Tax Efficient Incorporated Business Investing with Holding Companies

At Burgeonvest Bick, we offer strategies in conjunction with qualified tax professionals for our business owner clients.

Examples of strategies that we recommend which you may discuss with your tax advisor include:

• Holding Companies can be important vehicles for building a larger, tax-deferred investment portfolio using surplus funds from a business.
• Holding Companies can be useful for “creditor-proofing” assets as well as optimizing family income and intergenerational planning.
• The Active Business Income (ABI) of a corporation, up to the Small Business Limit ($500,000 in 2009), is taxed at 16.5% (in Ontario) which is considerably lower than the top personal tax rates.
• Active Business Income subject to the higher general corporate tax rate is more lightly taxed than the highest personal tax rates.
• Special treatment of dividends from private companies is an integral part of a tax integration formula.
• A holding company can be an essential tool as a tax efficient way to distribute and hold non essential investment assets to ensure the operating business qualifies as a small-business corporation for purposes of the $750,000 capital gains exemption.

To qualify as a small business corporation, among other tests, at the time of crystallization, 90 per cent or more of the value of its assets must be used in carrying on an active business in Canada. Investment assets generally do not qualify as active business assets for this purpose.

Potential Options:

• To achieve higher wealth accumulation, invest in low-taxed corporate income within the corporate structure.

• Use a Holding Company as a portfolio investment vehicle to achieve asset protection and intergenerational planning objectives.

• A holding company is a place to move investment assets into so that an operating company is positioned to potentially allow a shareholder to access the capital gains exemption.

This discussion of tax efficiency is not intended to be specific tax advice, but rather an illustrative and general discussion of potential advantages of investing through holding companies.  Determining the tax consequences of investment and distribution planning within a corporate structure is a complex undertaking.  See your professional tax advisor.