Access the Holdco Real Estate Guide

Basic Structure

1. Operating Company (Opco)

This is:

• HVAC company
• Refrigeration company
• Service business
• Has technicians
• Earns active business income

The Opco:

• Pays corporate tax on business profits
• Keeps retained earnings inside company
• Can pay intercorporate dividends to Holdco

2. Holding Company (Holdco)

This company:

• Receives excess retained earnings
• Holds investments
• Buys real estate
• Can own multifamily buildings
• Can flip properties
• Can partner with investors

Usually:

• Same owner owns both companies
• Or family trust owns both

Step 1: Moving Money From Opco to Holdco

Example:

• HVAC company has $2M retained earnings

Opco pays:

• Tax on active business income first

Then:

• Remaining after-tax retained earnings can usually move to Holdco as an intercorporate dividend

Usually:

• No immediate personal tax
• No immediate additional corporate tax
• Done accountant-to-accountant properly

This is one of the main reasons Holdcos exist.

Step 2: Holdco Buys Property

Yes, Holdco can buy:

• Multifamily
• Mixed-use
• Commercial
• Rental buildings
• Fix-and-flips

Example purchase:

• $650k property
• 30% down payment
• $200k renovation
• Closing costs
• Reserve fund

Mortgage:

• Bank finances remaining amount

Very common:

• Owner personally guarantees mortgage

Lenders often want:

• Corporate guarantee
• Personal guarantee
• Net worth statement
• T2s and financials from Opco

Step 3: Renting the Property

After renovation:

• Holdco rents property
• Rent goes into Holdco

Cash flow treatment:

Rental income minus:

• Mortgage
• Taxes
• Insurance
• Repairs
• Interest
• Utilities

Remaining profit = rental profit inside Holdco.

Holdco pays:

• Corporate tax on rental income

Important: Rental income is generally considered passive income. Passive income tax rates are usually higher than active business income tax rates. But some tax may later be refunded when dividends are paid to shareholders. Your accountant tracks this through:

• RDTOH accounts (Refundable Dividend Tax On Hand)
• CDA accounts (Capital Dividend Account)
• Refundable taxes

Step 4: Selling the Property

Example:

• Total project cost = $850k
• Sold later for $1.2M

Profit: Approx. $350k before selling costs and taxes.

Capital Gain vs Business Income

This matters a lot.

If CRA sees it as a long-term investment, profit may be treated as a capital gain. Example: $350k gain, with only 50% taxable.

If CRA sees it as flip or business activity, the entire profit may be business income and 100% taxable corporately.

CRA looks at:

• Intent
• Time owned
• Renovation activity
• Frequency of flips
• Advertising
• Experience
• Financing structure

Holding for 2+ years as rental helps support investment treatment, but does not guarantee it.

What Happens to the Profit?

After sale, cash stays inside Holdco unless distributed. Holdco can:

• Reinvest
• Buy another building
• Pay shareholder dividends
• Lend money
• Invest in stocks or GICs
• Partner in other deals

Does Holdco Pay Money Back to Opco?

Usually, no need. Normally money flows from Opco to Holdco, not usually back. But Holdco can:

• Loan money
• Invest into Opco
• Pay dividends if structured correctly

Accountants structure this carefully.

Can a Co-Investor Invest Using Their Corporation?

Yes. Very common.

Example:

• Your Holdco owns 50%
• Investor Holdco owns 50%

Profits split:

• Cash flow
• Appreciation
• Sale proceeds

Could be:

• Joint venture
• Shareholder agreement
• LP structure
• Tenant-in-common structure

Lawyer and accountant set this up.

Simple Example Flow

• HVAC Opco earns profits and keeps retained earnings
• Dividend to Holdco through a tax-efficient intercorporate dividend
• Holdco buys multifamily with 35% down and mortgage for 65%
• Owner guarantees loan
• Holdco renovates and rents
• Rental income collected, expenses paid, cash flow retained
• Property appreciates and sells later
• Profit stays in Holdco
• Lower tax if capital gain, higher tax if treated as flip
• Holdco reinvests or pays dividends personally

Very Important Items

You need:

• CPA experienced in Holdco structures
• Real estate lawyer
• Proper bookkeeping
• Proper shareholder structure
• Tax planning before transfers
• Mortgage broker familiar with corporate borrowing

Big Picture

This is exactly how many successful service business owners:

• Diversify away from only business value
• Build hard assets
• Create long-term appreciation
• Reduce dependence on future EBITDA multiples
• Build retirement income outside operating company risk

Especially common among:

• HVAC
• Refrigeration
• Elevator
• Waste management
• Heavy mechanical
• Fire systems
• Trades businesses with strong retained earnings

This material is provided for educational purposes only and does not constitute legal, accounting, tax, or financial advice. Please seek professional counsel for guidance specific to your situation.