HoldCo/OpCo Structure Explained

Moving Beyond "Running a Business" to "Managing a Family Office"

Most business owners operate with an "Income Mindset":how much can I take out today to live on?

The dynasty owner operates with an "Equity Mindset":how do I retain capital effectively to fund not just my retirement, but the next three generations?

The Dual-Corporate Structure (Holding Company + Operating Company) is the architectural difference between a business that pays bills and a business that builds a legacy.

Part 1: The "Family Bank" Concept

If you own your business shares personally, you are the choke point. Every dollar of profit must pass through your personal tax return (often at 53% in Ontario or Quebec) to be invested. This is inefficient.

By interposing a Holding Company (HoldCo) between you and your Operating Company (OpCo), you create a new entity:the "Family Bank."

The Power of Tax Deferral

In 2025, the corporate tax rate on active small business income in Ontario and Quebec is roughly 12.2%. The top personal marginal rate is over 53%.

If your company earns $500,000 of profit:

• Personal Ownership: You take the money out, pay ~$265,000 in tax, and have $235,000 left to invest.
• HoldCo Structure: You leave the money in the corp, pay ~$61,000 in corporate tax, and have $439,000 left to invest.

The Dynasty Advantage: You have an extra $200,000+ of capital per year compounding for you. Over 20 years, at a 6% return, that deferral difference alone is worth millions.

This is how families like the Desmarais or Westons operate. They do not pay personal tax until they consume the money.

Part 2: Creditor Protection (The Firewall)

The most overlooked aspect of wealth is defense.

Scenario: Your OpCo gets sued. A customer slips, a contract goes wrong, or a product fails.

• Without HoldCo: If you have retained $2M of cash inside your OpCo, that $2M is seizeable by creditors.
• With HoldCo: You regularly dividend "excess cash" from OpCo up to HoldCo. This is generally a tax-free inter-corporate dividend.
• Result: The OpCo runs "lean." If it gets sued, the $2M is already safe in the HoldCo, which is a separate legal entity. The creditor cannot reach up to the HoldCo assets (absent fraud).

Dynasty Principle: "Never keep your safe assets in the same basket as your risks."

Part 3: Preparing for the Exit (The LCGE)

Every Canadian business owner wants to use the Lifetime Capital Gains Exemption (LCGE). As of 2025, this allows you to sell your shares tax-free on the first $1.25 Million of gain.

The Problem: To qualify, your OpCo must be "pure." This means 90% of its assets must be used in active business at the time of sale. If you have been hoarding cash or a stock portfolio inside your OpCo, you might be disqualified from this exemption.

The Solution: The HoldCo acts as a purification vessel. You move the "bad assets" (excess cash, stocks) to the HoldCo year by year. This ensures the OpCo shares always look "pure" and ready for sale.

Part 4: The Family Trust : Separation of Control and Value

If the HoldCo is the "Fortress," the Family Trust is the "Constitution" that governs it.

Many business owners make the mistake of owning their HoldCo shares directly. While this works for a single generation, it is rigid. If you want to pass value to your children, you have to actually give them shares:which means giving them ownership, potential voting rights, and exposure to their personal creditors (or future ex-spouses).

A Discretionary Family Trust solves this by splitting the atom of ownership into two parts: Control and Benefit.

1. The "Golden Share" Concept (Control)

In a typical Trust structure, you (the parents) act as the Trustees. You make all the decisions. You decide which beneficiary gets money, when they get it, and how much. You retain full control over the HoldCo's board of directors, even though you might not "own" the growth shares anymore.

2. The Growth Vehicle (Benefit)

The Trust subscribes to the common ("growth") shares of the HoldCo. This means the future increase in value of your empire accumulates inside the Trust, not in your personal name.

Why this matters: You freeze your tax liability at today's value (Estate Freeze), while the future tax liability on growth is passed to the next generation:but without giving them the keys to the car until they are ready to drive.

3. Multiplying the Exemption (The Multi-Million Dollar Benefit)

We discussed the Lifetime Capital Gains Exemption (LCGE) earlier:the ability to sell roughly $1.25M (indexed) of shares tax-free.

• Without a Trust: You sell the business. You get one exemption ($1.25M tax-free).
• With a Trust: The Trust can allocate the capital gain to each beneficiary. If you have a spouse and three adult children, the Trust can potentially utilize five exemptions.
• Result: Instead of shielding $1.25M, you shield $6.25M from tax. That is a massive tangible difference in net worth realized upon a sale.

Dynasty Principle: "Ownership is a liability; control is an asset. Own nothing, control everything."

4. Protection from the "In-Laws"

If you give shares directly to your daughter, and she later divorces, those shares may be part of her "Net Family Property" (depending on the province and timing).

If the Trust owns the shares, and your daughter is merely a beneficiary who might receive money at the Trustee's discretion, it is much harder for an ex-spouse to claim those assets as part of a divorce settlement. It adds a robust layer of insulation around the family fortune.

Part 5: The Quebec vs. Ontario Nuance

While the federal tax act applies to both, the execution differs for our clients in Montreal versus Toronto.

Part 6: The "Safe Income" Trap (Section 55)

This is where the amateur separates from the professional.

You cannot simply move unlimited cash from OpCo to HoldCo tax-free. The dividends must be paid out of "Safe Income on Hand" (SIOH):essentially the tax-paid retained earnings.

If you dividend up "unrealized gains" (e.g., you remortgaged the OpCo building and dividend up the cash), the CRA can recharacterize that tax-free dividend as a Capital Gain under Section 55(2).

