1. INTRODUCTION
“Should five per cent appear too small / be
thankful I don't take it all…now my advice for
those who die / declare the pennies on your
eyes1
”. Granted our marginal tax rates never
escalated to rapacious levels which had the
Beatles singing the blues, they still drive the
public to vigorous extents in searching for ways
to minimize tax. Effective tax planning is a
central aspect of financial planning across all
levels of taxation, and it carries the prospective
of reducing tax implications for taxpayers under
certain approaches. Before engagement with
such endeavors, taxpayers must understand the
implication they face so as to choose a suitable
approach. As with the use of coupons and
“don’t pay until” promotions, tax planning
presents analogous approaches where
taxpayers can either reduce their taxable
income or defer the payment of taxes. Each
approach provides varying tactics and this
article will aim to present one such course of
planning. At a corporate stage, there is no
correct structure as each taxpayer faces
differing circumstances, which give rise to
various opportunities and implications. In the
real world, corporate organizations can become
very complex and one such element of this
complexity is the use of holding companies.
These are corporations, setup primarily for the
purpose of investing in other private or public
corporations. As they allow for a tax-free
transfer of earnings between corporations, they
may provide meaningful and substantial
benefits to users. Contrary to the complexity
1
The Beatles. "Taxman." Rec. 21 June 1966. George
Martin, 1966. CD.
holding companies create in business
organizations, the process to set one up is fairly
straightforward. Those interested in starting a
holding company must file an Articles of
Incorporation; as is the case with any
corporation. They can then transfer assets into
the company and begin investing in whatever
corporations the shareholder(s) choose.
Transfer of assets into the company can be
done on a tax-free basis under section 85 of the
Income Tax Act (ITA). This is beneficial if there
are accrued gains on the assets being
transferred as they would have pending tax
complications. The utilization and conditions
associated with section 85 are beyond the
scope of this article but understanding the
importance of such a tax deferral is crucial
when contemplating a startup of a holding
corporation. I’ll now take you through some of
the benefits associated with holding companies
and later provide some of the hazards.
HOLDING COMPANY
HOLDING COMPANIES:
SAFEDEPOSIT BOXES
April 1, 2013
Owais Akbar ▪ FMGT 7410 ▪ Victor Waese ▪ A00760114

2. INTEGRATION & DEFFERAL
The integration system implemented in Canada
serves the aim to remove any partiality that
may present itself when income is earned by an
individual through a corporation as opposed to
having it being earned by the investor directly.
In actuality, this concept falls short of
perfection and because of numerable provincial
rates, certain provinces can provide for tax
savings and costs. Further associated with this
system is the notion of tax prepayment and
deferral. A prepayment or deferral is produced
through differences in corporate and individual
tax rates. If corporate tax rates are lower than
individual rates, then this provides a deferral
and vice-versa if the opposite holds true. For
descriptive purposes, I will assume that any
taxpayer in question is in the highest marginal
tax bracket and resides within the same
province as the corporation used for
comparative purposes. Over the past several
years the Canadian tax system has developed
such that under section 123.3 of the ITA, an
additional tax has been levied on investment
income as defined per section 129(4). The
levying of this section eliminates any tax
benefits whether it be savings or deferrals;
replacing them with additional tax costs and
prepayments. Now although the CRA has made
earning investment income through a
corporation disadvantageous, there is still a
potential for tax deferrals if the earnings paid
by the corporation are paid out of business
income as non-eligible dividends or eligible
dividends not subject to Part IV tax. As Part IV
tax under section 186 is not applicable to
“connected corporations” as defined per
section 186(4), there becomes an immediate
tax deferral available if earnings are retained
within a corporation. This provision of the ITA is
what makes holding companies beneficial when
dealing with the transfer of earning. Byron
Beswick provides a fitting illustration in the
following example:
“Consider a typical situation where a holding
company (Holdco) owns the shares of an
operating subsidiary (Opco). Both corporations
are CCPCs. Opco pays eligible dividends to
Holdco, which are reinvested in shares of a public
company (Pubco) that pays eligible dividends
with a 5 percent yield. Since the eligible dividends
on the Pubco shares should increase Holdco's
general rate income pool (GRIP), 18 the eligible
dividends can be flowed out by Holdco as eligible
dividends. Provided that Holdco does not retain
any of the portfolio dividend income, no part IV
tax should be payable. On an Opco dividend of
$500,000, Holdco can flow out eligible dividend
income of $25,000 per year to its shareholder,
who is resident in Alberta. At the top marginal
Alberta rate on eligible dividends (19.29 percent),
Holdco's shareholder receives $20,177 after tax.
By comparison, if the shareholder received the
$500,000 Opco dividend directly, the after-tax
funds available for investment would be
$403,550. The after-tax dividends that would be
earned on this amount invested in the same
Pubco shares would generate after-tax income of
$16,285 per year. The incremental after-tax
income of $3,892 per year is a benefit that can
be maintained virtually indefinitely.
2
”
CREDITOR SHELTERING
“Why start a holding company when you can
just leave the money in the operating company
and defer tax that way?” One word stems an
answer: risk. If you own a company with excess
funds then you bear unnecessary risk. Any
company, regardless of the industry, faces
contingent liabilities which it would choose to
2
Byron Beswick and Beau Young, "Personal Tax
Planning—The Use of Holding Companies in the
Private Business Context," (2012), vol. 60, no. 1
Canadian Tax Journal, 169-191. 24-Mar-13

