Why start a holding company for your business?

The holding company: a powerful strategic tool often overlooked by Canadian entrepreneurs.

Did you know that over 70% of Canadian entrepreneurs reinvest their business profits? Yet, there’s a legal structure that can help do it more efficiently: the holding company. Still unfamiliar to many, can become a powerful lever for tax planning, asset protection or even business succession.

So, what is a holding company exactly? Or rather, what is a holdings structure, and how can it fit into your long-term strategy? The main purpose of a holding company is to hold shares, manage investments, and provide better control over how wealth is transferred or reinvested. But to fully understand what a holding company does, it’s important to look at both its benefits and limitations.

At T2inc.ca, our team of CPAs and tax advisors explains what a holding company is, the key benefits it offers, its common uses, tax implications and the mistakes to avoid. By the end of this guide, you’ll know if this structure can help your small business grow more efficiently, or better protect the value you’ve already built.

What is a holding company? Definition

By definition, a holding company is an incorporated business whose main purpose is to own shares in other corporations, as well as manage investments, real estate, or other long-term assets. It typically does not carry out any direct business operations or provide services, its role is to oversee, structure, and protect capital.

It is commonly used by entrepreneurs who already own an operating company and want to add a strategic layer to their corporate structure in order to optimize their corporate income for tax purposes. Compared to a sole proprietorship or a partnership, a holding company offers better asset protection and greater flexibility when it comes to tax planning and wealth transfer.

From a legal standpoint, the constitution of such a structure allows you to separate your assets and manage them more efficiently. While a holding company may appear passive, it is, in fact, an active tool in long-term planning, especially for those looking to reinvest profits, transfer ownership, or reduce corporate tax exposure.

5 main advantages of a holding company

Starting a holding company is a business decision that’s not just about collecting shares. It’s a comprehensive strategy that can transform how you manage profits, investments, and risk within your structure.

Here are some of the key advantages a holding company offers Canadian business owners.

1. Tax deferral through intercorporate dividends

One of the biggest advantages of a holding company is the ability to transfer surplus earnings from your operating company without triggering immediate personal tax. When your active business pays dividends to a related holding company, these are intercorporate dividends, not taxable until eventually paid to you personally.

This means you can move profits into your holding company, shelter them from personal tax, and reinvest them, in real estate or investment portfolios, without delay. This type of structure can offer tax savings if your business generates recurring profits that you don’t need to withdraw right away.

It also simplifies your corporate tax return, especially when dividends are retained within the group.

2. Set up a real estate holding company to isolate your investments

A real estate holding company allows you to legally separate your property assets from your business operations. It helps limit legal risks and improves how you structure your investment income.

In this context, the holding company becomes a tool for control and sustainability. It can protect your assets from creditors, facilitate loan applications, and consolidate rental income under one roof.

Whether you’re planning to start a holding company in Canada for long-term growth or to hold real estate, this structure offers a significant strategic advantage.

3. Better asset protection

Assets held in a holding company are shielded from legal action against your operating company. In case of litigation, they remain safe, whether it’s cash, property, or investments. This helps separate your personal assets from your operating company’s risk.

This is especially relevant in high-liability industries such as construction or transportation. Many types of holding companies are specifically designed to operate as holding structures, creating legal distance and reducing potential tax consequences tied to asset exposure.

4. Simplified business succession or sale

If you plan to transfer or sell your business someday, holding company ownership can make the process much more efficient. By holding shares of your active business inside the holding company, you can implement an estate freeze, defer capital gains taxes or facilitate a Section 85 rollover, all while retaining control.

It’s a proven tool for business succession planning, especially for family-owned corporations.

5. Centralized management of passive income and investments

A holding company lets you centralize your passive income, rental income, interest, dividends, capital gains, in one place. This allows you to manage your cash flow more efficiently, reinvest strategically, and adapt your financial planning as needed.

Think of it as your corporate dashboard: it helps you make smarter, faster decisions across multiple entities.

When does it make sense to start a holding company?

A holding company isn’t always necessary, but in the right context, it can become one of the most powerful tools in your corporate strategy. Here’s a quick overview of situations where a holding company structure is relevant… or not.

How to start a holding company in Canada: Step-by-step

Before you move forward, it's essential to understand how to properly structure and launch your holding company. A well-planned approach will help you avoid costly mistakes and align the setup with your long-term business goals.

Here’s how to start a holding company in Canada, in 7 key steps:

1. Define your goals and legal structure

Do you plan to hold real estate, manage investments, consolidate several businesses or prepare for succession? Your objective will determine the best legal and tax structure. This is the starting point of your strategy.

2. Choose the jurisdiction (federal or provincial)

You can incorporate your holding company either federally (across Canada) or provincially (e.g., in Quebec or Ontario). Your choice depends on where your business operates, your expansion plans, and administrative preferences.

3. Choose a legal name

Your holding company must have a unique legal name, distinct from your operating businesses. You’ll need to do a name reservation and register your company with the relevant authority (e.g., the Registre des entreprises in Quebec).

4. Draft the articles of incorporation

Your articles define how the company functions: types of shares, powers of directors, decision-making rules. It’s strongly recommended to work with a lawyer or tax advisor at this stage.

5. Incorporate the company

You can file your incorporation directly online via the federal or provincial portals, or use a business incorporation service like T2inc.ca for a fast, affordable and guided process.

Want help? Try our fast and affordable online incorporation service for holding companies.

6. Open a separate bank account

Your holding company must have its own business bank account. This ensures proper accounting, protects assets, and keeps transactions distinct from your operating company.

7. Draft a shareholder agreement (if applicable)

If your holding company has multiple shareholders, a shareholders’ agreements is essential to define governance rules, exit terms, share transfers, and conflict resolution. It’s a proactive way to protect everyone involved.

What is the cost of setting up a holding company in Canada?

The cost of setting up a holding company in Canada typically includes government filing fees (between $200 and $400), legal or accounting services (if needed), and possible registration with provincial authorities. 

What are the tax implications of a holding company?

While a holding company offers flexibility and strategic control, it also comes with tax considerations that business owners need to plan for. Here's what you should keep in mind:

Passive income tax: Investment income earned within a holding company is generally taxed at a higher rate than active business income. However, with proper planning, part of this tax can be recovered through the Refundable Dividend Tax on Hand (RDTOH) account.

Income splitting: Be cautious with the Canada Revenue Agency's (CRA) rules on split income. These rules restrict how dividends can be shared with family members and may result in higher taxation if not handled correctly.

Capital gains exemption: Holding shares of an operating company inside a holding company may limit access to the Lifetime Capital Gains Exemption (LCGE) — unless the corporate structure is properly planned in advance.

Is it the right time to set up a holding company?

Creating a holding company can completely change how you manage, protect, and reinvest your business profits. It’s a powerful tool, but like any good strategy, timing and structure are everything.

If your business consistently generates profits, if you’re planning to invest, or if you’re thinking about transferring or selling your business one day, this structure deserves your attention. It can help you centralize assets, optimize tax exposure, and support long-term wealth preservation. And unlike launching a sole proprietorship or starting a new business from scratch, a holding company adds a strategic layer to your existing corporation.

Ready to take action? Talk to the professionals at T2inc.ca to learn how a custom-tailored holding company can help you structure your business more efficiently and protect your assets, today and into the future.