Setting up a holding company can be a great way to save on taxes, creditor-proof your assets, and split income with family members. For Canadian business owners, the decision to set up a holding company should not be made lightly, as there are also potential drawbacks associated with this strategy. So, exactly what is a holding company and how do they help business owners save money on taxes?

The first thing you need to know is what a dividend is. When businesses make a profit, part of that money can be paid out to shareholders. The payment is called a dividend. But companies don’t just give away money to shareholders. To learn how dividends can breathe life into your business, contact us to book a free consultation call and start planning.

So What Is A Holding Company?

The second thing you need to know is that dividends from Canadian businesses are not taxed if they’re paid from one company to another company. This is why business owners create a holding company. If a business owner transfers all their company’s shares to another company they have control of, they can transfer profits through dividend payments and avoid tax because it’s business-to-business.

Typically, when setting up a holding company, the owner also transfer valuable assets, like cash or marketable securities, from their existing business into their new corporation before any dividends are paid out. This allows them to protect these assets from creditors or potential lawsuits; the new holding company won’t be targeted by any legal claims resulting from things their main business does.

How To Give A Family Member Money From Your Holding Company:

If you pay dividends to a person directly, they have to declare that as personal income, which is taxed and collected by the government on a yearly basis. This can be avoided by using tax-saving programs, such as contributing the money to their RRSP, a commmon retirement savings plan.

But then, they won’t be allowed to access the money until they’re eligible for the retirement savings. This is where a holding company shines. By transferring shares of your corporation into the names of other people, even family members can become shareholders and receive dividends paid out by the corporation.

This has several impactful benefits. The recipient can withdraw the dividents whenever they want. The dividends can sit in the holding company, un-taxed, for as long as needed; the recipient will only have to pay income tax on the year they withdraw dividends. Plus, the dividends in the holding company can be reinvested at any time, should the need arise.

To Set This Up, Chat With An Accounting Expert

In order to fully realize the tax benefits of setting up a holding company, it’s important that business owners consult with their accountant or financial advisor. With the accountants at ACM CPA, we ensure you use all the available deductions and credits offered by the government.

We give the best advice so our clients save the most tax on their businesses, and we pride ourselves on that. Contact us today for a free consultation and start reaping all the benefits of setting up a holding company.