Throughout this difficult year amidst COVID-19, many of my clients have taken the time to sit down with their accountants, lawyers, and RBC Wealth Management specialists to take a deeper dive into financial planning. A common discussion involves whether a client’s particular circumstances would make it worthwhile to invest through a corporation. It is important to note that financial planning yields different outcomes for everyone. That said, in the spirit of doing a little homework before engaging with professional tax advisors, below are some general considerations in relation to using an investment holding company.
What is an Investment Holding Company?
An investment holding company is not a defined term in the Income Tax Act, rather, it is a term used to define a corporation that is used solely to hold other assets, such as shares of another company or real estate properties. Generally speaking, active business operations would not be conducted in a holding company.
What does the term “tax integration” mean?
In Canada, the tax system aims for “tax integration” which means the net after-tax outcome is meant to be the same regardless of the structure one uses to invest and earn income. In other words, the amount of tax you would pay on an investment held personally should be the same if it is held through a corporation. Although corporations can have a lower corporate tax rate, one also pays tax personally when the earnings are taken out of the corporation by means of a dividend. Although tax integration may not be perfect, the Government’s goal is to not incentivize investors to create special structures for the purpose of passive investing.
What is Creditor Protection?
In some cases, proper structuring of a holding company could provide creditor protection. If this is achieved, investors are not held personally liable in lawsuits related to the properties in the holding company.
What is ‘continuity’ in relation to investment corporations?
A corporation is its’ own legal entity. Hence, a holding company would be able to continue as a holding company even if its' owner were to pass away. With appropriate planning and residency consideration, it may be possible to appoint other family members as officers and directors that could continue to manage the corporate assets.
What is a CCPC Tax Advantage for Active Businesses?
Although there is little tax advantage to incorporating solely for holding passive investments, active operating companies may be qualified as ‘Canadian Controlled Private Corporations’ (CCPC) and they generally face lower tax rates. Any active business income that is earned personally is taxed at the personal rate which, depending on the province, could be above 50%. However, a CCPC’s tax rate is lower and could hover around 10%. In this case, if income comes from an active business, there could be a tax advantage to incorporating.
What are Trapped losses?
Losses that occur on personal investments can be used to offset any investment gains. However, losses that occur in a holding company can only be used to offset earnings from that corporation and cannot be transferred to the shareholders to reduce their personal taxable income.
What are the incorporation and legal costs?
When incorporating, you must also consider the cost of incorporating as well as the legal fees incurred. There are on-going costs and other administrative requirements associated with owning a corporation. For example, annual financial statements and tax returns must be filed on a timely basis, which could lead to additional administrative costs and time spent.
To conclude, when dealing with complex financial planning topics, please speak to your advisor to determine the best course of action. Our RBC Wealth Management planning specialists will work with your accountant and lawyer to best review your personal circumstances that affect your family’s financial plan.