A consulting firm that has been retaining earnings inside its operating corporation for a few years eventually asks the same question: should some of that money move into a separate holding corporation? The answer depends on how much is actually accumulating, what it’s for, and whether the added cost of a second corporate entity is doing something a single corporation could not already do on its own.
What a Holdco Is Structurally
A holding corporation (Holdco) is a second CCPC that owns shares in the operating corporation (Opco) instead of, or in addition to, the individual consultant owning those shares directly. Once the Holdco owns the Opco shares, dividends Opco pays flow up to the Holdco rather than directly to the person. The Holdco then holds those funds, invests them, or distributes them to the individual shareholder on a separate timeline.
This is a two-corporation structure layered on top of whatever operating structure the consulting firm already uses. One Corporation or Multiple for a Consulting Firm? covers the choice of operating structure for multi-owner firms, including a Holdco variant for each partner. This article focuses specifically on what the Holdco layer itself does, independent of how many owners or operating corporations sit underneath it.
Inter-Corporate Dividends: The Mechanism That Makes This Work
Dividends paid from one Canadian corporation to another are generally received free of further corporate tax at the receiving corporation, under the inter-corporate dividend deduction, subject to refundable dividend tax rules that can apply in certain circumstances, particularly where the dividend flows between corporations that are not connected in the way the rules require.
This means Opco can pay out its after-tax retained earnings to Holdco without a second layer of corporate tax being triggered on the way. The funds are now inside the Holdco rather than inside Opco, and personal tax has still not been paid on them, since personal tax is only triggered when the funds eventually move from a corporation to the individual shareholder as a personal dividend.
This is a deferral mechanism, not a permanent tax reduction. The eventual personal tax on the funds when the shareholder actually draws them out is not eliminated by routing the money through a Holdco first. What changes is timing and where the funds sit in the interim.
What Moving Funds Out of Opco Actually Accomplishes
Separating accumulated assets from operating risk. Client-facing consulting work carries operating risk: a lawsuit, a large uninsured claim, a dispute with a client or subcontractor. Retained earnings sitting inside Opco are, in principle, exposed to claims against Opco. Moving accumulated funds to a Holdco, which does not carry on the client-facing business and is not a party to Opco’s client contracts, separates those accumulated assets from Opco’s operating liabilities. This does not eliminate risk to the business itself, and does not protect the shareholder personally the way liability insurance or careful contracting does, but it does keep a lawsuit against the operating business from directly exposing the accumulated capital that has already been moved out.
A vehicle for investments and other assets. A Holdco can hold a passive investment portfolio, real estate, or other assets separately from the operating business, with its own books and its own decisions about what to hold. Some consultants prefer this separation for clarity: Opco’s financial statements show only the operating business, and the Holdco’s statements show only the accumulated capital and its performance.
Flexibility on when personal tax is triggered. Because funds inside the Holdco have not yet been paid out personally, the shareholder retains control over when to draw personal income from the Holdco, which can support income smoothing across years with different personal tax situations, retirement timing, or other planning goals.
What a Holdco Does Not Do
A Holdco does not reduce the corporate tax already paid inside Opco on active business income. Active business income is taxed at the corporate rate (reduced by the SBD if eligible) whether or not a Holdco exists above the structure.
A Holdco does not create a second small business deduction limit. Associated Corporations and the Small Business Deduction covers this directly: a consultant who controls both Opco and Holdco controls both corporations, which makes them associated, sharing a single $500,000 SBD limit between them rather than each corporation getting its own. If the Holdco is purely a passive investment holding vehicle with no active business income, this often matters less in practice, since there is no second stream of active business income competing for a share of the limit. But if the Holdco itself carries on any form of active business, the association question becomes a real allocation decision.
A Holdco does not, on its own, eliminate personal tax liability. Funds paid out of the Holdco to the individual are still personal dividend income in the year they are paid, taxed at the individual’s marginal rate with the applicable dividend tax credit.
The Cost Side
A Holdco is a full second corporation: its own T2 corporate tax return, its own bookkeeping, its own bank account, and its own annual accounting fees. For a consultant already managing one corporation’s books and filings, adding a Holdco roughly doubles the corporate compliance workload and cost, even in a year where the Holdco does nothing more than hold a dividend received from Opco and a small investment account.
This cost is fixed regardless of how much is actually accumulating in the Holdco. A Holdco holding $40,000 costs close to the same amount to administer as one holding $400,000. The structure only makes economic sense once the amount being protected, deferred, or separated is large enough that the annual administrative cost is small relative to the benefit.
When the Structure Is Worth Adding
A Holdco tends to make sense when a consulting firm has been retaining meaningful earnings inside Opco beyond what the shareholder needs for personal spending in the near term, when there is a specific goal like accumulating an investment portfolio or holding real estate separately from operating risk, or when a longer-term goal such as estate planning or a future sale of the operating business benefits from having accumulated capital already separated out.
A Holdco tends not to make sense yet for a consultant who distributes most of what Opco earns each year, leaving little retained earnings to move, or for a firm early enough in its growth that the administrative cost of a second corporation outweighs the deferral or separation benefit available.
Setting It Up
Moving existing Opco shares into a new Holdco, so the Holdco becomes the shareholder of Opco instead of the individual, is generally done through a share exchange under section 85 or section 86 of the Income Tax Act, structured to defer tax on the exchange itself rather than triggering a disposition. This is a transaction that needs to be planned and documented properly before it happens, not treated as a simple share transfer, since getting the mechanics wrong can trigger an unintended taxable event on shares that may have accrued significant value.
Related Articles
- Associated Corporations and the Small Business Deduction covers the SBD-sharing consequence of adding a Holdco in detail.
- One Corporation or Multiple for a Consulting Firm? covers the Holdco variant in the context of a multi-owner consulting firm’s overall structure choice.
- Retained Earnings and Retirement Planning for Incorporated IT Contractors covers the broader question of what accumulated retained earnings are for and how they factor into longer-term planning.
Scope of This Article
This article covers what a Holdco structure does for a growing IT consulting firm, the inter-corporate dividend mechanism that makes it work, and when the added cost is worth it. It does not cover:
- The full mechanics of a section 85 or section 86 share exchange
- Estate planning, family trust, or succession structures that often build on a Holdco layer
- Refundable dividend tax on hand (RDTOH) mechanics for passive investment income earned inside a Holdco
- Province-specific considerations for Holdco structures
The authoritative source for the inter-corporate dividend mechanics is the CRA’s income tax folio on taxable dividends.
Get in touch if your corporation has been retaining earnings for a few years and you want to review whether a Holdco structure fits your situation.