Do You Need a Holding Company? – A Complete Guide by a Montreal CPA Firm Near You

Setting up a holding company in Canada can be one of the most effective tax and

asset-protection strategies available to business owners—but only when used properly.

A holding company (often called a “Holdco”) can help shelter assets, reduce taxes,

facilitate succession planning, separate business risks, and support wealth-building.

However, many entrepreneurs create holding companies without fully understanding the

structure, legal rules, or CRA implications. When implemented incorrectly, a holding

company may offer little benefit—or worse, create tax inefficiencies, duplicate filing

requirements, and complicate corporate structures unnecessarily. Understanding the

benefits and risks of a holding company in Canada is essential for determining whether

this structure is right for your business and long-term goals.

Legal and Regulatory Framework

A holding company is incorporated under the same legislation as any other

corporation—either federally under the Canada Business Corporations Act (CBCA)

or provincially. For tax purposes, holding companies are treated as Canadian-Controlled

Private Corporations (CCPCs) when owned by individuals. Key tax rules include:

• Tax-Free Intercorporate Dividends – Under section 112 of the Income Tax Act,

operating companies (OpCos) can pay dividends to a Holdco tax-free, allowing profits

to be moved out of the high-risk operating environment.

• Asset Protection – By transferring retained earnings to a Holdco, business owners

protect accumulated wealth from operating risks such as lawsuits, creditors, or business

failure.

• Estate Planning & Succession – Holdcos are commonly used in estate freezes,

governed by sections 86 and 85, where shares are restructured to shift future growth to

the next generation.

• Passive Income Rules – Under section 125(5.1), Holdco investment income may

affect the Small Business Deduction of the OpCo if the corporations are “associated.”

• Capital Gains Purification – To qualify for the Lifetime Capital Gains Exemption

(LCGE), passive assets may be moved to a Holdco during purification planning.

These rules form the foundation of holding company benefits in Canada.

Key Court Decisions

Important court decisions have clarified the role and limits of holding companies.

In Neuman v. Canada, the Supreme Court ruled on dividend sprinkling within corporate

groups, emphasizing that income splitting through Holdcos must reflect economic

reality.

In McClarty v. Canada, the court confirmed the legitimacy of using Holdcos for risk

separation and investment activities when commercial purpose exists.

In Triad Gestco Ltd. v. The Queen, the court examined purification transactions and

outlined strict conditions for LCGE qualification involving holding companies.

In Deans Knight Income Corp. v. Canada, the Supreme Court reinforced anti-avoidance

rules related to corporate control changes, affecting Holdco restructuring.

These cases show that proper documentation, commercial purpose, and compliance

are essential when using a holding company in Canada.

Why CRA Targets This Issue

While holding companies are fully legal, CRA pays close attention to situations

involving:

• excessive passive investment income in Holdcos

• complex corporate structures used for income splitting

• improper use of Holdcos to multiply the LCGE

• shareholder loan misuse between OpCo and Holdco

• transactions involving Section 85 rollovers without commercial purpose

• Holdcos used only to avoid tax rather than for legitimate business reasons

CRA may also analyze whether OpCo and Holdco are “associated,” which affects the

Small Business Deduction and corporate tax rates. Because holding companies can

significantly reduce tax liability and provide deferral opportunities, CRA routinely reviews

corporate structures involving Holdcos.

Mackisen Strategy

At Mackisen CPA Montreal, we design corporate structures that maximize holding

company benefits safely and strategically. Our process includes:

• determining whether a Holdco is necessary based on income level, risk exposure, and

long-term plans

• evaluating passive income implications and Small Business Deduction sharing

• structuring tax-free intercorporate dividends under section 112

• implementing estate freezes using Holdco share reorganizations

• separating high-risk and low-risk assets for liability protection

• planning purification strategies for Lifetime Capital Gains Exemption qualification

• coordinating lawyer-prepared corporate reorganizations with tax planning

• implementing a multi-year roadmap for wealth accumulation and succession planning

This ensures the holding company structure is tax-efficient, compliant, and tailored to

each client’s situation.

Real Client Experience

A client with a successful OpCo accumulated $2 million in retained earnings. We

created a Holdco, transferred funds through tax-free dividends, and protected the

wealth from operating risks.

Another client planned to pass the business to their children. We implemented an estate

freeze using a Holdco, allowing future growth to accrue to the next generation while the

parent retained fixed-value preferred shares.

A third client had excessive passive investments inside the OpCo, jeopardizing their

Small Business Deduction. We purified the corporation by moving passive assets into a

Holdco, restoring QSBC eligibility.

These examples demonstrate how a holding company in Canada provides powerful

strategic benefits when used properly.

Common Questions

Business owners often ask whether a Holdco reduces corporate tax. Not

directly—Holdcos do not receive lower rates, but they allow tax-free movement of funds.

Others ask whether a Holdco is necessary for small businesses. Not always—Holdcos

offer the most value when wealth accumulation or risk separation exists.

Some ask whether they can own real estate in a Holdco. Yes, but passive income rules

must be considered.

Another question: Can a Holdco help with LCGE eligibility? Yes—through corporate

purification and restructuring.

These questions highlight why understanding holding company benefits in Canada is

essential.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal helps

entrepreneurs structure their corporate groups strategically, ensuring maximum tax

efficiency, asset protection, and long-term planning. Whether you need a Holdco for

investment, risk management, estate planning, or LCGE purposes, our expert team

ensures precision, transparency, and protection from audit risk.