What’s the Right Structure? Part 1: Holding Company vs. Operating Company
This is the first article in our new series, What’s the Right Structure, where we explore key legal and tax considerations for business owners looking to grow, protect, or restructure their companies. In this opening piece, we break down the difference between a holding company and an operating company — and why introducing a holdco might be a smart move.
As your business grows, choosing the right corporate structure becomes critical, not just for tax efficiency, but also for legal protection, long-term planning, and future succession. One of the most common questions we hear from clients is whether they should introduce a holding company to sit above their active operating company.
In this article, we break down the differences, benefits, and strategic reasons behind a two-tiered structure.
What is an Operating Company (Opco)?
An operating company is a corporation that houses an active operating business which carries out day-to-day commercial activities. An operating company generates revenue, hires employees, enters into contracts and assumes liabilities and can be anything from a restaurant to dental clinic or manufacturing facility. The key feature of an opco is that it directly interacts with customers, suppliers, contractors, and employees, thereby exposing itself to liability arising from these various relationships.
What is a Holding Company (Holdco)?
A holding company, by contrast, does not actively operate a business and does not interact with third parties. Instead, it holds passive assets such as shares of a private or public company, real estate, bonds or IP etc. In a typical dual structure of a small business owner/operator, the holdco is owned by the individual or his or her family trust and the opco is wholly owned by the holdco. The holdco therefore sits above the opco but below the individual in the corporate structure.
Why Use a Holding Company?
There are two principal reasons why a holding company is utilized: creditor proofing and tax benefits.
1) Creditor Protection
As mentioned, an operating company is inherently exposed to liability through its relationships with creditors, suppliers, vendors, customers, employees, contractors, and others. Any of these parties can bring a legal claim against the opco at any time. If your opco has accumulated profits over the years or holds valuable assets, you likely want to ensure that this “nest egg” is protected from unexpected claims.
The basic strategy is for opco to perform an annual cash sweep transferring excess funds to its holding company by way of an intercorporate dividend, which is generally tax-free under Canadian tax law. This moves the surplus one level up into the holdco, where it is effectively insulated from the operational risks of the business.
Once inside holdco, these funds are no longer accessible to creditors of opco. Since holdco does not carry on business or interact with third parties, it faces no direct exposure to liability. If the opco is ever sued or becomes insolvent, the funds in the holdco remain protected. This process is called ‘creditor-proofing’ your opco.
One Step Further
If opco requires its funds for working capital, the strategy can be taken one step further by having holdco loan back the intercorporate dividend funds to opco under the terms of a Secured Loan Agreement. Then, holdco registers a lien to support its loan under the Personal Property and Security Act (PPSA). In this way, the funds substantively remain inside opco but they are securitized by declaring them up to holdco and then loaned back under the terms of a secured agreement in which holdco has priority to the funds in the event of an action.
2) Tax Planning
Intercorporate dividends
If you are a direct, personal shareholder of your opco, declaring a dividend at year-end effectively pushes corporate profits into your personal hands. While this may be appropriate in some cases, it’s important to consider the tax implications. Canada has some of the highest marginal personal tax rates in the world with individuals paying up to 54% on income earned above $220,000 per year (as of 2025).
In contrast, a Canadian-controlled private corporation (CCPC) that qualifies for the Small Business Deduction is taxed at a combined 12.2% (Federal + Ontario) on its active business income up to the small business limit. That’s a significant spread and one that can be strategically leveraged to defer personal tax and grow capital more efficiently inside the corporation.
Rather than declare a dividend and push income into the owners pocket thereby triggering a high rate of tax, an intermediary holdco allows the opco to declare a dividend to holdco where it can accumulate its yearly profits and earnings, at no additional tax.
Therefore one of the most significant benefits of a holdco is the ability to move surplus funds from the opco into the holdco tax-free using intercorporate dividends. As long as the corporations are “connected” (i.e., the holdco owns at least 10% of the opco’s voting shares and value), dividends paid from opco to holdco are not subject to additional corporate tax.
This allows you to accumulate retained earnings (after tax net profits) in holdco, where they are protected from opco’s liabilities, without triggering tax on that transfer.
Investment Income Deferral
Once profits are moved into the holdco, they can be reinvested in real estate, marketable securities, or other passive investments. Because corporate tax rates are significantly lower than personal rates, each dollar has greater earning power. Instead of paying up to 54% in personal tax, which leaves only $0.46 on the dollar to invest, opco pays just 12.2% in small business tax (on active business income), leaving $0.88 per dollar available for reinvestment. This allows capital to compound more quickly and efficiently inside the corporate structure.
It is important to note that while investment income inside a corporation is taxed at a high rate (about 50% in Ontario), 30 points of this tax is refundable reducing the effective rate down to about 20% when the holdco pays taxable dividends to its individual shareholder.
This strategy allows for deferral of personal tax, keeping more capital compounding within the corporation over time.
When Does It Make Sense to Set Up a Holdco?
You should consider incorporating a holdco if your opco has retaining earnings or significant surplus cash or you’re concerned about protecting assets from business risk.
It’s important to note that adding a holdco to an existing operating company involves an additional step called a section 85 rollover. It will also involve initial setup costs, annual legal and accounting fees, and must be properly managed to comply with tax and corporate law.
Final Thoughts
Adding a holding company can be a important tool when used strategically. However, setting up a dual structure before its entirely necessary will be expensive in both accounting and legal fees, as well as superfluous. You want to introduce the holding company at the point in time when it presents significant benefits. Before restructuring, speak with a corporate lawyer or you’re your accountant to ensure the setup is aligned with your long-term goals, tax planning, and operational needs.
Shira Kalfa, BA, JD, Partner and Founder
Shira Kalfa is the founding partner of Kalfa Law Firm. Shira’s practice is focused in corporate-commercial and private M&A law including corporate reorganizations, corporate restructuring, mergers and acquisitions, commercial financing, secured lending and transactional law.
© Kalfa Law Firm , 2025
The above provides information of a general nature only. This does not constitute legal or accounting advice. All transactions or circumstances vary, and specified legal advice is required to meet your particular needs. If you have a legal question you should consult with a lawyer.
