BMO Nesbitt Burns
2 St. Clair Ave. West
Investment Holding Company
What is it?
An 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.
Before 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.
- Reduce 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.
- Estate 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.
- Reduce 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.