How does a section 88 wind up of a subsidiary into its parent work?
A section 88(1) wind up lets a taxable Canadian corporation that owns at least 90% of each class of a subsidiary's shares take the subsidiary's property at its tax cost, with no gain and no deemed dividend. The parent can bump eligible capital property toward its value when control was acquired, and the subsidiary's unused losses carry over.
What has to be true for section 88(1) to apply?
Three conditions, all tested immediately before the wind up. The subsidiary is a taxable Canadian corporation. Another taxable Canadian corporation, the parent, owns not less than 90% of the issued shares of each class of the subsidiary's capital stock. And every share the parent doesn't own is held by persons dealing at arm's length with the parent laws-lois.justice.gc.ca.
"Each class" is where files break. A parent holding 100% of the common shares fails if someone else holds more than 10% of a class of preferred shares, and one share held by a person who doesn't deal at arm's length with the parent fails the whole test. When 88(1) doesn't apply, 88(2) governs instead and the property leaves the corporation at fair market value under 69(5) laws-lois.justice.gc.ca.
The corporation must actually be wound up under the procedures of its corporate statute, but the CRA's archived bulletin says it doesn't need to be dissolved before the year end for 88(1) to apply in that year, as long as there is substantial evidence it will be dissolved within a short time canada.ca.
What moves to the parent, and at what tax value?
Section 88(1) applies notwithstanding any other provision of the Act except 69(11), so the fair market value rule that normally hits a winding up distribution is switched off for the property the parent receives laws-lois.justice.gc.ca.
| Item | Result on a section 88(1) wind up | Provision |
|---|---|---|
| Subsidiary's property distributed to the parent | Deemed sold at its cost amount (Canadian and foreign resource property at nil), so the subsidiary has no gain | 88(1)(a) |
| Parent's cost of that property | The same cost amount, plus any bump designated on eligible capital property | 88(1)(c) |
| Parent's shares of the subsidiary | Deemed sold for the greater of their ACB and the lesser of paid up capital and the net cost amount of the assets, so never a loss | 88(1)(b) |
| Deemed dividend on the wind up | None: subsection 84(2) does not apply | 88(1)(d.1) |
| Non capital and net capital losses | Become the parent's, usable from parent years beginning after the wind up starts | 88(1.1), 88(1.2) |
| CDA and RDTOH | Carried over by applying the amalgamation rules in 87(2)(z.1) and (aa) | 88(1)(e.2) |
| GRIP | Added to a CCPC parent's GRIP at the end of its taxation year after the one in which it receives the assets | 89(6) |
| Property paid to minority shareholders | Deemed sold at fair market value | 69(5) |
Paragraph 88(1)(e.2) imports a long list of amalgamation rules, reading "predecessor corporation" as the subsidiary and "new corporation" as the parent laws-lois.justice.gc.ca. That is how the subsidiary's capital dividend account and RDTOH reach the parent, using 87(2)(z.1) and 87(2)(aa)
laws-lois.justice.gc.ca. GRIP has its own rule: for a CCPC parent, s.89(6) adds the subsidiary's GRIP, less eligible dividends it paid in its last year, at the end of the parent's taxation year that follows the year it receives the assets
laws-lois.justice.gc.ca.
How the bump works: $500,000 on the land, $100,000 lost on the building
The bump lets the parent designate an amount that raises its cost of a capital property above the subsidiary's cost amount. The property must have been capital property of the subsidiary when the parent last acquired control and owned without interruption until the wind up, and it can't be ineligible property. Depreciable property is ineligible, and so is property caught by the anti avoidance rule in 88(1)(c)(vi), where a specified shareholder from before the acquisition of control ends up with distributed property as part of the same series laws-lois.justice.gc.ca.
Two caps apply. In total, the bump can't exceed the parent's ACB of the subsidiary shares minus the net cost amount of the subsidiary's assets (cost amounts plus cash, minus debts and certain reserves) and minus taxable dividends deductible under section 112 and capital dividends the parent received on those shares. Per property, it can't exceed fair market value when the parent last acquired control, minus the greater of the cost amount at that time and just before the wind up, minus a prescribed amount. The parent designates it in its return for the taxation year in which the subsidiary was wound up laws-lois.justice.gc.ca.
Holdco buys 100% of Target from an arm's length vendor for $1,000,000. At that moment Target holds land with a cost of $200,000 worth $700,000, a building with a cost amount of $150,000 worth $250,000, and $50,000 of cash, with no debt. Holdco later winds Target up, nothing has changed and no dividends were paid. The prescribed amount is nil in this example.
| Step | Amount |
|---|---|
| Holdco's ACB of the Target shares | $1,000,000 |
| Net cost amount: $200,000 land + $150,000 building + $50,000 cash, no debt | $400,000 |
| Total bump room: $1,000,000 minus $400,000 | $600,000 |
| Land cap: $700,000 value minus $200,000 cost | $500,000 |
| Building: depreciable, so no bump | $0 |
| Bump designated on the land | $500,000 |
| Holdco's cost of the land: $200,000 + $500,000 | $700,000 |
| Bump room lost | $100,000 |
| Proceeds for Holdco's Target shares: greater of $1,000,000 ACB and the lesser of PUC and $400,000 | $1,000,000 |
Holdco has no gain or loss on its Target shares. If it sells the land for $700,000 after the wind up, it reports no gain, where without the bump it would have had a $500,000 capital gain, half of it taxable at the 50% inclusion rate. The $100,000 of unused room is the building's accrued gain, and it is simply lost: the building comes across at $150,000.
