A common corporate structure involves a holding company owning shares of an operating company. Integrating a holding company into an existing corporate structure can be used to your advantage if you wish to move excess funds from your operating company but wish to defer paying personal tax on the funds.

If a business owners were to pay the excess earnings from an operating company to his or her personal hands then personal tax would be payable, leaving less to reinvest. The rate of tax on that withdrawal could be as high as 47%! If instead a holding company is utilized, it is possible to move excess earnings to your holding company without any immediate tax. The use of a holding company defers tax until later, leaving more funds for investment.

A holding company can also be used to remove excess cash and investments so that the operating company retains small business corporation status required for utilizing the capital gains exemption upon sale of a business.

Creating the right structure for the holding company needs to be carefully considered as there are a number of factors at play for optimizing the tax result.

If you have excess earnings in an operating company each year, you may want to move the excess funds to a holding company to protect those earnings from creditors of your operating company. If an operating company needs working capital, the holding company can lend that money back to your operating company on a secured basis to maintain the potential protection from creditors. Similarly, in the case of rental operations, holding rental properties within a corporation may limit your personal liability and provide some creditor protection.

By retaining assets in a holding company, owners have flexibility in when and how much to pay themselves personally. This flexibility may be useful in managing personal marginal tax rates and minimizing income that would be taxed at the highest marginal tax rate. In addition, some federal non-refundable tax credits and benefits are reduced or eliminated when your net income exceeds certain thresholds. By retaining income in an investment holding company, you may be able to manage your personal income to keep it below these thresholds.

Corporate income tax for investment income requires a thorough understanding of the concepts of capital dividend accounts and refundable tax. In general, tax law is designed to minimize the deferral of tax on investment income and to avoid double tax. But working through the details is crucial and requires care.

Holding companies can provide a useful mechanism for minimizing tax on the transfer to the next generation. Owners should consider:

- Freezes that allow the tax on the transfer to the next generation to be minimized or eliminated

- Minimizing probate costs through the use of secondary wills for assets held within a trust

- Minimizing US estate tax risk by maintaining US investments inside a corporation.

There are pitfalls with the use of holding companies; however the opportunities for tax minimization and deferral are meaningful.

We have extensive experience in providing full accounting support and tracking for investment companies. We can deliver tailored reporting that meets your needs for managing investment performance and tracking spending and utilization of corporate cash.