How Does a Canadian Holding Company Structure Reduce Risk?
The operating company runs the business and bears the operating risk: customer claims, employment claims, supplier disputes. The holding company owns the shares of the operating company and accumulates retained earnings transferred up as intercorporate dividends under section 112 of the Income Tax Act. Cash that is not needed for operations no longer sits in the operating company where a plaintiff can reach it.
What Is the Role of the PPSA in a Holding Company Asset Protection Strategy?
The holding company lends money to the operating company on documented commercial terms and registers a financing statement under the Personal Property Security Act covering the operating company's assets. Properly perfected, this security interest ranks ahead of unsecured judgment creditors. If the operating company is sued and a judgment registered, the holding company is the first creditor in line and recovers its collateral before the plaintiff sees a dollar.
When Must the Holding Company Structure Be Set Up to Protect Personal Assets?
Before any claim is known or reasonably anticipated. Both the dividend movement and the PPSA registration must precede the claim. A backdated security interest or a rushed registration after a known dispute will be challenged as fraudulent preference under the Bankruptcy and Insolvency Act and reversed. The structure must reflect genuine commercial reality from day one.
Key Takeaways+
- A holding company removes accumulated wealth from the operating risk pool through tax-free intercorporate dividends.
- A perfected PPSA security interest places the holdco ahead of unsecured judgment creditors.
- Both steps must be in place before any creditor claim is known.
- Rushed or backdated security interests will be reversed as fraudulent preference.
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