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Newsletter Accountant Toronto - (CGA) Toronto Certified General Accountant
Newsletter #10 - December 2010
Small Business Needs (cont'd)
The Benefits of a Holding Company (Cont'd)
Holding Investments for Retirement
The longer you can delay the payment of tax, the more you have to accumulate and make investments. Think of your
holding company as a retirement pension “holding” your investments. By paying tax-free dividends from Opco to Holdco,
you can diversify your holdings and have Holdco make investments. Without the holding company structure, you would
have to pay tax first from the dividends from your operating company, leaving less to reinvest.
Protection from Creditors
By establishing a holding company, funds can be transferred away from future risks associated with the operating
company without incurring additional income taxes. Funds can be paid as tax-free dividends from Opco to Holdco, which
protects those earnings from creditors of Opco. Since the operating company likely needs the funds for operations, the
holding company can lend the money back to Opco on a secured basis.
The Disadvantages of a Holding Company
Additional Legal and Accounting costs An additional corporation means additional accounting and legal costs associated with it i.e. financial statements and
corporate tax returns, legal preparation of annual corporate minutes.
Qualification for the Lifetime Capital Gains Exemption
Individuals who dispose of shares of a small business corporation are eligible for a lifetime $750,000 capital gains
exemption. This means that the capital gain reflected in the growth of your operating company (since incorporation) of up
to $750,000 can be exempt from capital gains tax if certain conditions are met. Shares of a holding company, which in
turn owns shares of an operating company, can qualify for the capital gains exemption when sold. However, accumulation
of investment type assets in the holding company may impede the ability to use the lifetime capital gains exemption. This
potential problem can be remedied by consulting with your accountant and appropriate steps are taken prior to sale.
Stay tuned….
My next newsletter will discuss the strategy behind salaries and dividends as compensation to owners of companies.
Personal Income Tax
The Principal Residence Exemption
A principal residence is defined as a housing unit owned by the taxpayer either by himself or herself or jointly, and ordinarily inhabited by the taxpayer, the taxpayer’s spouse or common-law partner, the taxpayer’s former spouse or common-law partner, or the taxpayer’s child under the age of 18 at any time in the year
“Ordinarily inhabited” can mean residing for a “short period of time”, for example, a seasonal residence like a cottage, as long as the main reason for owning the property is not to earn income or to flip it for a profit
A principal residence includes up to a half hectare (about 1.24 acres) of land surrounding the home, and any land in excess of a half hectare that can be shown to be necessary to the taxpayer’s use and enjoyment of his residence
