If profit is piling up in your operating company, here’s a question worth sitting with: where should that money actually live? Leaving it in the company that does the work is the default — and often the wrong answer. In an interview, Michael Baker, CPA, walked through why, and what a better structure looks like.
Don’t leave surplus cash in your operating company
Two problems. First, cash and investments sitting in your operating company (Opco) are exposed to the risks of the business — a lawsuit, a creditor, a bad year. Second, too much passive wealth inside the Opco can throw your shares offside for the Lifetime Capital Gains Exemption when you eventually sell (see our piece on selling your business). For both reasons, many incorporated owners move surplus to a holding company (Holdco).
The passive-income trap
There’s a second reason structure matters: the passive-income rules. Once a corporation’s passive investment income (technically, adjusted aggregate investment income) exceeds $50,000 in a year, its $500,000 small-business limit is reduced by $5 for every $1 over the threshold — and the small-business deduction disappears entirely once passive income hits $150,000. Losing that low rate on your active income is expensive.
A quick example
Your corporation holds a $1.5M investment portfolio earning 5% — that’s $75,000 of passive income. The first $50,000 is fine. The $25,000 above it grinds your small-business limit by $5 for every $1 — a $125,000 reduction in the active income that qualifies for the low rate. Push passive income to $150,000 and the deduction is gone completely. Managing where that investment income sits, and in what assets, is how owners keep the grind in check.
Passive income is also taxed at the highest corporate rates, with a “refundable tax” mechanism that effectively forces it back out as a dividend before you recover part of the tax — and the integration isn’t perfect. All of which is why owners plan deliberately around it.
Estate freeze + family trust
For owners thinking a generation ahead, an estate freeze — locking in today’s value of your company so future growth accrues to the next generation — combined with a family trust can pass that growth on tax-efficiently and, in the right circumstances, multiply the capital gains exemption across family members. These are powerful structures. They are also complex: TOSI rules apply to trust distributions, and they require a proper accountant and lawyer to set up and maintain. This is firmly “work with a professional” territory, not a template.
The takeaway
The structure your retained earnings live in matters as much as the investments inside it. A Holdco — sometimes paired with a trust — can protect your wealth from business risk, manage the passive-income grind, and set up a cleaner eventual exit. But it only works if it’s designed for your situation and revisited as things change.
Frequently asked questions
Should I have a holding company?
Many incorporated owners with surplus cash benefit from one. A holding company can protect retained earnings from the operating business's risks, help keep your operating-company shares qualified for the Lifetime Capital Gains Exemption, and provide a cleaner structure for investing and eventual succession. Whether it's right for you depends on your situation, so confirm with your accountant.
How does the $50,000 passive income rule work in Canada?
Once a CCPC's passive investment income exceeds $50,000 in a year, its $500,000 small-business limit is reduced by $5 for every $1 over the threshold. At $150,000 of passive income, the small-business deduction is eliminated entirely, so more active income is taxed at the higher general corporate rate.
What is an estate freeze?
An estate freeze locks in the current value of your company to you (often via preferred shares), so future growth accrues to the next generation, frequently through a family trust. It can reduce tax on death and, in the right circumstances, multiply the capital gains exemption across family members. It's a complex structure that needs professional setup.
Do family trusts still work after the TOSI rules?
Yes, but with limits. The Tax on Split Income (TOSI) rules restrict distributing trust income to family members who aren't genuinely involved in the business. Family trusts remain valuable for asset protection, succession, and multiplying the capital gains exemption, but income-splitting through them is far more constrained than before 2018.
Can a holding company protect my Lifetime Capital Gains Exemption?
It can help. Moving surplus cash and passive investments out of your operating company into a holding company keeps the operating company's shares 'onside' as a Qualified Small Business Corporation, which is required to claim the exemption. Because the qualification tests look back 24 months, this needs to be done well before a sale.
General information for Canadian incorporated business owners — not tax, accounting, or legal advice. Figures are current for 2026 and change yearly; tax outcomes depend on your province and situation. Confirm the details with your CPA before acting. Dundas Wealth operates as the brand of Dundas Life Inc. (FSRA #37628M).