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.
Choosing the right corporate structure becomes increasingly important as your business expands, not only for tax efficiency but also for legal protection, asset preservation, succession planning, and long-term strategy. One of the most common questions our clients ask is:
“Should I introduce a holding company above my operating company?”
This article breaks down the key differences, benefits, and strategic reasons to consider adding a holding company (“holdco”) to your structure.
What Is an Operating Company (Opco)?
An operating company is the corporation that carries out day-to-day business activities. It:
- Generates revenue
- Hires employees
- Enters into contracts
- Assumes business risks and liabilities
Examples include restaurants, dental clinics, retail stores, manufacturing facilities, consulting firms, and more.
Because the opco directly interacts with customers, suppliers, and contractors, it is exposed to creditor claims, lawsuits, and operational liabilities.
What Is a Holding Company (Holdco)?
A holding company, on the other hand, does not engage in active business operations. Instead, it holds passive assets such as:
- Shares of a private or public corporation
- Real estate
- Marketable securities
- Intellectual property (IP)
- Cash or investments
In a typical small business structure, the holdco is owned by the individual (or a family trust), and the opco is wholly owned by the holdco. The holdco therefore sits above the opco, but below the individual.
Why Use a Holding Company?
Holding companies are primarily used for:
- Creditor Protection
- Tax Planning and Tax Deferral
1) Creditor Protection
Because the operating company carries business risk, it is vulnerable to claims from creditors, vendors, customers, contractors, employees, and other third parties.
If your opco accumulates profits or owns valuable assets, you want to protect this “nest egg” from unexpected legal or financial threats.
The Strategy: Annual Cash Sweep
The opco can declare an intercorporate dividend to the holdco. Under Canadian tax law, this type of dividend is generally tax-free.
Once funds move to the holdco, they are:
- Outside the opco
- Protected from opco’s creditors
- Kept separate from operational risk
This is known as creditor-proofing your corporation.
One Step Further: Secured Loan Strategy
If the opco needs funds for working capital, the holdco can loan the money back under a Secured Loan Agreement.
Steps:
- Opco declares a dividend to holdco
- Holdco loans the funds back to Opco
- Holdco registers a PPSA lien (Personal Property Security Act)
This creates secured priority for the holdco if the opco becomes insolvent or faces claims.
2) Tax Planning Advantages
a) Intercorporate Dividends
Declaring dividends from opco directly to an individual triggers high personal tax, with top marginal rates in Canada reaching up to 54% (2026 figures).
By contrast:
- A CCPC eligible for the Small Business Deduction pays 12.2% combined tax (Ontario + Federal) on the first $500,000 of active business income.
- A holdco allows an opco to declare tax-free intercorporate dividends upward, keeping profits inside the corporate group.
This enables:
- Tax deferral
- More efficient capital growth
- Asset protection
To qualify, the corporations must be “connected” (holdco owns at least 10% of voting shares and value of opco).
b) Investment Income Deferral
Once profits reach the holdco, they can be used to reinvest in:
- Real estate
- Marketable securities
- Passive investment portfolios
- Additional business ventures
Because corporate tax rates are significantly lower, each dollar has greater earning power.
Example:
- $1 earned personally after 54% tax = $0.46
- $1 earned in opco after 12.2% tax = $0.88
Although corporate investment income is taxed at a high rate (about 50% in Ontario), approximately 30% is refundable, reducing the effective rate to ~20% when the holdco pays taxable dividends to its shareholder under the Refundable Dividend Tax On Hand (RDTOH) rules.
This creates a long-term deferral, allowing capital to compound more effectively.
When Does It Make Sense to Set Up a Holdco?
A holding company may be appropriate if:
- Your opco has retained earnings or surplus cash
- You are concerned about risk exposure
- You want to plan for succession, estate planning, or future investments
- You want to defer personal tax
- You anticipate selling the business in the future
If your opco is in existence and has accumulated value, adding a holdco usually involves a Section 85 rollover, plus legal and accounting fees. It is important to set it up at the right time, not prematurely.
Final Thoughts
Introducing a holding company can be a powerful tool for business owners when used strategically. However, implementing a dual-corporate structure before it becomes necessary may create unnecessary complexity and costs.
Before restructuring, speak with a corporate lawyer or your accountant to ensure the strategy supports your long-term tax planning and operational goals.
Considering a holding company or planning a corporate restructuring?
Book a consultation with Kalfa Law Firm to ensure your structure is tax-efficient, creditor-protected, and aligned with your long-term business goals.
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. Updated January 2026
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.