The Lesson: Documentation is consistency. Your accountant must track your "Safe Income" balance annually. This is the boring, unsexy work that preserves dynasties.

Frequently Asked Questions

Q1: Can I set up a HoldCo if I am already incorporated?

Yes. We perform a "Section 85 Rollover." You exchange your personal shares of OpCo for shares of HoldCo. This can be done on a tax-deferred basis (no immediate tax triggered), but it requires precise legal drafting.

Q2: Does a HoldCo double my accounting fees?

It will increase them, but not double them. You now have two tax returns (T2s) and two minute books. However, the cost (approx. $3k-$5k/year extra) is usually dwarfed by the tax deferral benefits of a single year.

Q3: Can the HoldCo pay me a salary?

Technically yes, but usually no. You typically take salary from the OpCo (active source). You take dividends from the HoldCo.

Q4: What is the "Passive Income Trap"?

If your HoldCo (and associated companies) earns more than $50,000 in passive investment income (interest, rents, royalties) in a year, the government begins to reduce your Small Business Deduction limit on the OpCo. This is known as the SBD "grind". At $150,000 of passive income, your OpCo pays the higher general tax rate (approx. 26.5% instead of 12.2%).

Planning Tip: We use Corporate Owned Life Insurance (par) to shelter growth, as it does not count toward this $50k test. Learn more about life insurance as a corporate asset class.

Q5: Can I buy a vacation home in my HoldCo?

Be very careful. If you (the shareholder) use a corporate asset for personal enjoyment, the CRA assesses a Shareholder Benefit. You must pay fair market rent to the HoldCo for every day you use it, plus GST/HST. For most, personal ownership of cottage properties is cleaner.

Q6: What happens to the HoldCo when I die?

This is where "Estate Freezes" come in. Without strategy, your estate pays tax on the deemed disposition of the HoldCo shares. With a freeze, we lock in your tax liability today and pass future growth to your heirs.

Q7: Can I use the HoldCo to income split with my spouse?

Since 2018, the "TOSI" (Tax on Split Income) rules make this harder. Unless your spouse works 20+ hours/week in the business or you are over age 65, dividends paid to them might be taxed at the highest marginal rate.

Q8: Does a HoldCo protect against my personal divorce?

Not automatically. Family law in Ontario and Quebec generally views shares acquired during marriage as family property. However, a HoldCo can structure distinct classes of shares that might be excluded from net family property if structured correctly before marriage (via a Marriage Contract).

Q9: Can I hold US stocks in my HoldCo?

Yes, but US dividends are subject to withholding tax that is harder to recover in a corp than personally. However, for US Estate Tax purposes, holding US assets inside a Canadian Corp is a great shield against the IRS death tax.

Q10: What is "Purification"?

It is the act of moving assets that are not used for the active business (like a pile of cash or a stock portfolio) out of the OpCo and into the HoldCo so the OpCo shares qualify for the Lifetime Capital Gains Exemption. This is often coordinated with corporate investment strategies to optimize the structure.

Q11: What is the "21-Year Rule" for Trusts?

In Canada, a trust is deemed to have sold all its assets at fair market value every 21 years. This can trigger a massive tax bill on unrealized gains.

Dynasty Strategy: We plan for this years in advance, usually by "rolling out" the assets to beneficiaries tax-free before the 21st anniversary hits. It acts as a forced generation-transfer checkpoint.

Q12: Who should be the Trustee?

Typically, it is the business owners (Mom and Dad). However, for "Dynasty" strategy, we often recommend appointing an independent third trustee (like a trusted lawyer or accountant) to act as a tie-breaker or to validate that decisions are made in the best interest of the trust, adding a layer of corporate governance.

Q13: Is a Trust different in Quebec vs. Ontario?

Yes. In Ontario (Common Law), a trust is a relationship between the Trustee and Beneficiaries. In Quebec (Civil Code), a fiducie creates a "separate patrimony":the assets are ownerless. While the tax result is similar, the legal mechanics of setting it up and the duties of the administrators differ significantly.

Q14: Does a Trust pay taxes?

Trusts are generally taxed at the highest marginal tax rate on any income they retain. Therefore, the strategy is usually to flow all income through the Trust to the beneficiaries (who are taxed at their lower personal rates) or to corporate beneficiaries. Trusts are flow-through mechanisms, not holding tanks.

Q15: Can I add beneficiaries later (e.g., future grandchildren)?

Yes, most discretionary family trusts are drafted to include "future children and grandchildren" of the founders as beneficiaries. This ensures your structure automatically expands to cover new family members without needing to rewrite the legal agreements.

Resources & Recommended Reading

External Resources

• Income Tax Act Section 85 (Rollovers) & Section 55(2) (Anti-Avoidance) : CRA guidance on inter-corporate transactions
• Government of Canada: T2 Corporation Income Tax Guide (Chapter 4: Small Business Deduction) : Official tax treatment documentation
• CRA Interpretation Bulletins: Safe Income on Hand calculations and Section 55(2) applications

Related Articles

• The SBD "Grind" & Your Corporate Portfolio : Understanding how passive income affects small business deduction
• RDTOH & GRIP for Owner-Managed Corporations : Refundable tax mechanisms and eligible dividends
• CDA 101: The Capital Dividend Account Explained : Tax-free dividend strategies
• Tax Optimization Services : How we help optimize corporate tax strategies