You have cash built up inside your holding company, and you’re ready to invest it and make that money work for you, but where do you start? In this blog, we’ll share the best ways to invest inside your holding company and what to invest in. Let’s start with the basics—what a holding company is and its benefits, precisely the benefits of investing inside your holding company.
What are the Benefits of Investing Inside Your Holding Company?
In Canada, a holding company is a corporation that owns and controls other companies or assets. It is not active, meaning it does not produce goods or services.
Holding companies are commonly used as investment vehicles to consolidate ownership of subsidiary companies and assets. They provide a structure that allows for easier management and allocation of resources and tax planning strategies. By leaving money in your holding company, you can reinvest those funds into the business or its subsidiary companies. Retained earnings can fuel the company’s growth initiatives and increase its value over time while working towards your personal financial freedom.
How to Invest Inside Your Holding Company?
Now that we have built up some retained earnings from your operating company, it’s time to put the funds to work. Deciding what to invest in within your holding company will depend on different factors, including your financial goals, risk tolerance, market conditions, and the nature of your subsidiary companies, as you may want to diversify.
Here are some investment options to consider within a holding company.
1. Individual stocks
Investing in the stock market is tax efficient, as individual stocks qualify as capital gains. Capital gains are an important consideration as they create Capital Dividend Account credits, allowing you to get money from your corporation completely tax-free.
2. Bonds and fixed income
Bonds are an excellent option for short-term, low-risk investing. They provide interest income to the corporation and are generally liquid.
3. Real estate (REITs)
Real estate is not liquid and requires some additional management, but it’s a long-term tax-efficient tool to invest in as the growth is taxed as a capital gain.
4. Mutual Funds and Exchange-Traded Funds (ETFs)
Mutual funds and ETFs are a hands-off approach to investing, as you can choose from a bundle of stocks and bonds in different portfolio options. You can customize your portfolio to suit your time horizon, risk tolerance, and investment goals, whether a passive portfolio with ETFs or an actively managed portfolio with mutual funds. We always recommend a corporate class structure with these types of investments. It converts all income into capital gains and creates Capital Dividend Account credits, which allows you to withdraw money from your corporation tax-free.
5. Permanent life insurance
Corporate-owned life insurance is one of the most effective vehicles for future business plans, savings for other investment opportunities, retirement, or legacy planning. This is a great alternative to a TFSA, as you cannot own one inside your corporation. It’s a low-risk investment option that allows you to grow money in your corporation completely tax-exempt. Life insurance also includes a death benefit, which creates Capital Dividend Account credits, allowing more money to come from your corporation tax-free.
6. Internal financing
If you plan to grow or expand your business, you can lend out the funds in your corporation for future business expansion or invest in other subsidiaries.
Investment Strategies to Consider
One tool you always want to use in your corporation is the Capital Dividend Account (CDA).
As mentioned in this blog, certain investment vehicles will allow you to generate CDA credits. These credits allow you to withdraw cash out of your corporation tax-free.
Here are some tips to make the most of your CDA:
- Invest in capital gains vehicles such as stocks, corporate-class mutual funds, or real estate. 50% of the capital gains from these types of investments are eligible for CDA credits and can be withdrawn from your corporation completely tax-free.
- Use life insurance. When you own life insurance inside your corporation, the death benefits create CDA credits and allow the death benefits to be paid out to your family tax-free. Using life insurance as one of your investment vehicles allows for tax exemption, provides significant tax savings for the next generation, and creates a lasting legacy for your family.
(Check out these strategies to invest and save tax using the power of your corporation)
The investment opportunities are endless inside your holding company, but it’s also important to consider any risks and tax implications.
Book a call today to see if your investment decision aligns with the overall strategy and objectives of the holding company and your financial goals.