Can I do a Section 88 wind-up to close my corporation tax-free?
Only in specific structures. Section 88(1) permits a tax-deferred wind-up of a taxable Canadian corporation into its parent Canadian corporation, provided the parent owns at least 90% of the shares of each class immediately before the wind-up. Section 88(2) governs wind-ups that don’t meet the 90% test; those are taxable events with a deemed dividend and capital-gain analysis.
Section 88(1) mechanics. The subsidiary is deemed to dispose of each asset at cost amount to the parent (tax-deferred rollover), and the parent takes those assets at the subsidiary’s cost amount. Tax pools like non-capital losses, RDTOH, and CDA of the subsidiary flow up to the parent under s. 88(1.1) and (1.2), subject to acquisition-of-control rules.
Example: Holdco owns 100% of an Opco with $500,000 UCC in equipment, $300,000 inventory, and $2,000,000 cash. Section 88(1) wind-up: Holdco takes equipment at $500,000 UCC, inventory at cost, cash at $2M. No corporate-level gain triggered. Holdco absorbs Opco’s tax attributes.
Section 88(2) applies to a wind-up that is not 88(1) (typically a wind-up to individual shareholders or to a corporate parent below 90%). Subsidiary is deemed to have disposed of assets at FMV; shareholders receive a deemed dividend equal to distributions less PUC and are deemed to have disposed of their shares (potential capital gain).
Note: Section 88(1) requires the wind-up to be completed before the parent files its T2 for the year in which the wind-up occurred. Sloppy timing (partial distribution over multiple years) can knock the deal out of s. 88(1) treatment.
Source: canada.ca â Winding up a corporation
— Bader A. Chowdry, CPA, CA, LPA — Insight Accounting CPA
Disclaimer: Bader A. Chowdry, CPA, CA, LPA is a Licensed Public Accountant regulated by CPA Ontario. Insight Accounting CPA Professional Corporation is a Chartered Professional Accountant firm. This content is general information only and does not constitute professional advice for your specific facts. Confirm current rules and figures with your own advisor before acting.