The tv show Seinfeld was a must watch when I was in my 20’s.  In 1 episode George made up the name of a fictional company called Vandelay Industries – it was a business that dealt with the import and export of “fine latex products”.

While in Seinfeld they never mentioned the company Vandelay Holdings, you may have come across companies with the word “holdings” in the company name.  In this blog post, I will explain what a holding company (or holdco for short) is, when they are used, and why you might benefit from one.

As the word suggests, the company is holding (or more accurately owning) some kinds of assets that are able to earn income.    The assets may earn passive income, like dividend or interest income earned by investments in stocks, bonds, or mutual funds.  The assets may include land and/or a building which would earn rent.  Physical assets – like vehicles or equipment, could be rented out to another business or company (we would call an operating company) for the purpose of generating income.  Finally, a holding company can hold shares in an operating company.

There are a few scenarios where the use of a holding company makes sense for a business owner.

Operating companies that are family owned businesses, and which the majority of shareholders are Canadian, receive a preferential tax rate on their business income, called the small business deduction.  If that same business holds assets that earn too much passive income, it can fall offside and lose some of the deduction.  Your accountant can review this matter with you, and may advise on moving those passive assets into a holding company.

Another scenario is where a company owner may be winding down the business, but needs to take money out of the company over several years after the business is not operating to minimize the tax of taking money out in 1 year.   The business still exists but is no longer generating active business income.  If this business was a professional corporation, like a doctor or dentist, they will want to change their name (and avoid professional dues) ie: from John Smith Professional Corporation to something else, like Smitty’s Holdings Ltd.

In the 3^rd scenario, a company may be interested in creditor protecting expensive business assets, or land/building by transferring them to a holding company and renting them back to the operating company.

In cases were there is a holding company created which is related to the operating company, it is normal for the holding company to own shares in the operating company – in this way the operating company is controlled by the owners of the hold co.

As mentioned, the set up of a holding company, requires input from accountant and lawyer as to when a holdco would be of benefit.  The lawyer prepares the necessary documents to create a new holding company or modify an existing operating company to create a hold co.

Planning ahead is always important.  You don’t want to be like George Kastanza and get caught with your pants down! (fans of Seinfeld know what I mean).

Contact me if you are intersted in learning more about how a holding company could be useful for your business.