Canada’s 88(1)(d) Tax Cost Bump And What It Means for Canadian and Foreign Purchasers.



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Under paragraph 88(1)(d), the Income Tax Act permits an increase (or bump) in the cost of property and effectively reduces or completely eliminates accrued gains that would otherwise be taxed on a disposition of property[1].  This increase is particularly relevant to foreign purchasers of Canadian corporations, although it is often unavailable to those foreign purchasers in transactions in which something other than money (such as shares or other securities of the foreign corporation) is used to pay for the acquisition.


Overview of the 88(1)(d) bump

Most taxation systems identify the amount a taxpayer paid for a property as that property’s tax cost.  When the property is disposed of, any sale proceeds the taxpayer receives (or is deemed to receive) are measured against the taxpayer’s tax cost of the property to determine whether the taxpayer has realized a gain or a loss.  The benefit of the 88(1)(d) bump is to increase the tax cost of the property and thus reduce or eliminate the amount of any gain realized on a future disposition of that property.

The 88(1)(d) bump is available only when a taxable Canadian corporation (the parent) owning all the shares in another taxable Canadian corporation (the subsidiary) causes the subsidiary to wind up or merge into the parent.  The general rule in the Income Tax Act (“ITA”) on wind-ups is that the parent acquires all the subsidiary’s property at whatever tax cost the subsidiary had in that property without any gain or loss being realized on the wind-up.  In effect, the parent steps into the shoes of the subsidiary, inheriting any accrued gains or losses.

If all applicable criteria in a wind-up transaction are met, the 88(1)(d) bump allows for an increase in the tax cost of some property of the subsidiary to increase potentially up to an amount equal to the property’s fair market value (FMV) as of the time the parent acquired control of the subsidiary.  This opportunity arises when the parent’s tax cost of it’s shares of the subsidiary (the outside basis) is greater than the subsidiary’s aggregate tax cost of all of its property (called the inside basis).  On a wind-up, the parent’s outside basis is eliminated when the subsidiary’s shares are cancelled.  Without an 88(1)(d) bump, if the outside basis exceeds the subsidiary’s inside basis, the parent company simply loses the excess inside basis and loses tax cost.  The 88(1)(d) bump effectively permits the parent to apply some of it’s excess outside basis to increase the tax cost of the eligible subsidiary assets acquired on the wind-up.

Note again that the 88(1)(d) bump is only available on the wind-up of a wholly-owned subsidiary up to it’s parent.  The 88(1)(d) bump can be beneficial when a parent may want to sell some of it’s wholly-owned subsidiary assets as quickly as possible following its acquisition in the subsidiary shares.  The 88(1)(d) bump is available also in situations where a foreign acquirer wants to purchase the foreign subsidiaries of a Canadian target corporation.  Correct application of the bump can effect the sale of the foreign subsidiaries to the foreign acquirer without incurring Canadian capital gains tax .


The 88(1)(d) bump arises only on a wind-up or amalgamation of one taxable Canadian corporation into another  that meets certain criteria.  Two aspects of the 88(1)(d) bump rules that can determine the availability of the bump provision are:

  1. Acquisition of Control (AOC) – a person is generally considered to acquire control of a corporation when it obtains ownership of enough shares to elect a majority of the corporation’s board of directors.
  2. Series of Transactions – many of the 88(1)(d) rules refer to the “series of transactions” that incudes the parent’s AOC of the subsidiary. The determination of what constitutes the series of transactions may or may not result in a successful application of the 88(1)(d) bump, depending on the series.


Determination of Eligible Property

Only certain property is eligible for the 88(1)(d) bump.  For purposes of the bump, only non-depreciable capital property is eligible for the bump.  This restricts eligible property to land, shares of corporations, and interests in partnerships or trusts.

To be eligible  for the bump, the eligible property must be owned by the subsidiary at the time of the AOC and held continuously until the wind-up.  Note that eligible property of the subsidiary refers to eligible property owned directly by the subsidiary (ie: there is no look-through provision that allows property owned by another entity in which the subsidiary has an interest to be eligible  for the bump).  However, that same look-through property can be made eligible by engaging in a reorganization of the property so that the subsidiary owns it directly.  Alternatively, such reorganizations can occur downstream and sequential qualifying wind-ups and bumps can be implemented up through the corporate chain.

