A holding company owns shares or debt of other corporations rather than operating a business itself — used by sellers to insulate accumulated profits before a sale, and by funds as the acquisition vehicle that holds and finances the shares they buy.
On the seller's side, the case for inserting a holding company ahead of a sale is protective, not tax-driven in the first instance: "moving surplus cash or dividends up to the holding company keeps it insulated from the day-to-day risk of the operating business," and having one already in place makes it simpler to add further operating subsidiaries later without a restructuring. The same source is candid that it is not universal: for an early-stage business with no accumulated assets or real creditor exposure yet, a single corporation is often enough until "there's actually something worth protecting."
On the buyer's side, a fund's own acquisition holdco creates two checkable tax exposures worth diligencing before close. First, ITA s. 125 sets a CCPC's small-business-deduction business limit at $500,000, shared across all corporations "associated" with each other, so a target that becomes associated with the buyer's other Canadian-controlled private corporations after closing shares that $500,000 limit with the group, and a target sitting on redundant passive investment assets brings a passive-income grind — a full grind once adjusted aggregate investment income across the group reaches $150,000 — in with it. Second, on the seller's side of a related-party sale, ITA s. 84.1 applies where an individual sells shares to a non-arm's-length purchaser corporation — typically their own holdco — and can deem part of the proceeds to be a dividend rather than a capital gain, unless the sale qualifies for the intergenerational-transfer relief built into the same section. Since only a genuine capital gain can use the lifetime capital gains exemption, a seller who moves shares into their own holdco without meeting that relief can convert what looked like a tax-sheltered sale into ordinary dividend income.
A departing founder sells her shares of Target Inc. to a newly incorporated holdco that she herself controls, intending to bank the proceeds inside the holdco. Because the purchaser corporation is non-arm's-length to her, ITA s. 84.1 applies to the sale; unless she qualifies for the intergenerational-transfer relief, part of what would otherwise have been a capital gain — eligible for her lifetime capital gains exemption — is instead recharacterized as a taxable dividend out of the holdco. Meanwhile, the fund acquiring a different, unrelated target through its own acquisition holdco checks, before closing, whether that target will become associated with two other portfolio companies the fund already controls — and finds the group's combined small-business-deduction limit would fall from $500,000 apiece to $500,000 shared three ways, a real, quantifiable cost folded into the purchase price negotiation rather than discovered after closing.
See also: Amalgamation · Asset purchase agreement · Continuance under the CBCA.
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