3. hedge against. A transfer of these funds to a
holding company successfully minimizes the risk
associated with creditors as the money is
sheltered within the holding company. If the
operating company requires financing, the
holding company can lend funds back to the
operating company while establishing itself as a
secured creditor. Bear in mind that “there are
laws respecting fraudulent conveyances and
preferences3
” and you should consult with a
professional before undertaking any such
actions. Furthermore, holding companies
provide a degree of flexibility which can be
extremely favorable in situations with multiple
shareholders. For instance, consider a situation
with two shareholders who equally own shares
of a closely held corporation. Since these
individuals “may want to be business partners
but not investment partners4
” they can each set
up their own respective holding companies. The
shareholder who requires funds can have the
money flow through his holding company to
him and pay his respective tax while the
shareholder who doesn’t require the money,
can retain it within his holding company and
continue to defer tax.
INCOME SPLITTING
Another principal advantage of incorporating a
holding company is that it provides a means to
transfer shares to family members without
3
"Holding Corporations: What Are They and Are
They for Me?" Million Dollar Journey. N.p., 23 Oct.
2008. Web. 01 Apr. 2013.
4
Buckwold, Bill. "Chapter 14: Multiple Corporations
and Their Reorganization." Candian Income Taxation
Planning and Decision Making. 2012-2013 Edition
ed. N.p.: McGraw-Hill Ryerson, n.d. 571. Print.
adverse tax consequences. An individual may
transfer their shares of an operating company
into a holding company and have the holding
company issue separate class shares to their
family. Splitting income in this manner is
perfectly acceptable and “should not be subject
to the income attribution rules in the Act,
provided that each family member acquires the
shares for their fair market value, using his or
her own funds5
.” In effect, whether payment is
by means of salary or dividend, this method can
provide for a lower tax assessment and is
another effective tactic in tax planning.
5
Byron Beswick and Beau Young, "Personal Tax
Planning—The Use of Holding Companies in the
Private Business Context," (2012), vol. 60, no. 1
Canadian Tax Journal, 169-191. 24-Mar-13
INCOME SPLITTING

4. ESTATE FREEZES: U.S. &
CANADIAN
A further and little more complex advantage of
holding companies is the aid they provide in
estate planning. Now this approach definitely
requires some professional guidance but I will
detail some of its important features. In
Canada, the purpose of an estate freeze is
essentially to halt the value of shares for the
original holder so as to minimize tax
implications at death. This planning can be done
through a holding company as it allows for any
future growth to be transferred to family
members in a similar manner to the one
discussed above under income splitting. If a
Canadian resident holds US investments they
may be subject to US estate tax at the same
rates US citizens are subject to. Although there
are some definite tax credits available,
individuals should “consider using a Canadian
holding company to hold [these] investments. A
corporation doesn't die as you do, so you can
sidestep U.S. estate taxes if the corporation is
the owner.6
”
BUSINESS ACQUISTIONS & SALES
When acquiring a business, especially if it is
financed by means of debt, holding companies
provide a significant benefit in terms of
repayment of the loan. This benefit is simply
derived from the fact that the holding company
will make payments from tax-free dividends
6
Cestnick, Tim. "Estate Tax: Uncle Sam Wants That
Too." Editorial. The Globe and Mail. N.p., 26 Jan.
2011. Web. 01 Apr. 2013.
<http://www.theglobeandmail.com/globe-
investor/personal-finance/estate-tax-uncle-sam-
wants-that-too/article622489/>.
after a single level of taxation, whereas an
individual will face two levels of tax. Although
the source of the funds is the same operating
company, the flow of dividends is subject to
different levels of tax; providing a benefit under
one alternative and a cost under the other. For
further understanding, consider that the
holding company is unable to utilize its tax
deduction as a result of having no taxable
income. Under these circumstances, these
losses are carried forward and upon repayment
of the loan, the owner can choose to
amalgamate the two corporations. This
effectively allows for the losses to be applied
against the income of the operating
corporation.
Upon selling a business, holding companies can
yet again prove to be substantially beneficial as
the idea is to minimize tax. If an individual sells
the shares of the operating corporation, that
individual will be subject to tax on any accrued
value above the cost of those shares. A holding
corporation can however reduce this excess by
having the operating company pay it a tax-free
dividend prior to the sale. Payment of the
retained earnings (safe income) as dividend will
effectively reduce the value of the shares;
thereby reducing tax on the disposition. Care
should be given to provision in the ITA which
limits tax-free dividends to the amount of safe
income.
These are just some of the several advantages
of having a holding company in a corporate
structure. Benefits are specific to different
investors and each taxpayer should evaluate
their situation accordingly. So as not to
propagate the notion that holding companies

