Investment Holding Company
What is it?
investment holding company is a private Canadian corporation whose
purpose is to hold investments. It is a separate legal entity that must
file annual income tax returns, can sue another party or be sued, and
can exist forever until it is formally wound up. When an individual
decides to incorporate an investment portfolio, the current portfolio is
rolled into the holding company and the individual receives shares or
other debt from the holding company that represent the value of the
investments transferred. Unlike a personal investment account, a
shareholder cannot make regular contributions or withdrawals from the
holding company’s investment account without a transaction occurring,
such as the issuance of additional shares or debt or the payment of a
dividend or salary.
1995, incorporating an investment portfolio was a way of deferring
income tax on investment income because the top personal tax rate was
higher than the corporate tax rate. However, since 1995, an additional
refundable tax payable by private corporations on its investment income
has eliminated the tax deferral and the recent decline in personal tax
rates has resulted in a net tax cost.
Despite the loss of the tax deferral, there are still some good reasons to consider incorporating an investment portfolio.
probate fees (where applicable) on death. Shares of a private
corporation may be transferred without probate provided a second will is
used that deals only with the private company shares.
planning. An estate freeze can be undertaken to roll personally-owned
investments into a corporation on a tax-deferred basis so that the
future growth of the investments will accrue to the next generation.
U.S. estate taxes. Where personally-owned U.S. assets would be subject
to U.S. estate taxes payable by Canadian residents, these assets can be
transferred to a Canadian corporation on a tax-deferred basis and not be
subject to U.S. estate tax.
Administration and other
costs of setting up and operating an investment holding company can be
quite high. Individuals considering incorporating an investment
portfolio should discuss their personal situation with an income tax
advisor prior to taking any action.