When can the parent use the subsidiary's losses?
Only in parent taxation years beginning after the wind up commences. Each unused non capital loss is deemed to be the parent's loss for the parent's taxation year in which the subsidiary's loss year ended, and net capital losses follow the same timing under 88(1.2) laws-lois.justice.gc.ca. A parent with a December 31 year end that starts a wind up in March 2026 can't touch the losses on its 2026 return; the first year they're available is the one that begins January 1, 2027.
An acquisition of control cuts this down. If control of the parent was acquired after the wind up began, or control of the subsidiary was acquired at any time, business losses from before that point survive only against income from the same or a similar business carried on with a reasonable expectation of profit, and net capital losses from before it are gone laws-lois.justice.gc.ca. The carryforward periods themselves are on non capital loss carryover and net capital loss carryover.
A loss that would otherwise land in a parent year beginning after the wind up started can be pushed back one year by electing under 88(1.1)(f); the parent ticks box 190 in Part 8 of Schedule 4 canada.ca.
Is there a deemed year end on a section 88 wind up?
No, not from section 88 itself. An amalgamation ends each predecessor's taxation year immediately before the amalgamation under 87(2)(a) laws-lois.justice.gc.ca, but 88(1)(e.2) imports a list of 87(2) paragraphs that starts at (c) and leaves out (a)
laws-lois.justice.gc.ca. On that reading the subsidiary keeps its normal year end until it is dissolved, unless something else ends the year, such as an acquisition of control under 249(4). Its final T2 answers yes on line 078 for a tax year ending on the dissolution date shown on the articles of dissolution
canada.ca.
The legal representative should get a clearance certificate before distributing property, or they can be personally liable for unpaid tax, interest and penalties canada.ca. Filing dates for that last return are on T2 filing deadline after dissolution. If the parent would rather have one corporation continue with a fresh year, compare a vertical amalgamation under section 87.
Where does the wind up show on the T2 returns?
The parent reports it in the return for the year the wind up happened. Most of the lines are in the T2 guide canada.ca.
| Return | Line or schedule | What goes there |
|---|---|---|
| Parent | Line 072 and Schedule 24 | Yes to a section 88 wind up of a subsidiary during the year; without Schedule 24, processing may be delayed |
| Parent | Schedule 4, line 105 | Subsidiary's unused non capital losses at the end of its tax year ending immediately before the wind up |
| Parent | Schedule 4, line 205 | Subsidiary's unused capital losses (gross, before the inclusion rate) |
| Parent | Schedule 4, box 190 | Election under 88(1.1)(f) |
| Parent | Schedule 8, column 6 | Depreciable property transferred on the wind up |
| Parent | Schedule 13, line 275 | Reserves transferred on the wind up |
| Parent | Return for the year of the wind up | Bump designation under 88(1)(d) |
| Subsidiary | Final T2, line 078 | Yes, once it is dissolved, for the year ending on the dissolution date |
Line 072 and the Schedule 24 rule come from the guide's identification chapter canada.ca. The CRA's form page says a parent files Schedule 24 for the first time after winding up a subsidiary
canada.ca.
Sources
Does the parent have a capital gain on the subsidiary shares it gives up?
Usually not, and never a loss. The parent's proceeds are the greater of its ACB and the lesser of the shares' paid up capital and the net cost amount of the subsidiary's assets, so a gain arises only when both of those exceed the ACB laws-lois.justice.gc.ca.
Can the bump apply to inventory or depreciable property?
No. The bump is limited to capital property, and depreciable property is listed as ineligible property, so inventory and buildings or equipment come across at the subsidiary's cost amount laws-lois.justice.gc.ca.
Does a dividend paid before the wind up reduce the bump?
Yes. Taxable dividends the parent deducted under section 112 and capital dividends it received on the subsidiary shares reduce the total bump room dollar for dollar laws-lois.justice.gc.ca. See intercorporate dividends and safe income under section 55 before you plan one.
Does section 88(1) work if the parent owns 85%?
No. The parent needs at least 90% of the issued shares of each class laws-lois.justice.gc.ca. Below that, 88(2) applies and the subsidiary is treated as disposing of the property it distributes at fair market value
laws-lois.justice.gc.ca.
General information for the tax year shown, not advice for a specific client. Confirm the facts before you file or remit.