A holding company (often "holdco") is a corporation whose main function is to hold assets — typically the shares of an operating company, and sometimes passive investments — rather than to carry on an active business itself. Surplus cash from the operating company is moved up to the holdco as inter-corporate dividends, which are generally tax-free between connected Canadian corporations.
Business owners use a holdco to separate accumulated wealth from the risk and creditors of the active business, to hold passive investments apart from the operating company, and to position a corporate group for a future sale or succession. The structure adds the compliance cost of a second corporation and brings the passive-investment-income rules into play, which can reduce access to the small-business deduction where passive income across the associated group exceeds defined thresholds.