This week, I am answering a question received from a reader, a question that many business leaders also ask themselves, one day or another: “When does the creation of a management company become relevant for a business owner? »
Incorporation is often done in a hurry to speed up the start-up of new activities. Over the years, if growth and results are there, its shareholders will come to wonder whether they should not hold their shares through a management (or portfolio) company, especially the more that they often know other entrepreneurs who have adopted such a structure in their networks.
Comparing your tax structure to that of another entrepreneur, however, involves its share of risks. Taxation being complex and the financial needs, objectives and realities of a company director being as varied as they are personal, it often happens that the comparison leads to a misunderstanding rather than to a real clarification.
The usefulness of the management company
Unlike a so-called operating company, the management or holding company does not produce any goods or services. In its simplest form, it represents the personal accumulation tool of the owner of a business or the real estate entrepreneur. Thus, it can be set up to hold investments, rental properties or shares of one or more other companies.
Its creation offers great flexibility as to when the shareholder will be personally taxed on the net profits derived from his operating company. This flexibility is particularly sought after when several shareholders are co-owners: it is not uncommon for two entrepreneurs with a common business vision to also present a totally different cicada or ant profile in their personal lives!
The holding company is also useful when acquiring shares of a business that is already in operation, or when planning the sale of a business by “purifying” its assets in order to qualify the shares. thereof as qualified small business corporation shares. Finally, there are other advantages than tax optimization, such as the protection of assets in the event that your company is subject to legal proceedings.
When does it become relevant?
Take the example of an active business that generates significant profits that are not subject to a moratorium on the payment of dividends imposed by a creditor. Cash in the company is building up and there is a desire among shareholders to invest in order to achieve more individual goals. The
management company thus makes it possible to
distribute profits through the payment of intercompany dividends,
thereby delaying immediate personal taxation.
According to the principle of integration at the base of our tax laws, it must be remembered that this does not mean that you will not have to pay these personal taxes. They will surely be waiting for you when you pay a personal dividend through this new company! If your salary allows you to meet your personal needs and you have fully contributed to your RRSP and TFSA rights, the management company could become a powerful tool for implementing your future accumulation strategies.
This is why some entrepreneurs need this structure very early in the life of their business, and others do not. Beyond the profitability and the profile in your company, your cost of living and your personal needs often make it possible to decide on its relevance. Some couples can live on a large salary and benefit more from this structure. Other entrepreneurs have a different family situation or even a high lifestyle and will not need it. The fact of distributing the profits each year in the management company and then collecting them personally can generate an unforeseen result: that of managing a structure that has become unnecessarily cumbersome.
Thus, I believe it is safe to say that there is no particular “time” during the life cycle of the company when the creation of the holding company becomes necessary. Indeed, it could happen that it is used as soon as the start-up company is incorporated, while in other cases, the holding company could be created later during a possible reorganization of the company, for example following an estate freeze.
To remember
Tax rules.Certain tax rules may cause the allocation of intercorporate dividends to warrant capital gain treatment (rather than tax-free), and the transfer of investments
important in your holding company can cause the
passive income rules affect
your small business deduction.
Split tax.The rules of this tax mean that it is generally not beneficial to transfer existing investments to your new holding company.
Tax structure. It is obvious that the more complex your tax structure, the higher the creation and management costs. If your shares are held by a corporation rather than directly, you will have to practically double your bookkeeping and professional fees surrounding accounting and tax filing.
Integrated analysis. Whether your business is well established or just starting out, an integrated analysis of your financial goals and your personal and family situation should be as important as tax planning and legal advice.