Section 88 Winding-Up Canada — Bumping Cost Base 2026
Quick answer (45 words)
Section 88 of the Income Tax Act lets a parent corporation absorb a wholly-owned subsidiary's assets tax-free. Section 88(1)(d) "bumps" the tax cost of certain non-depreciable capital property up toward fair market value. Used when winding up an inactive subsidiary or post-acquisition restructuring.
Author: Bader A. Chowdry, CPA, CA, LPA.
When does a Section 88 wind-up make sense?
Three common situations:
- Post-acquisition cleanup. Parent buys a target corp; later wants to absorb the target's assets. Section 88 wind-up + bump = tax-efficient.
- Inactive subsidiary cleanup. Parent owns a subsidiary that's no longer operating; absorbing its assets simplifies the structure and uses any remaining loss carry-forwards.
- Asset bump for future sale. When the parent paid more for the sub's shares than the sub's underlying tax cost, Section 88(1)(d) bumps the assets up — reducing future tax on disposition.
How the "bump" works?
When the parent winds up a wholly-owned subsidiary, Section 88(1)(d) lets the parent increase the tax cost base of certain non-depreciable capital property (land, shares of other corps, certain financial instruments) up toward fair market value, but limited by the parent's purchase price for the subsidiary's shares.
Example:
- Parent paid $5M for shares of Sub.
- Sub's assets (mostly land) had tax cost base of $1M, FMV $5M.
- Without the bump: parent inherits $1M tax cost on the land; future sale at $5M = $4M capital gain.
- With Section 88(1)(d) bump: tax cost base is bumped up to $5M (limited to parent's purchase price); future sale at $5M = $0 gain.
The bump is denied or limited under Section 88(1)(c) anti-avoidance rules in certain situations (e.g., where the bump would benefit a non-arm's-length party).
The mechanics of a Section 88 wind-up
- Confirm the subsidiary is wholly-owned by the parent (Section 88(1) requires 90%+ ownership of voting and value).
- File final corporate tax return (T2) for the subsidiary.
- Distribute the subsidiary's assets to the parent.
- Section 88(1)(d) bump calculation — determine the bump room (parent's share-purchase price minus the sub's net asset tax cost) and apply to eligible non-depreciable capital property.
- Dissolve the subsidiary through Articles of Dissolution (provincial process).
- Update parent corporation's books to reflect absorbed assets at bumped tax cost.
What's eligible for the bump?
Eligible: Non-depreciable capital property — land, shares of unrelated corps, certain financial instruments.
Not eligible:
- Depreciable property (buildings, equipment), bump doesn't apply; UCC carries over.
- Inventory, not capital property.
- Receivables, prepaid expenses, etc.
- Property where Section 88(1)(c) anti-avoidance applies.
FAQ, Section 88 Winding-Up
Q: What is Section 88 of the Income Tax Act?
A: A provision that allows a parent corporation to wind up a wholly-owned (90%+) Canadian subsidiary tax-free, with the parent assuming the subsidiary's assets at the subsidiary's tax cost (with a "bump" for certain non-depreciable capital property).
Q: What is the Section 88(1)(d) "bump"?
A: Lets the parent corporation increase the tax cost of certain non-depreciable capital property up toward fair market value, limited by the parent's purchase price for the subsidiary's shares. Reduces future tax on disposition.
Q: When does the bump get denied?
A: Under Section 88(1)(c) anti-avoidance, the bump can be denied if the bumped property was acquired by the subsidiary as part of an avoidance arrangement, or where benefits flow to non-arm's-length parties in certain ways.
Q: How much does Insight Accounting CPA charge for a Section 88 wind-up?
A: $10,000-$35,000 depending on complexity (number of assets, valuations needed, anti-avoidance analysis required). Includes the legal coordination, T2 final return, post-wind-up tax adjustments to the parent.
Case study: Mississauga family medical practice incorporation
The challenge. A Mississauga-based family physician with $385K gross billings was paying $108K in personal income tax under sole-proprietorship status, with no income-splitting capability and shrinking RRSP room.
What we did. We incorporated her practice as a Medical Professional Corporation, structured share classes for future estate freeze, and added her physician spouse as a TOSI-excluded discretionary dividend shareholder.
The result. Annual tax savings: $28K. Cumulative 10-year projected savings: $310K. RRSP room maximized.
"Most CPAs incorporate and stop. The TOSI optimization and pre-positioning for the eventual practice sale is where real money compounds.", Bader Chowdry, CPA, CA, LPA
Most CPAs treat tax planning as annual paperwork. We treat it as a 25-year compounding strategy, every decision today affects retirement, succession, and the eventual sale.
, Bader Chowdry, CPA, CA, LPA
Try our free Insight Accounting CPA tools
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This article is for general informational purposes only and is not tax, legal, or accounting advice. Information current as of 2026-05-01 under Canadian and Ontario tax law. Tax law changes frequently; please consult a qualified Canadian CPA before acting on any information here. Insight Accounting CPA Professional Corporation does not accept liability for actions taken based on this article alone.
Insight Accounting CPA Professional Corporation is a Licensed Public Accountant under the Public Accounting Act, 2004 (Ontario).
