What Is a Holding Company and When Does a Business Need One?

What “holding company” actually means

A holding company is not a distinct legal category of corporation. It is an ordinary corporation, incorporated in the usual way, that meets a specific legal test: it controls another corporation. Under the Canada Business Corporations Act (CBCA), a corporation is formally called a “holding body corporate” of another corporation “if that other body corporate is its subsidiary” (CBCA, s 2(4)). Alberta’s Business Corporations Act (ABCA) uses the identical wording: “a body corporate is the holding body corporate of another if that other body corporate is its subsidiary” (ABCA, s 2(3)).

In practice this means: Company A is the holding company of Company B when Company B is a subsidiary of Company A. The relationship runs one way. Company A holds; Company B is held.

How “control” is measured

Both statutes define a subsidiary using the same control test: a corporation is a subsidiary of another person (which can itself be a corporation) if securities carrying more than 50% of the votes needed to elect its directors are held, other than merely as security, by or for that person (CBCA, s 2(3); ABCA, s 2(2)). The threshold is voting control to elect directors, not a majority of all shares outstanding or a majority of company value. A corporation that holds 51% of the voting shares of another corporation is that corporation’s holding company under both the federal and Alberta tests, even if non-voting shares held by others make up most of the target’s total equity.

A common variant of this structure is the wholly-owned subsidiary. Corporations Canada’s glossary for the CBCA describes a wholly-owned subsidiary as “a corporation that is 100% owned by a parent corporation, either directly or indirectly through the parent corporation’s other wholly-owned subsidiaries.” In that arrangement, the holding company owns all of the subsidiary’s shares outright, rather than just enough to control the board.

Group structures beyond a single parent-subsidiary pair

Alberta’s Business Corporations Act also defines “affiliated” corporations, which extends the holding-company concept to group structures with more than one layer or more than one sister company. Under the ABCA, “one body corporate is affiliated with another body corporate if one of them is the subsidiary of the other or both are subsidiaries of the same body corporate or each of them is controlled by the same person” (ABCA, s 2(1)(a)). This is the provision that captures, for example, two sister operating companies that sit under the same Alberta holding company but are not directly subsidiaries of each other.

Restrictions on a subsidiary holding shares of its own parent

The CBCA places a limit on reciprocal share ownership within a holding-company group. If a subsidiary corporation ends up holding shares of the corporation that is its own parent, the parent must cause that subsidiary to sell or otherwise dispose of those shares within five years from the date the subsidiary became a subsidiary (CBCA, s 30(2)). This prevents a group from using cross-ownership indefinitely to entrench control or distort voting.

When a business actually sets one up

No provision of the CBCA or the ABCA requires an incorporated business to have a holding company. Incorporation itself, whether federally or in Alberta, creates a single corporation with no obligation to layer a parent on top of it. Setting up a holding company is a choice, and the situations where the sources reviewed show it being used are structural rather than mandatory:

1. Acquiring or controlling another corporation. A corporation is created (or an existing one is used) specifically to hold voting control of a target company, meeting the more-than-50%-of-votes test described above.
2. Corporate takeovers. The CRA’s GST/HST Memorandum 8-6 addresses the specific scenario of a holding corporation formed to acquire shares of an operating subsidiary in a takeover. For the input tax credit rules on acquisition costs under section 186(1) of the Excise Tax Act to apply, the holding corporation itself must be registered for GST/HST.
3. Group reorganization. In Alberta, the affiliated-corporation definition is what lets a group with more than one operating company, or more than one layer of ownership, be recognized as a single corporate family under the Act.

Where a business is incorporated determines which statute’s definitions and restrictions apply. A corporation incorporated federally under the CBCA is governed by CBCA sections 2(3), 2(4), and 30(2). A corporation incorporated under Alberta’s Business Corporations Act is governed by the parallel ABCA sections 2(1)(a), 2(2), and 2(3).

Ontario: a gap to flag

Ontario incorporations are governed by the Business Corporations Act, RSO 1990, c B.16 (OBCA), which sets its own definitions section separate from the CBCA and the ABCA. The precise Ontario statutory wording for a “holding body corporate” or subsidiary definition was not verified against the primary source for this article, so it should not be assumed to be identical to the federal and Alberta wording above, even though the CBCA and ABCA text match closely. A business incorporating a holding company in Ontario should check OBCA section 1 directly, or confirm the definition with a lawyer, before relying on it. Separately, Ontario government guidance states that the Ministry’s fee to file Articles of Incorporation electronically is $300, which would apply to incorporating a new Ontario holding corporation the same as any other OBCA corporation, though this fee figure should be checked for currency before relying on it.