Business Law Basics – Why Your Lawyer Recommends a Holding Company and Separate Share Classes

When launching a new business venture in Canada, especially with one or more partners, your lawyer will likely bring up two key recommendations right away:
First, to hold your shares through a holding company, and
Second, to issue a separate class of common shares to each shareholder.

These suggestions may seem like extra steps at first glance. However, they play a critical role in keeping your business structure flexible, tax-efficient, and well-prepared for future growth. Below, we explain why your lawyer (and your accountant) often prioritize these two strategies—and why you should take them seriously.

holding company Canada

Understanding Why a Holding Company Makes Sense

A holding company (often referred to as a “Holdco”) is a corporation that you personally own. It doesn’t carry out any day-to-day operations. Instead, it holds your shares in the actual operating company (Opco), which is where the business activity happens.

Although this may seem like an added layer, it creates several strategic advantages for business owners in Canada.

Tax Deferral and Reinvestment Potential

When your Holdco owns at least 10% of the shares (by both value and votes) in a Canadian-controlled private corporation (CCPC), the dividends paid to it by Opco are generally tax-free. That means the entire pre-tax amount can be reinvested directly from within the corporate structure.

The result? You can use those funds to:

  • Reinvest in the business
  • Build a passive investment portfolio (ETFs, real estate, etc.)
  • Fund other ventures under corporate control

Additionally, if your Opco qualifies for the small business deduction, the first $500,000 of active business income is taxed at just 11% in Alberta. This is far lower than personal tax rates, which often range between 40% and 48%. Rather than taking profits out and paying high personal taxes, you retain as much as 89% of your earnings inside the corporate group—allowing your capital to grow and compound over time.

Creditor Protection for Retained Earnings

Holdcos also help protect accumulated earnings and investments from operating risk. If your Opco faces a lawsuit, debt claim, or other liability, assets held in your Holdco are generally not exposed—unless you or your Holdco have made specific guarantees.

This creates a safeguard between your profitable assets and any unforeseen operational issues.

Planning for Succession and Income Splitting

A holding company also improves flexibility for:

  • Estate planning
  • Succession with family members or co-owners
  • Income splitting with a spouse or adult children

It can also help position you for the Lifetime Capital Gains Exemption (LCGE). As of June 2024, this exemption can shelter up to $1.25 million in capital gains per eligible shareholder when selling qualifying shares of a small business corporation.

The Importance of Using Separate Share Classes

Let’s shift to shares. When people incorporate a business together, the default is often to issue one class of common shares to everyone—often labeled “Class A.” This may feel clean and equal at the outset, but problems can emerge over time.

What happens when a new investor enters at a higher valuation? Or if one founder exits after five years?

Creating a separate class of common shares for each shareholder solves these issues. For example:

  • Your Holdco receives Class A shares
  • Partner 1’s Holdco receives Class B shares
  • Partner 2’s Holdco receives Class C shares

This structure ensures that each shareholder’s investment remains distinct.

Two Reasons This Matters: ACB and PUC

When thinking about tax planning, two elements are especially important:

  • Adjusted Cost Base (ACB) – What you paid for your shares, used to calculate any gain on a sale
  • Paid-Up Capital (PUC) – The amount recognized by the company as a capital contribution, which may be returned tax-free in certain cases

If all shareholders are issued the same class and someone later buys in at a different price, it becomes harder to track ACB and PUC properly. It’s like sharing one bank account and trying to keep score on who deposited what—it leads to confusion and potential tax issues.

By giving each shareholder a unique class of common shares, their ACB and PUC can be tracked separately. This makes it easier to handle:

  • Future buyouts or exits
  • Dividend payments to select shareholders
  • New investors joining at different valuations

Flexibility for Future Growth

Separate share classes also provide structural flexibility that makes your company more scalable. You can:

  • Bring in new partners without affecting existing ownership
  • Manage tax-efficient dividends
  • Create different terms for different shareholders

Whether your company grows fast, restructures, or even winds down, having these structures in place makes everything cleaner and easier to manage.

When to Put These Structures in Place

Ideally, you should put these elements in place before you incorporate or issue shares. Restructuring afterward can be more expensive and may lead to tax or legal complications.

Working with a lawyer and accountant early can save you time, money, and stress later.

Here’s who you should involve:

  • A business lawyer to draft your articles and shareholder agreements
  • An accountant or tax advisor to ensure the structure works for your tax goals
  • A financial planner, if your business is part of a broader estate or retirement strategy

The earlier you establish a solid foundation, the easier it will be to grow with confidence.

Key Takeaways for Founders and Partners in Canada

If you’re starting a business with partners or planning for long-term success, it’s worth taking time now to get the structure right. Using a holding company and issuing separate share classes gives you:

  • Better tax outcomes and reinvestment flexibility
  • Stronger asset protection from creditors
  • Simplified ownership tracking and buyouts
  • Access to tax exemptions like the LCGE

These legal tools are simple to set up with the right guidance—and they can help your business stay efficient and resilient for years to come.

Want Help Structuring Your Business?

Whether you’re starting a company or optimizing one you’ve already launched, we’re here to guide you through:

  • Setting up a holding company
  • Creating the right share structure
  • Drafting shareholder agreements
  • Coordinating with your accountant or tax advisor

Book a consultation today to take the next step in building a business that’s legally sound, tax-efficient, and built for the future.

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