and two T2 returns. Our Ontario annual return guide covers the registry side.

Tax points to plan for

• Shared small business limit. A holdco and the opco it controls are associated, and associated corporations share one small business limit of $500,000 for the reduced rate. A holdco doesn't create a second limit.
• Passive income. If the associated group earns more than $50,000 of passive investment income in a year, the federal small business limit shrinks, and it's eliminated above $150,000.
• Part IV tax on portfolio dividends. Dividends the holdco receives from companies it isn't connected to, such as public shares in its investment account, are subject to refundable Part IV tax at 38 1/3%. It's refundable when the holdco later pays taxable dividends, but it affects cash flow.

These rules interact, so treat this section as a checklist to raise with your accountant rather than advice.

When a holding company isn't worth it

• You spend everything the business earns. If profits come out to you personally each year, there's little to move into a holdco.
• Profits are modest. The second set of accounts and T2 return costs money every year, and the benefit has to outweigh it.
• Your business is a professional corporation with restrictions on who may own shares. Some regulated professions limit holding company ownership, so check with your regulator first; see our professional corporation service.
• You haven't incorporated yet and aren't sure the business will last. Many owners start with one corporation and add a holdco once profits build up.

For packages that include a holding company, see our pricing.