Dissolving a subsidiary corporation — tax-deferred wind-up
Winding-up of a subsidiary
Section 88 provides rollover treatment when a parent corporation winds up a wholly owned (90%+) Canadian subsidiary — assets transfer to the parent at tax cost, and the subsidiary's tax attributes flow up. A "bump" election may be available to increase the ACB of certain assets.
Plain-language explanation
Section 88 governs the tax-deferred winding-up of a subsidiary corporation into its parent. When a parent owns 90% or more of a Canadian subsidiary, the subsidiary can be wound up into the parent on a rollover basis — generally no immediate tax.
s.88(1) wind-up: When the parent owns at least 90% of the subsidiary's shares, the subsidiary's assets can be distributed to the parent at their tax cost (UCC, ACB). This prevents triggering gains on the transfer of assets from the subsidiary to the parent.
The "bump" election (s.88(1)(d)): One of the most valuable provisions in corporate tax. When a parent acquires a subsidiary through a share purchase, the ACB of the subsidiary's non-depreciable capital property can be "bumped up" to the fair market value of the underlying assets (within the ACB of the shares paid by the parent). This recovers the inherent premium paid for goodwill and other appreciated assets, providing free ACB for future disposals.
Continuity of attributes: The parent inherits the subsidiary's tax attributes: CCA pools, loss carryforwards, CDA balance, and GRIP. Loss restriction rules (s.111(5)) may apply where there was an acquisition of control.
Non-qualifying wind-up: If the parent owns less than 90% or the wind-up doesn't qualify, the subsidiary is treated as having disposed of its assets at FMV on dissolution, potentially triggering large tax bills.
Example
AcquireCo buys 100% of TargetCo for $1,000,000 (the shares' ACB). TargetCo has land with a cost of $200,000 and FMV of $700,000. AcquireCo winds up TargetCo and makes the s.88(1)(d) bump election. The land's ACB is bumped from $200,000 to $700,000 — so when AcquireCo later sells the land for $700,000, there is no capital gain.
Amendment history
Significant changes to this provision. Older versions help you understand rules that applied in prior tax years.
Technical amendments to the bump rules restricted the use of loss companies in bump transactions — preventing taxpayers from bumping the ACB of shares of a loss company to use both the bump and the losses.
Common questions
What is the "bump" in a s.88(1)(d) election? +
When you buy shares of a company, your ACB is the purchase price. Inside the company, the assets may have lower ACBs. The s.88(1)(d) bump lets you allocate part of your share purchase price to specific underlying non-depreciable assets, increasing (bumping) their ACB. You are effectively "pushing down" the premium you paid for the shares into the underlying assets.
Can you bump depreciable property? +
No. The bump is only available for non-depreciable capital property (land, shares, certain intangibles). You cannot bump depreciable property (buildings, equipment) because that would create a stepped-up CCA class that was never actually paid for.
Key terms
Related sections
Source: Income Tax Act, RSC 1985, c. 1 (5th Supp.), section 88. — Read the official text on Justice Canada
These summaries are for educational purposes only and do not constitute legal or tax advice. Speak with a CPA for advice on your specific situation.