Not Transferred on Butterfly Reorganization

A “butterfly” reorganization allows properties held in one Canadian corporation to be divided between two or more Canadian corporations with the same shareholders as the existing corporation, without gains being realized at the corporate or shareholder levels.  Property transferred to the parent as part of a distribution made on a butterfly reorganization will not qualify as eligible property.

The scope of eligible property available for the 88(1)(d) bump can be summarized as property distributed to the parent on the wind-up that is:

  • non-depreciable capital property;
  • owned directly by the subsidiary at the time of the Acquisition of Control (AOC) and held continuously thereafter until the wind-up;
  • not acquired by the subsidiary from the parent (or person dealing non-arms length (NAL) with the parent) as part of the AOC series, or property acquired in substitution for such property; and
  • not distributed as part of a butterfly reorganization.




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It is not uncommon for a friendly acquirer to ask the target to prepackage property in a way that optimizes the 88(1)(d) bump.  For example, if the acquirer proposes to dispose of some of the target’s property that includes assets that cannot be eligible property, the acquirer may request that the subsidiary transfer all ineligible property to a separate subsidiary before the AOC.  Normally those shares in the new subsidiary held by the target are considered eligible property, which effectively converts the characterization of the property from ineligible to eligible, and the acquirer can apply an 88(1)(d) bump to increase its tax cost of those shares when the target is wound-up or amalgamated into the acquirer.  This leaves the acquirer free to dispose of the shares of the new subsidiary without realizing any gain.


Calculation of the Maximum Bump

There are generally 2 limitations on the calculation of the maximum bump:

  1. Per Property Limit

Utilizing the 88(1)(d) bump provision, the tax cost of any particular eligible property can be increased up to an amount equal to the Fair Market Value (FMV) at the time of the Acquisition of Control (AOC).  Or stated another way, the maximum amount of the property’s bump is the difference between the FMX and it’s tax cost at time of the AOC.

Some subsidiaries have tried to engage in efforts to reduce the tax cost of their eligible property so as to protect more accrued capital gain by utilizing the bump.  In response to this the CRA has amended the property limit rules to respond to perceived avoidance transactions that reduced the subsidiary’ tax cost after the date of the AOC but before the wind-up.  The CRA therefore amended the maximum amount of the bump on any particular eligible property to the amount by which the FMV of the particular property at the time of the AOC exceeds the greater of:

  1. the subsidiary’s tax cost of that particular property at the time of the AOC; and
  2. the subsidiary’s tax cost of the property at the time of the wind-up.


Shares of a foreign affiliate are likewise subject to an additional specific limitation.  If a Canadian owned parent corporation acquires and subsequently winds-up a wholly-owned taxable Canadian subsidiary that owns shares in a foreign affiliate, the bump is not permitted on the sum of the parent’s tax cost on those shares and the exempt surplus[2] of the foreign affiliate at the time of the AOC exceeding the FMV of those shares.  Canadian tax authorities perceive the 2 amounts to be duplicative and, as a result, the bump in foreign affiliate shares is essentially reduced by the exempt surplus amount.

  1. The Overall Limit

The overall limit is described as follows:

-Parent’s tax cost of Subsidiary’s shares immediately before the wind-up, less

-net tax cost of Subsidiary’ assets immediately before the wind-up, and less

-tax-free dividends paid by Subsidiary to Parent or another corporation with which the Parent deals at non-arms length (NAL).

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In structuring takeovers, and acquirer must consider that offering tax deferral opportunities to target  shareholders  (ex: qualifying share-for-share exchanges that defer gains on target shares) may reduce the tax cost of target shares, and therefore reduce the overall limit on the amount of any potential 88(1)(d) bump.


The Bump Denial Rule

The bump denial rule looms over any analysis of whether the 88(1)(d) bump is available for a particular wind-up.  If this rule is contravened for even a single property, no 88(1)(d) bump can be claimed for any property distributed on that wind-up.

The bump denial rule is designed to prevent the parent from buying and then winding-up the subsidiary, claiming the 88(1)(d) bump on its property, and then selling some of that property to the subsidiary’s former shareholders.  The CRA’s concern with such a series of transactions is that there is no appropriate realization (and tax paid) on the accrued gains on the subsidiary’s own property, which the former subsidiary’s shareholders would continue to own if the bump was allowed.

