[Taraz]

From a tax perspective, is it better to own shares in a startup personally, or via another company that you own?

The company is a software startup, so we're hoping that it will eventually be worth millions of dollars (although it is currently worth zero-ish dollars). On the slim but non-zero chance that the startup does end up being worth a lot, does it make more sense to hold the 30% share of the startup personally, or via my consulting company (I own 100% of this company).

Do you have to worry about double-taxation when your company owns part of another company? What are the any pros/cons for either option?

Any thoughts?

 

[Jaberwock]

If you own the start up personally, you will be able to claim the $750,000 lifetime capital gains exemption when you sell the company (assuming that you haven't already claimed that exemption).

Owning through a holding company has no tax advantage unless the holding company has multiple owners (wife, kids for example) to share the spoils.

 

[makemerich]

Jaberwock is correct re: LCGE provided that the company is a Canadian controlled private corporation/small business corporation.

Advantage to owning the shares in a company: limitation of liability. Without crunching the numbers I doubt you would have any tax advantage/deferral on capital gains or dividends as your holding company would be subject to Part IV tax, which in most cases eliminates the incentive of holding investments in a holding company.

If the startup is not exposed to any sort of risky areas that may be subject to litigation I would recommend holding them personally. I recommend you read up on CCPC rules and how to claim the LCGE in the event that the shares do appreciate significantly and you want to sell.

http://www.taxtips.ca/smallbusiness/capitalgainsdeduction.htm

 

[atrp2biz]

Why wouldn't liability be limited to the corporation irrespective of whether it is owned personally or through a holding company?

 

[makemerich]

I'm no lawyer but if the company that is being invested in is guilty of negligence there may be the possibility that damages can be further passed on to directors or shareholders. Generally this is extreme and reservde for directors who would have made the business decisions but consider the OP is prepared to own 30% share of the startup that may qualify as control and he may be a director. Adding a holdco between the investor and the investee may help to defer some liability. Was really grasping at straws trying to think of a pro of holding the investments in a company, if you couldn't tell. If the OP did in fact incorporate and own the shares in a holdco he would also have to pay for yearly filings, adding another con to the list.

 

[amack081]

If you own the start up personally, you will be able to claim the $750,000 lifetime capital gains exemption when you sell the company (assuming that you haven't already claimed that exemption).

Owning through a holding company has no tax advantage unless the holding company has multiple owners (wife, kids for example) to share the spoils.

This is not true.
The dividend refund from the operating company paying up to the holdco (irrespective of multiple owners) is a tax advantage as it allows control over timing of dividends paid to the individual (for instance paying a dividend when the individual is retired and in a lower tax bracket).
Moreover, should the operating company be successful for a long period of time, the dividend refunds may exceed the value of the LCGE.

From the holdco's perspective, should dividend money be reinvested and trigger capital gains, the holdco will be able to pay capital dividends on the other 50% out to the individual tax free.

Also what people tend to forget with the LCGE is that its on the sale of the shares of the QSBC and not on the sale of assets of the corporation. Therefore, if there's no buyer of the business (just its assets for example), then the individual isn't entitled to their Life Time Capital Gains Exemption. While the Life Time Capital Gains Exemption can be a benefit, there's no guarantee down the line that someone will want to purchase the shares of the business.

Finally, a holdo does provide asset protection as for legal purposes they are different entities.

 

[Nerd Investor]

Just to chime in, if you end up setting up a new company for this business, you may want to have the common shares owned by a Family Trust (especially if it has the kind of growth potential you think it does). It lets you multiply your capital gains exemption in the event of sale and income split along the way with your wife, adult children or other beneficiaries.

 

[Jaberwock]

This is not true.
The dividend refund from the operating company paying up to the holdco (irrespective of multiple owners) is a tax advantage as it allows control over timing of dividends paid to the individual (for instance paying a dividend when the individual is retired and in a lower tax bracket).


It is true that dividends paid to a Holding company would allow control of the timing of payments to the individual. However, if the holding company invests those dividends, any income from the investments held in the holding company would be taxed at the highest marginal rate, negating any benefit to the individual.

 

[amack081]

This is not true.
The dividend refund from the operating company paying up to the holdco (irrespective of multiple owners) is a tax advantage as it allows control over timing of dividends paid to the individual (for instance paying a dividend when the individual is retired and in a lower tax bracket).


It is true that dividends paid to a Holding company would allow control of the timing of payments to the individual. However, if the holding company invests those dividends, any income from the investments held in the holding company would be taxed at the highest marginal rate, negating any benefit to the individual.

This is correct... up until the holdco pays out dividends out the individual, to which it will receive a dividend refund which brings effective income tax rate down. Moreover, the dividends paid out to the individual from investment income would be eligible dividends which have tax advantages to the individual.