[Jamie Golombek, Managing Director, Tax and Estate Planning, CIBC Financial Planning and Advice] 

We often get asked about the benefits of having a holding Company. Should I have a holding Company, and if so, why do I have one or do I need one or should I get rid of one? Well, these are all great questions. So, let's start with a discussion of what is a Holdco in the first place. 

[What is a Holdco?]

A Holdco doesn't actually do anything; it doesn't produce any goods or provide any services. 

[A Holdco doesn’t produce goods or services, but exists to hold shares of another company or investments]

It primarily exists either to hold shares of another operating company or to hold investments such as a portfolio of marketable securities. The first common use of a Holdco is where a Holdco is interposed between the owner of the company and the active operating business. 

[1. Holdco interposed between the company owner and the active operating business]

This’ll have profits to be flowed up tax free, via dividends, and retained in the holding company until the business owner needs the money personally. The second use of a Holdco is to simply to hold investments. 

[Holdco simplifies holding investments]

Those investments could be marketable securities, or could be a portfolio of rental properties. And again, that income is then kept inside the holding company till needed, and ultimately paid up to the individual ultimately as a dividend. 

[The benefits of using a Holdco]

There are a number of benefits of using a Holdco, as discussed in our latest report called “Hold the Holdco.” 

The first one is asset protection. 

[Asset protection]

The legal structure by which you hold your assets is obviously critically important. 

[Using a Holdco for assets means they might not be accessible to creditors of the operating company]

And using a Holdco for various assets like investments means that typically they may not be accessible by the creditors of the operating company.

Another reason for using a holding Company, is the timing of compensation, namely dividends… 

[2. Timing of compensation or dividends]

…because a Holdco can effectively allow you to retain income inside the holding company, which is paid up by the operating company, and then defer paying it out to yourself until a later point in time. 

[3. Holding U.S. securities]

Number 3, it may be a benefit to have U.S. securities held inside of a holding company simply for U.S. estate tax planning purposes.

If you own U.S. shares when you die, those are considered to be U.S. situs property and that could be subject to U.S. estate tax depending on the value of your estate. By using a Canadian holding company to own U.S. situs property, you may be able to avoid having to pay U.S. estate tax on death, on the U.S. situs property held inside the Holdco.

[Using a Canadian Holdco to own U.S. situs property may enable you to avoid paying U.S. estate tax on death on that property]

There are a variety of other reasons discussed in our report as to why someone might use a holding company: such as for mergers and acquisitions activity, or a future sale of the business, or even in the context of an estate freeze.

[Should I incorporate my investment portfolio]

The second area that we often get asked about when it comes to holding companies is, “Should I incorporate my investment portfolio?” To answer that question, we really need to come back to the concept of integration. In other words, would I actually pay more or less tax on my investment income if that income was earned in a corporation or earned personally? 

[A table showing “Tax Savings (cost) from Incorporating Investment Income, by Province or Territory”]

Jurisdiction Other Canadian Investment Income Canadian Dividends Net Capital Gains
AB (5.55%) 0.00% (2.78%)
BC (5.91%) 0.00% (2.95%)
MB (6.94%) 0.00% (3.47%)
NB (6.59%) 0.00% (3.30%)
NL (7.06%) 0.00% (3.53%)
NS (7.98%) 0.00% (3.99%)
NT (2.09%) 0.00% (1.05%)
NU (5.73%) 0.00% (2.87%)
ON (4.12%) 0.00% (2.06%)
PE (8.36%) 0.00% (4.18%)
QC (3.48%) 0.00% (1.74%)
SK (4.80%) 0.00% (2.40%)
YT (5.74%) 0.00% (2.87%)

Source: Tax Templates Inc., July 1, 2019, assuming the shareholder pays tax at the top marginal tax rate

As figure 1 in our latest bulletin “Hold the hold Holdco” shows, in every province in Canada, there is a tax cost of earning investment income inside of a Canadian holding company versus earning that same income personally.

There's no immediate corporate tax on Canadian dividends provided they're paid out the same year. But in essence, what this chart shows is that, in most cases, it doesn't really make sense to have a holding company. That being said, whether it be a tax deferral, in other words, is there some flexibility in timing? As we said earlier, using a Holdco when we have investment income can allow us to defer paying tax on that income. 

Again, if we take a look at figure 2 from our report, you can see that pretty much every province there's actually a prepayment of tax as opposed to a deferral. And even in the few provinces where there is a slight deferral, those amounts are relatively small. 

[A table showing, “Tax Deferral (Prepayment) from Incorporating Investment Income, by Province or Territory”]

Jurisdiction Other Canadian Investment Income Eligible Dividends Other Than Eligible Dividends Net Capital Gains
AB (2.16%) (6.62%) 3.97% (1.08%)
BC (0.87%) (6.89%) 6.30% (0.43%)
MB (0.27%) (0.55%) 8.34% (0.13%)
NB 0.63% (4.82%) 9.42% 0.32%
NL (2.37%) 4.28% 6.26% (1.18%)
NS (0.67%) 3.25% 9.95% (0.33%)
NT (3.12%) (10.00%) (1.51%) (1.56%)
NU (6.17%) (5.25%) (0.54%) (3.08%)
ON 3.36% 1.01% 9.07% 1.68%
PE (3.30%) (4.11%) 6.89% (1.64%)
QC 3.04% 1.67% 7.92% 1.52%
SK (3.17%) (8.69%) 2.04% (1.58%)
YT (2.67%) (9.40%) 3.84% (1.33%)

Source: Tax Templates Inc., July 1, 2019, assuming the shareholder pays tax at the top marginal tax rate

So, in a nutshell, I would say be careful when it comes to incorporating an investment portfolio. There is a limited application. In most cases, unless you've got money already in there — from the sale of an operating company or maybe moved up there from the operating company — holding an investment portfolio inside of a Holdco generally does not make good financial sense.

[Soft music plays]

[Disclaimer: CIBC financial advisors provide general information on certain tax, investment and estate planning matters; they do not provide tax, accounting or legal advice. Please consult your personal tax advisor, accountant, licensed insurance professional and qualified legal advisor to obtain specialized advice tailored to your needs.

This video is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this document should consult with his or her advisor. All opinions and estimates expressed in this video are as of the date of publication unless otherwise indicated, and are subject to change. ®The CIBC logo is a registered trademark of Canadian Imperial Bank of Commerce (CIBC). The material and/or its contents may not be reproduced without the express written consent of CIBC.]