The bump denial rule is complex and involves the identification of prohibited persons transacting on prohibited property.

Prohibited property is generally distributed property involved in a bump transaction, and is prohibited because that property cannot be the subject of future transactions between the parent and the shareholders of the former subsidiary.  Prohibited persons are essentially the shareholders of the former subsidiary.

The denial rule also prevents the bump from being applied in situations where distributed property is exchanged for other property, creating substituted property.

The extent of the bump denial rules are beyond the scope of this article.  There are many ways in which the bump denial rules can disqualify a wind-up transaction from being eligible to apply the 88(1)(d) bump provisions.  Most of the denial rules, however, revolve around transactions involving the property on which the 88(1)(d) bump is being applied and the shareholders of the subsidiary.  Generally the involved persons (ie: the shareholders of the subsidiary) are not allowed to transact on the distributed property during the AOC series.

One other transaction that can give rise to a bump denial is the case where, post AOC, the subsidiary owns property deriving more than 10% of it’s value from distributed property.  For example, if the parent acquires the subsidiary by delivering parent shares or debt to subsidiary shareholders in payment, the subsidiary shareholders will own property (ie: shares in the parent) that derives its value post-AOC partly from the subsidiary’s own property (ie: distributed property on the wind-up).  If those parent shares derive more than 10% of their FMV from the subsidiary’s eligible property, the parent shares are deemed to be substituted property and therefore prohibited property unless  an exception to the rule applies.


Fortunately, because many wind-up transactions are facilitated by the parent purchasing the subsidiary via a exchange of shares or debt prior to the wind-up, there is an applicable exemption available.   In general, shares or debt of a parent issued as consideration for the acquisition of a subsidiary (referred to as specified property) are exempted from being identified as prohibited property for purposes of the 88(1)(d) bump.


Unfortunately, such an exception does not apply to shares or debt issued by non-Canadian corporations (except for debt issued solely for money).  Therefore, shares of a foreign entity acquiring a Canadian subsidiary will constitute substituted and, therefore, prohibited property, unless either:

  • The shares are debt issued in exchange for money.
  • The foreign entity it so much larger than the Canadian target subsidiary that the foreign entity’s securities cannot be said to derive more than 10% of their value from the Canadian target subsidiary’s assets (that is, distributed property).


The result is that Canadian acquirers have an advantage over foreign acquirers in that they can use their shares and debt to pay for the shares of Canadian targets and still be able to claim the 88(1)(d) bump.




The 88(1)(d) bump is a powerful planning tool.  The ability to increase the tax cost of a subsidiary’s eligible property up to it’s FMV offers the potential for substantial tax savings, especially when the sale of such property is contemplated in the near future.  The elimination of accrued gains on eligible property at the corporate level also creates opportunities for additional tax savings by facilitating the restructuring of the subsidiary’s corporate group.

That said, the 88(1)(d) bump has significant limitations, and successfully using it often required considerable effort.  Because several of the relevant rules are based on the time of the parent’s acquisition of control of the subsidiary, the bump is effectively limited to takeover situations.  The rules governing what properties are eligible for the 88(1)(d) bump also create important constraints, although timely planning (such as prepackaging) often permits the scope of eligible property to be optimized.


If you have any questions or want to speak further about your corporation, contact Nicholas Kilpatrick at


Nicholas Kilpatrick is a partner with the accounting firm of Burgess Kilpatrick and specializes in tax structuring and business development for his small and medium business sized clients.  Please visit our website at or on Facebook at Kilpatrick for more information on our firm.  This article has been paraphrased from an article by Steve Suarez of Borden Ladner Gervais, Toronto, titled “Canada’s 88(1)(d) Tax Cost Bump: A guide for Foreign Purchasers.


[1] Suarez, Steve, Canada’s 88(1)(d) Tax Cost Bump: A guide for Foreign Purchasers, Tax Notes International.

[2] Exempt surplus of a foreign affiliate is that after-tax surplus generated by the foreign affiliate on which it has already paid domestic tax, and which can be expatriated back to the Canadian parent tax-free by virtue of the fact that a) the Canadian parent owns at least 1% of the shares and value in the foreign affiliate; and b) the foreign affiliate operates an Active Business, as defined in subsection 248(1) of the Income Tax Act (ITA)

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