Successful businesses may find themselves building up investments over time. These investments may not be vital to the main operation of the business. Prudent business planning often involves the separation of business operating assets from these investments. A holding corporation may just be the ticket for minimizing tax and maximizing your wealth.
Are you ready to claim the capital gains exemption on a future sale of your business?
A lifetime exemption for capital gains realized on the disposition of qualified small business corporation (“QSBC”) shares is still available for many taxpayers. The amount of the capital gains exemption was increased to $866,912 for 2019, and will be indexed to inflation for subsequent years. However, if a corporation builds up too many investment assets not required for normal business operations, it will not qualify for this unique tax-free sale. Consideration must be given to separating these investments with a holding corporation in the owner’s structure.
Do you have cost base that can be cashed in?
If you purchased your business from someone else, it is likely that the shares you acquired have adjusted cost base (ACB) which can become relevant when planning to withdraw cash from your business. ACB is a tax term that represents the amount that you paid for the shares when you acquired them. ACB can potentially be converted into cash (or debt that can be repaid later) using a holding corporation. This allows the individual owner to access the capital they invested on a tax-free basis.
Would there be value in using a holding corporation as a retirement-savings vehicle?
In many circumstances the corporate tax rate on business income is far lower than the owner’s personal income tax rates. Therefore, using an investment holding corporation as a retirement vehicle often produces significant tax deferral opportunities.
Would it be beneficial to transfer investments into a separate corporation?
Your corporation may have accumulated assets not used in the operating business you carry on. Such investments could be moved into a holding corporation. This may help families with planning issues. An example would be when one family member has an interest in running the family business and another family member does not. A separate holding corporation can be used to provide for the non-active individual. This may also help with asset protection in terms of protecting investment assets that are not needed in the corporation’s main business. By moving these investments to the holding corporation, they are no longer on the balance sheet of your main operating corporation. This may help with issues like creditor protection and limited liability protection.
Scott Conner is a Tax Partner at BDO Canada LLP. With over 15 years of experience as CPA, CA specializing in Canadian income tax, Scott helps a variety of individuals and private companies pay the least amount of tax possible with great tax planning strategies. He also specializes in planning for estates, trusts, and non-resident dispositions of real estate.