By Raz Toor, Business and Corporate Lawyer, Falcon Law PC
Business owners often come to me after their accountant has suggested setting up a holding company.
The conversation usually starts with something along the lines of: “My accountant says I should have a Holdco. What does that actually mean?”
The basic concept is fairly simple. An operating company, or Opco, carries on the actual business. A holding company, or Holdco, generally owns assets rather than conducting the day-to-day business itself. In a common structure, Holdco owns the shares of Opco.
The reason for using that structure can be tax planning, separating excess cash or investments from the operating business, estate or succession planning, or preparing for future transactions.
But I would not recommend creating a holding company simply because another business owner has one. Whether it makes sense depends on what the company earns, what the owner intends to do with those earnings, the risks of the operating business and the owner’s longer-term plans.
What Is an Operating Company?
The operating company is normally the corporation customers, employees, suppliers and landlords actually deal with.
If you own a construction company, clinic, technology company, restaurant or consulting business, Opco may sign the customer contracts, employ the staff, lease the premises, own the equipment and receive the business revenue.
That also means the operating company generally bears the risks associated with the business.
If there is a contractual claim, unpaid supplier, employment dispute or other operating liability, the claim will often start with Opco because that is the corporation carrying on the business.
What Does a Holding Company Do?
A holding company is still an ordinary corporation. “Holdco” is not a special legal category of corporation.
What makes it a holding company is what it owns and what it does.
A simple Holdco might do little more than own the shares of Opco and hold cash or investments. Other holding companies may own shares in several operating businesses, real estate or other assets.
A typical structure might look like this:
Business Owner → Holdco → Opco → Operating Business
Instead of the individual owning Opco directly, the individual owns Holdco and Holdco owns the shares of Opco.
That sounds simple on an organizational chart. The tax and legal reasons for putting that additional corporation in the structure are where the real analysis begins.
Why Would You Move Money From Opco to Holdco?
One of the most common reasons is that the operating business has accumulated more cash than it currently needs.
Leaving every dollar inside Opco means that those funds remain in the same corporation carrying on the operating business.
In many Canadian corporate structures, taxable dividends can generally be paid from one Canadian corporation to another with an intercorporate dividend deduction. In broad terms, this frequently allows funds to move from Opco to a corporate shareholder such as Holdco without the same immediate personal tax that would arise if the money were paid directly to the individual shareholder.
There are important exceptions and anti-avoidance rules, including potential Part IV tax and section 55 considerations, so I do not advise clients to start moving money between corporations simply because someone told them intercorporate dividends are “tax free.” That part of the plan should be confirmed with the company’s accountant or tax advisor.
From the legal side, we make sure the share ownership, dividend resolutions and corporate records support what is actually being done.
Does a Holdco Protect Assets From Opco’s Creditors?
This is another major reason business owners ask about Holdcos, but I think it needs to be explained carefully.
Separating surplus assets from the corporation carrying on the higher-risk operating business can create a meaningful degree of separation.
If Opco has legitimately distributed surplus funds to its shareholder Holdco and Holdco separately owns those assets, the assets are no longer simply sitting in Opco’s bank account.
That does not mean the money becomes untouchable.
The structure has to be established and operated properly. Personal guarantees may still expose an owner personally. Holdco can have its own liabilities. Transfers made when creditor problems already exist can raise very different issues. There can also be tax, insolvency and other rules affecting particular transactions.
In other words, a Holdco can be part of sensible risk planning, but it should not be marketed as a way to move assets beyond the reach of legitimate creditors after a problem has already arisen.
You Do Not Necessarily Need a Holdco on Day One
I occasionally see entrepreneurs assume that the “proper” way to start a business is to incorporate two companies immediately: Holdco and Opco.
Sometimes that makes sense. Often it does not.
If the business is brand new, has little retained cash and the owner is withdrawing most of the earnings to pay personal expenses, there may be limited immediate benefit to maintaining another corporation.
A second corporation means another minute book, another tax return, additional accounting costs, banking considerations and more corporate administration.
I generally prefer to understand why the second corporation is being created.
If the accountant says there is a tax-planning reason, the business is accumulating substantial retained earnings, or there is a longer-term ownership or succession plan, then there may be a clear rationale. If the explanation is simply “everyone says I need a Holdco,” I would look at the structure more closely first.
Sometimes Holdco Is Added Later
A business owner may start by owning Opco personally and only later decide to insert a holding company above it.
That is possible, but it is not usually done by simply transferring the existing Opco shares to a newly created Holdco without considering the tax consequences.
If the Opco shares have increased substantially in value, transferring them can potentially create a taxable disposition. Depending on the circumstances, the client’s accountant may recommend a tax-deferred reorganization, including the possible use of a Section 85 rollover.
This is an area where I want the accountant and lawyer working together.
