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Tina Maltese
Nicola Miller

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Why Create a Holding Company?

Personal Holding Company

What is a Personal Holding Company

A personal holding company (PHC) is often referred to as a "Holdco” or "Investment Holding Company”. PHC is not a defined term in the Income Tax Act, but rather is a term adopted to define a corporation which holds assets, usually income-generating investment assets. A PHC is usually a Canadian controlled private corporation and is a separate legal entity from its owners, requiring financial statements and separate corporate tax returns. Quite often, individual family members (or a family trust) will hold the various common and preferred shares of the private corporation, which owns the underlying investment securities.

Uses for Personal Holding Companies

Existing Business Owners – It’s quite common for business owners to set up a PHC to hold the shares of an operating company and/or to protect investment assets that are not needed in the company’s business. A significant planning tool involves the receipt of an inter-corporate dividend by a (parent) holding company from a (subsidiary) operating company which is "connected” or controlled by it. In many instances, these inter-corporate dividends can be received tax-free.

Former Business Owners – A PHC often results after the sale of business assets by an operating company. The proceeds from the sale of the business assets are kept in the corporation (to defer possible personal tax on a wind-up or distribution) and are used to purchase investment securities.

Estate Freeze / Income Splitting – A PHC can be used to facilitate the transfer of wealth to the next generation to aid in succession planning. Appreciating assets, such as shares of an operating company or an investment portfolio, can be transferred to the next generation through a PHC in the context of an estate freeze, designed to cap an individual’s tax liability at their death and transfer any future growth to younger family members. The ability to split income amongst family members, subject to various income attribution rules, can also be facilitated through a PHC.

Please refer to the full report.