Want to free yourself from tax? Try a Holding Company

Trying to decide whether an investment holding company is appropriate for your money? First, you need to understand how income earned by corporations can be taxed, and the opportunities available to make the most of these tax systems.

Investment income earned by a corporation is generally taxed at rates slightly higher than those applicable to individuals, this higher rate can be outweighed by other tax benefits in certain situations.

You can establish an investment holding company by transferring your personal investments to a corporation on a tax-deferred basis, but before you do, these are things you should consider:

Income Splitting

You may be able to create a structure whereby family members own shares of the holding company, either directly or indirectly through a family trust.  If these individuals are in lower tax brackets than the transferor, the family’s overall tax bill can be reduced by paying dividends from the holding company to these family members.

This type of planning is typically most feasible for splitting income with adult children and grandchildren, and may be an efficient way of paying for their post-secondary education.

Estate Planning

When you own a personal investment portfolio, your ultimate tax liability upon death will continue to increase along with your investments.  If you transfer this portfolio to a holding company, it may be possible to limit the value on which you will ever be taxed and the tax liability attributable to any future increase in value may be deferred to the next generation.

This structure may also eliminate Ontario probate fees and US estate tax on the value of one’s investment portfolio. It may also give you control of your personal income level and avoid or minimize the impact of the Old Age Security clawback annually.

Clearly, the use of an investment holding company may provide significant advantages.  These advantages should be weighed against the costs of implementing and maintaining an appropriate structure.

- Zoran Vranjkovic, CA
Tax Manager
Welch LLP