Why Create a Holding Company?
Personal Holding Company
|What is a Personal Holding Company
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
Uses for Personal Holding Companies
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.
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.
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.