The direct answer: it is built for three reasons, and creditor protection is the weakest of them
A separate equipment company is worth building when the fleet is big enough to be a business in its own right, when two or more operating companies need the same machines, or when the owner wants the equipment to end up somewhere different from the contracts in a succession or sale. It is rarely worth building purely to keep the iron away from job-site creditors, because the people most likely to take the equipment, the lenders who financed it, already have it, and they do not lose their security when title moves to a related company.
That order matters because the pitch usually runs the other way. Owners hear "protect the equipment" first and "rent it back" second. In practice the rent-back is the structure; the protection is a side effect that works only for the slice of equipment you own outright and only against creditors who never took a guarantee. The rest of this page is the working version: how the two companies run together, what the bank and surety actually do, how the fleet you already own gets across, and what a second company costs you in tax.
The wider question of whether a holding company belongs above the operating company at all, and what it does for retained earnings rather than equipment, is in should a construction company have a holding company. The equipment company is usually a second step, and sometimes the holdco itself simply owns the fleet.
How an equipment company actually runs: rent, a lease, HST and CCA
The structure runs on a written equipment lease between the two companies, priced the way a rental house would price it and actually paid every month. The operating company deducts the rent as a job cost. The equipment company reports the rent as income, claims capital cost allowance on the machines, deducts the interest on the loans that financed them, and pays the loans from what is left. Because the operating company is associated with it and deducts the rent from active business income, the rent is treated as active business income in the equipment company rather than passive investment income, which keeps it out of the roughly 50 per cent passive rate and out of the small business deduction grind.
Reasonable is the word that carries the tax. Rent well above market shifts profit into the equipment company for no business reason, and CRA can deny the operating company's deduction for the excess. Rent well below market, or rent that is booked but never paid, invites the opposite argument and leaves the equipment company unable to service its debt. We set the rate from actual rental quotes for comparable machines, write it into a lease with terms, put a schedule of units behind it, and revisit it when the fleet changes. That paper is also what a lender or surety asks for first.
HST is mechanical if it is set up before the first invoice. Equipment rent is a taxable supply, so the equipment company registers, charges HST on every rental invoice, and the operating company claims it back as an input tax credit. The cash washes across the group, but the filings do not disappear, and a month where one company remits before the other recovers is a real cash cost. Closely related corporations, which for this purpose means at least 90 per cent common corporate ownership through a holdco rather than the same person owning both companies directly, can jointly elect to treat supplies between them as made for no consideration, which takes the HST out of the intercompany rent entirely. The election has to be made and filed, not assumed.
Capital cost allowance follows the machines to the new company. Most heavy construction equipment sits in a declining-balance class with a relatively fast rate, and the equipment company claims it against rental income. One rule to design around: CCA on property held mainly to earn rent can be capped at the net rental income it produces, with an exception for a corporation whose principal business is renting or leasing equipment. An equipment company that does nothing else generally fits the exception, but the fit should be confirmed on paper before the structure relies on it.
What it protects, and what the lender and the surety take back
The equipment company protects equity in machines that are paid off, against creditors of the operating company who hold no guarantee from anyone else. That is a narrower promise than it sounds. Most working fleets are financed, and an equipment lender's security stays registered against the machine no matter which related company holds title; the loan documents usually forbid moving title at all without consent. So the lender's position is unchanged, and the lender will normally ask that the operating company, the entity with the cash flow, guarantee the equipment company's loans, while the equipment company guarantees the operating line. Two companies, one pool of exposure.
The surety does the same thing from a different direction. A bonding program is underwritten against a general indemnity agreement signed by the principals and, almost always, every related company in the group. The equipment company will be asked to sign. What the surety gives back is a more complete picture of net worth: equipment equity held in a related company can be counted when the surety analyses the group on a combined basis, provided the statements and the lease are clean and the rent is not draining the operating company's working capital.
There is a quieter benefit that survives all of this. If the operating company fails on an unbonded job, the equipment company's unencumbered machines and its lease receivable are not the operating company's assets. A trustee gets the opco's receivables and whatever it owns directly; the fleet next door keeps working for the next company. That is worth something for a contractor with a large paid-off fleet, and close to nothing for a contractor whose fleet is entirely on term loans.
The lender relationship deserves a specific warning. A related company renting equipment to the opco adds a fixed monthly cost to the opco's statements, which lowers its reported margin and its debt service coverage. The same dollars used to be depreciation and interest, which lenders add back; now they are rent, which they do not. Before restructuring, run the opco's covenant calculations with the rent in them and take the result to the bank, rather than letting the bank find it in next year's statements. The preparation for any large equipment purchase, and the lender's view of it, is in how to prepare for a major equipment financing decision.
