1. Tax savings
- If certain tests are met (ie the hold co. owns more than 10% of the voting shares) your portion of the after-tax earnings of the operating company (OP CO) could be paid to the hold co by way of a tax-free inter-corporate dividend. You would only be taxed on the portion of the dividend you withdraw from the hold co. The balance you can re-invest from your hold co. Passive income is not eligible for the small business deduction limit (14% combined low rate) but you recover $1 of the high-rate tax for every $3 of dividends you pay out. You can control your personal tax liability by controlling how much you gradually draw from your hold co, and saving a balance to draw out at a minimal liability in retirement and by any kids after they turn 18 years old but are in school with little income.
- If in the other case, the shares of the OP CO are owned personally the total payout would be immediately subject to personal income taxes and you would not be eligible for the refundable dividend tax on hand strategy to reduce the tax on any investments you make personally.
2. Creditor Protection
- Any excess earnings of an OP CO should be held by hold cos so that the money is out of reach of potential creditors and liability claims from the OP CO.
3. The $800,000 Lifetime Capital Gains Exemption
- In order for its shares to qualify for the $800,000 lifetime capital gains exemption at least 90% of the OP CO assets need to be used in an active business.
4. Purifciation and Making the Business More Saleable
- Potential investors/purchases and their lending institutions would be only interested in the true business assets. We should claim all our mileage, meals&ent, office-in-home, laptops, in the hold cos and those assets are the responsibility of the hold cos. The financials will be a truer representation of the discretionary cash flow and true value of the OP CO.
In the future at the time you want to sell your shares in the OP CO you will need to have the OP CO amalgamate with a new corporation to avail of the $800,000 lifetime capital gains exemption. The OP CO will have the same legal name and the same business number except it will have the suffix RC 0002 instead of the RC 0001 it has now.
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