Management company in Quebec: is it advantageous?

What is the purpose of a management company?

In a typical structure, the entrepreneur owns an operating company that runs the business and a management company that may hold investments or certain assets.

Dividends can generally be paid between Canadian corporations without immediate tax through the intercorporate dividend deduction, subject to several tax rules and anti-avoidance measures.

This can allow funds not needed for operations to be moved to another company rather than being paid immediately to the shareholder personally.

Important: this does not mean that personal income tax disappears. Rather, it can be deferred until the sums are eventually paid to the shareholder.

In what situations can it become interesting?

A management company may be worth analyzing, in particular, when a company:

• generates more cash than the shareholder personally needs;
• accumulates significant investments;
• wishes to better separate certain assets from operational activities;
• prepares for a reorganization, a succession or a possible sale;
• owns several companies or holdings.

The right time, however, depends on the financial, tax and corporate situation of each entrepreneur.

Beware of investment income

Accumulating investments within a corporate structure also has tax implications.

For a Canadian-controlled private corporation and its associated corporations, the small business deduction limit begins to be reduced when total adjusted investment income exceeds $50,000. It can be eliminated completely when it reaches $150,000.

This is therefore a good example of a situation where the creation of a management company should not be considered in isolation.

We need to look at the structure of the group as a whole.

Is it automatically advantageous?

No.

An additional company also means more accounting, tax returns, legal fees and administration.

For an entrepreneur who already withdraws almost all of the profits from their business to finance their lifestyle, the benefit of a management company may be much more limited.

Conversely, when a company generates significant surpluses that will remain invested for several years, the discussion often becomes much more relevant.

The right question to ask

The question is therefore not simply:

"Do I need a management company?"

It's better to ask ourselves:

"What am I trying to achieve with my corporate structure?"

Asset protection, investments, growth, preparing for a sale, family succession: the answer can be very different depending on the objective.

Partenariat Fiscal supports entrepreneurs and executives throughout Quebec in analyzing their corporate structure, corporate reorganizations, asset protection and tax planning.

This article provides general information and does not constitute tax, legal, or accounting advice.