In 2026, for example, we worked on a corporate restructuring involving a multi-unit franchise business and several existing corporations. The client’s accountant recommended a Section 85 rollover as part of the proposed ownership structure. Our role was to take that tax plan and make it work legally—reviewing the existing corporate records, confirming the available share classes, preparing the corporate approvals and implementing the share transactions.
That is fairly typical of these reorganizations. The accountant determines the intended tax treatment; the corporate lawyer makes sure the corporations and their records actually reflect the transaction.
A Holdco Can Matter When You Eventually Sell the Business
One issue that business owners sometimes overlook is what will happen when the business is eventually sold.
A purchaser may acquire the assets of Opco or buy its shares. Those are very different transactions.
If the owner is hoping to sell Opco shares personally and potentially rely on the lifetime capital gains exemption, the corporation must satisfy the applicable requirements for qualified small business corporation shares.
One of the issues in that analysis is the composition of the corporation’s assets.
A company that has accumulated significant passive investments or excess assets inside the operating corporation can create additional tax-planning issues when a future share sale is being considered. Accountants sometimes refer to the process of addressing non-active assets before a sale as “purification.”
This is one reason a properly structured Holdco can form part of longer-term planning. But the structure should be established with tax advice rather than assuming that transferring cash out of Opco immediately before a sale will automatically solve the issue.
When a client is preparing to sell, we coordinate the corporate structure with the actual business sale transaction rather than treating the two issues separately.
Investment Income Inside Holdco Can Affect the Broader Corporate Tax Picture
Another misconception is that investment income inside Holdco has no impact on Opco because the companies are legally separate.
They may be separate corporations, but associated corporations are considered together for certain tax purposes.
Under the current federal small-business-deduction rules, the business limit can begin to be reduced when a Canadian-controlled private corporation and its associated corporations earn more than $50,000 of adjusted aggregate investment income. The federal business limit can be fully eliminated once that amount reaches $150,000.
That does not mean accumulating investments in Holdco is a bad idea. It means the accountant needs to consider the entire corporate group rather than looking at Holdco and Opco in isolation.
This is a good example of why the legal answer and tax answer need to be coordinated.
Should Holdco Own Real Estate?
Sometimes clients also want Holdco to own the building used by Opco.
That can be a legitimate structure, but it introduces another set of issues.
There may be a lease between the property-owning corporation and the operating corporation. Financing may involve guarantees or security from multiple entities. HST, land transfer tax and income tax considerations can arise depending on how property is acquired or transferred.
If the real estate is already owned by Opco, moving it into Holdco is not simply an internal bookkeeping exercise. A transfer of real property can have significant tax and transactional consequences.
I would therefore distinguish between designing a structure before a property purchase and trying to reorganize ownership of a property that the business already owns.
Holdco Does Not Eliminate the Need for Good Corporate Records
Adding corporations to a business structure makes corporate housekeeping more important, not less.
Each corporation has its own legal existence.
If Holdco owns Opco, the share registers should show that. If Opco declares a dividend to Holdco, the appropriate corporate approvals should be documented. If money moves between the companies as a loan rather than a dividend, the records and accounting treatment should reflect that.
I often see problems when business owners treat several related corporations as though they are all one bank account.
They are not.
If the structure was created to obtain legal and tax benefits from having separate corporations, the companies should also be operated as separate corporations.
When a Holdco Structure Makes the Most Sense
For me, the strongest candidates are usually established business owners who are retaining meaningful earnings in their companies and have a reason for moving those funds outside the operating entity.
There may also be a clear rationale where the owner has several businesses, is undertaking a corporate reorganization, expects a future sale or succession, or has received specific tax-planning advice from their accountant.
The answer is less obvious for a brand-new business generating modest income where virtually all of the cash is being withdrawn by the owner personally.
A more complicated structure is not automatically a better structure.
What I Would Ask Before Setting Up Holdco
If a business owner comes to me asking for a holding company, I usually want to understand why.
Is Opco accumulating cash? Is the owner planning to invest those funds? Is there an operating-risk concern? Is a business sale being considered? Has the accountant recommended the structure? Are there several shareholders? Does the owner expect to bring in another business partner? Is real estate involved?
Once those questions are answered, we can determine whether we are simply incorporating another company or actually implementing a broader corporate reorganization.
That distinction affects both the work involved and the advice the client needs.
How Falcon Law PC Can Help
Falcon Law PC works with entrepreneurs and established business owners on holding-company structures, corporate reorganizations, shareholder arrangements, ownership changes and ongoing corporate matters.
Where the proposed structure is driven by tax planning, we can work directly with the client’s accountant or tax advisor to implement the corporate side of the plan.
You can learn more about our legal services for entrepreneurs and business owners.
If the restructuring is being undertaken in preparation for buying or selling a business, Falcon Law PC can also coordinate the structure with the business purchase or sale.
This article provides general legal information only and does not constitute legal, accounting or tax advice. Whether an operating-company and holding-company structure is appropriate depends on the particular business, ownership, assets, tax circumstances and longer-term plans of the owner.