Opco-Trust-Holdco

Written by Jonathan Wright.

This is a note for the company owner considering their corporate structure.

Perhaps you’re at the stage of your business where you’re earning more cash than you need for personal use. The cash is sitting in your corporate account and you’re concerned about future liability.

Maybe you’ve also heard something about a “lifetime capital gains exemption” and want to make sure you’re set up properly to take advantage of the tax savings this provides.

So what are your options?

Leave it

You could leave things as they are. For obvious reasons, this is simplest. It’s also the most fraught.

First, if the operating company is sued, your cash is at risk. This is your original concern.

Second, the more cash and passive assets your company holds, the more difficult it becomes to use the lifetime capital gains exemption.

I covered this before in a couple articles, but in brief, the lifetime capital gains exemption is a (nearly) tax-free capital gains exemption on the sale of shares, up to $971,190 at the time of writing. From a tax perspective, it’s extremely valuable. But one of the preconditions of this exemption is that greater than 50% of the value of the corporation must be attributable to assets used in an active business carried on in Canada. If you’ve loaded up your holding company with passive assets—cash, real estate or shares of Apple—this might be a problem (and could potentially make the shares unsaleable).

Holdco

The next option is to cause a holding company to own the shares of the operating company. Then the operating company can potentially move tax-free dividends up to the holdco, and the cash can be invested there.

This addresses liability (assuming you’re not avoiding crystallized liabilities) but not the lifetime capital gains exemption. The company you’ll be selling (the holdco) could possibly have too many passive assets to meet the requirements for the exemption.

Opco-trust-holdco

To solve for both, we have a hybrid. We put a trust between the opco and the holdco.

The trust will own shares of the operating company and the holdco will be a beneficiary of the trust, along with the business owner and her family. This will allow for the tax-free flow-through of dividends from the opco to the holdco through the trust. And also, when the time comes, the trust can sell the shares of the opco and allocate the gains to human beneficiaries. Then, assuming the shares qualify, each of the beneficiaries can use their own lifetime capital gains exemption, multiplying the tax savings.

This is a brief summary only and doesn’t discuss a fair bit of nuance. If you’d like to know whether an opco-trust-holdco structure might work for you, or are just considering the next steps for your corporate structure, you can feel free to reach out to us. The author can be contacted directly at jonathan@rkwlaw.ca or 604.425.1123.