5. are perfectly advantageous, I will cover some of
the potential dangers they can create.
DISADVANTAGES
Although I don’t mean to sound bias, the
disadvantages of holding companies are limited;
many of which are precautions individuals
should take when attempting to exploit certain
benefits. For instance, with the income splitting
benefit described before, a taxpayer must be
careful not to get caught offside by the
attribution rule. Likewise, as holding companies
are not considered to earn active business
income (ABI), they are not entitled to the small
business deduction (SBD). However, even
within this drawback there appears to be a
solution as section 129(6) deems certain income
to be ABI; allowing for holding companies to
utilize the SBD. Once able to claim a SBD,
individuals must be wary of the association
rules under section 256(2). This connotes that
the holding company and operating company
must share the SBD limit unless certain
elections are made. Consideration must still be
given even after such an election because “the
courts have placed the onus on the taxpayer to
prove that reducing taxes was not a main
reason for the separate existence of the two
corporations7
.” As divulging into the details of
these provisions is not within the scope of this
article, I will just say that the general anti-
avoidance rule (GAAR) under section 245 is a
perpetual constraint, regulating various tax
7
Byron Beswick and Beau Young, "Personal Tax
Planning—The Use of Holding Companies in the
Private Business Context," (2012), vol. 60, no. 1
Canadian Tax Journal, 169-191. 24-Mar-13
planning tactics. Another, but not too surprising
disadvantage is the denial of a capital gains
deduction (CGD). As corporations are not
entitled to this to begin with, it isn’t much of a
shocker. Nevertheless, it proves to be a
drawback as individuals could use the CGD to
shelter gains on the disposition of shares. A
final aspect of holding companies to consider is
the limitation section 40(2)(g)(ii) creates. Under
IT-159R3, CRA holds the view that:
a taxpayer's capital loss on the disposition of a
debt or other right to receive an amount is nil
unless,
(a) the debt or right was acquired by the
taxpayer for the purpose of gaining
or producing income (other than exempt
income) from a business or property, or
(b) the debt or right was acquired by the
taxpayer as consideration for the
disposition of capital property to a person with
whom the taxpayer was dealing
at arm's length.
On account of this provision, losses associated
with outstanding debt can be denied if there
isn’t sufficient evidence to uphold the “intent to
earn income” clause contained within the rule.
An application of this rule can be seen in the
following court ruling in the case of Alessandro
v. The Queen.
ALESSANDRO V. THE QUEEN
The issue in this case is whether the appellant,
Gregorina Alessandro, is entitled to a business
investment loss (BIL) of $497,292 in 1997 when
loans made to OPHL became bad. As a result of
this bad debt, the appellant claims to have
disposed of the investment in OPHL for an

6. amount equal to nil. She feels entitled to the BIL
as she claims to own OPHL through her
complete ownership of Arrow and Alessandro
Holdings Limited (AHL). The Minister agreed
that she was a shareholder of AHL but the
interrogation regarded AHL’s position as a
majority shareholder of OPHL. The Minister
denied the BIL for the appellant on the grounds
that she was not a shareholder of OPHL. As is
the case with such appeals, the onus was on
Alessandro to prove that otherwise. After
certain findings and disputes, it was determined
that the appellant did in fact have control of
OPHL. The Tax Court ruled “that the taxpayer
controlled both the holding company and its
subsidiary, such that she could cause dividends
to be paid by the subsidiary to the holding
company and in turn from the holding company
to herself.8” This is important because this
underlines the message that in owner-manager
circumstances, BIL’s associated with debt are
available to taxpayers. Accordingly, the
appellant was entitled to the loss in 1997.
Supplementary appreciation of this provision
can come from review of Rich v. The Queen.
This case establishes that so long as income-
earning is one of the purposes of a loan, then
the clause in section 40(2)(g)(ii) is met. To
“satisfy the income purpose test, income need
not flow directly from a loan to the taxpayer.9”
8
Byron Beswick and Beau Young, "Personal Tax
Planning—The Use of Holding Companies in the
Private Business Context," (2012), vol. 60, no. 1
Canadian Tax Journal, 169-191. 24-Mar-13
9
"Alessandro v. The Queen - Tax Court of Canada."
Tax Court of Canada. N.p., n.d. Web. 01 Apr. 2013.
<http://decision.tcc-
cci.gc.ca/en/2006/2007tcc411/2007tcc411.html>.
This was the case in The Queen v. Byram
whereby a taxpayer was ruled to have made
interest-free loans in expectation of dividend
income. The court held the position that
shareholders “make such loans on an interest-
free basis anticipating dividends to flow from
the activities financed by the loan.10
”
FINAL WORDS
Over the last few decades holding companies
have diversified and emerged as favorable
investment vehicles in every industry. With
numerous benefits and entwined with limited
downside, their popularity as a tax planning
tactic continues to grow. If a taxpayer is willing
to entertain the risks and costs associated with
managing a holding company, they can
potentially minimize their tax consequences.
The question remains whether they are for
everyone and frankly, it relies upon each
individual’s specific situation. What is without a
doubt is that a penny saved is a penny earned.
10
Ibid