Moving the fleet you already own: section 85, consents and HST on the transfer
Machines already in the operating company move to the new company under a section 85 rollover, or they trigger tax on the way across. Used equipment is usually worth more than its undepreciated capital cost, so a plain transfer at fair market value creates recapture of the CCA already claimed, taxed in the operating company in the year of the move. Under section 85 the two companies elect a transfer price at the equipment's tax cost instead, the operating company takes back shares of the equipment company as part of the consideration, and the recapture waits until the equipment is genuinely sold. The election goes on form T2057 by the earliest filing deadline of the two companies, and a late election carries a penalty that grows monthly.
Three practical points decide whether the rollover is clean. First, each machine needs a defensible fair market value and its tax cost tracked, because the elected amount has floors and ceilings set by both. Second, any loan that moves with a machine needs the lender's written consent, and debt assumed counts as non-share consideration in the election, which can force the elected amount above tax cost and trigger the recapture the rollover was meant to avoid. Third, the transfer is itself a supply for HST purposes: with both companies registered the tax charged is recovered as an input tax credit, and the closely related group election can remove it, but the registration and election must exist on the transfer date.
| Step | What has to happen | Where it goes wrong |
|---|---|---|
| Fleet schedule | Every unit listed with tax cost, fair value, loan balance and lender | Values pulled from the depreciation schedule instead of the market |
| Lender consents | Written consent to transfer title and, usually, a guarantee from the opco | Title moved without consent, putting the loans in default |
| Section 85 election | Elected amounts set per unit, shares issued, T2057 filed on time | Machines sold for a dollar, or the election never filed |
| HST on the transfer | Both companies registered; tax charged and recovered, or the group election filed | New company registered after the transfer date |
| Equipment lease | Market rent, written terms, unit schedule, invoiced and paid monthly | A rate picked to hit a tax outcome, or rent that is never actually paid |
| Surety and bank notice | Indemnity updated, combined statements agreed, covenants re-run with rent | The surety learns about the new company from next year's statements |
The order is the discipline. Consents and registrations come first, the valuation and election design second, the legal transfer third, and the lease starts the day title moves. Doing it in reverse, which is what happens when a bookkeeper simply starts recording rent between two companies, produces a taxable transfer nobody reported and a lease nobody signed.
The tax cost of a second company: one small business deduction, shared
The equipment company and the operating company are associated, so they share a single small business limit, and that is the main tax cost of the structure. The first 500,000 dollars of active income across the group is taxed at Ontario's combined 12.2 per cent rate; income above it in either company pays the general rate. Rent that moves from the opco to the equipment company does not create new low-rate room, it moves income between two companies drawing on the same limit. The group also shares the taxable capital and passive income thresholds that grind the limit down, so an equipment company that starts investing its surplus rent can affect the opco's rate.
Then the ordinary costs: a second corporate return, a second set of financial statements, a second minute book, intercompany reconciliations every month, and professional fees for all of it. The surety and the bank will want the equipment company's statements every year alongside the opco's. None of this is a reason to avoid a structure that fits; all of it is a reason to be honest about the size of fleet that justifies it.
When it is worth it, and the facts that change the answer
It is worth it when one of three things is true. The fleet is large relative to the business, with meaningful paid-off equity in it, so that separating it protects something real. Two or more operating companies, a paving division and a civil division, or two contractors under common ownership, need the same machines, so one owner renting to both is cleaner than cross-charging. Or succession is on the table: a child or key employee takes over the operating company while the founder keeps the equipment company and its rent, or a buyer wants the contracts and crews but not the iron. The same logic drives the ownership of a shop or yard, which we cover in who should own commercial property, and the two assets often end up in the same company.
These are the facts that swing the decision:
- How much of the fleet is paid off, because only unencumbered equity gains any protection.
- The lenders' consent and guarantee terms, which decide whether title can move at all and on what conditions.
- The bonding program, and whether the surety will count equipment equity in a related company on a combined basis.
- How many operating companies will use the machines, now or after a planned reorganization.
- The recapture sitting in the fleet, which sets the stakes on the section 85 election.
- Succession or sale plans that need the equipment held apart from the contracts.
We run this as a defined-scope reorganization under our corporate restructuring service: the fleet schedule and valuation, the lender and surety conversations, the rollover design and T2057 filings, the lease and HST setup, and the lawyer coordination. For contractors who want the whole finance function, including the monthly intercompany rent, handled by one team, that is what accounting for construction and trades covers. A free 15-minute discovery call tells you whether your fleet is big enough to justify any of it.
