When a Canadian corporation buys another company, the Section 88(1)(d) “bump” rule allows the buyer to legally increase the tax cost base of specific non-depreciable assets inside the target company (like land or shares in subsidiaries). This complex legal strategy requires a specialized tax lawyer but can save the acquiring company millions in future capital gains taxes when those assets are eventually sold.
Buying a business in Canada is thrilling, but structuring the acquisition correctly makes the difference between a profitable takeover and a massive future tax liability. 💼 In the corporate world, you generally have two choices: buy the assets of a company directly, or buy the shares of the company. Sellers almost always prefer to sell their shares so they can use their Lifetime Capital Gains Exemption (LCGE). Buyers, however, usually hate buying shares.
Why do buyers hate share deals? Because the assets sitting inside the purchased company-like a valuable piece of commercial real estate in Toronto or Vancouver-keep their old, original historical cost. 📈 If the buyer later sells that real estate, they will pay a huge capital gains tax on decades of appreciation. To solve this standoff, Canadian tax law offers the “88(1)(d) Bump.” This strategy allows a buyer to purchase the shares, keeping the seller happy, while subsequently “bumping up” the tax receipt value of the inside assets, keeping the buyer protected.
Step-by-Step Process: Executing an 88(1)(d) Bump in Canada
Pulling off a successful bump is notoriously difficult. The Canada Revenue Agency (CRA) has implemented extremely complex anti-avoidance rules to stop corporations from abusing this system. 📍 Most corporate executives rely entirely on their M&A (Mergers and Acquisitions) tax lawyers to execute this sequence flawlessly.
Step 1: Structuring the Initial Acquisition
To qualify for a bump, the acquiring corporation (Parent) must purchase 100% of the shares of the target corporation (Target) in a fully taxable transaction. 💳 You cannot use tax-deferred “rollovers” (like a Section 85 exchange of shares) to acquire the target if you want to use the bump. The purchase must generally be made with hard cash or debt.
Step 2: Identifying Eligible Bump Assets
Not all assets can be bumped. This is the most common misconception. 🔍 The CRA strictly limits the bump to “non-depreciable capital property.” This means you can bump the tax cost of vacant land, shares in a lower-level subsidiary, or partnership interests. You cannot bump depreciable property like factory equipment, office buildings, or goodwill/intangibles.
Step 3: Calculating the Maximum Bump Room
Your accounting firm must calculate exactly how much you are legally allowed to increase the asset values. 📝 The maximum “bump room” is generally the difference between the high purchase price you paid for the Target’s shares and the underlying tax equity (cost base) of the Target’s assets. You cannot bump an asset’s cost higher than its actual Fair Market Value on the day you bought the company.
Step 4: Ensuring No “Prohibited Property” Rules are Tripped
Before proceeding, your tax lawyer must navigate the treacherous “bump denial” rules. 🚫 If the Target company owned certain “prohibited properties,” or if prior shareholders try to buy back into the merged company as part of a pre-arranged series of transactions, the CRA will completely deny the bump.
Step 5: Amalgamating or Liquidating the Target
To officially trigger the bump, the Parent company must absorb the Target company. 📄 This is done either by a formal vertical amalgamation or by legally winding up (liquidating) the Target into the Parent. This legal action effectively transfers the Target’s assets directly into the hands of the Parent corporation.
Step 6: Filing the Designation with the CRA
The bump is not automatic. Your corporate tax return must formally claim it. 📬 Your accountant will file specific corporate tax schedules (like Schedule 24) with the CRA, officially designating exactly how much of the bump room is being allocated to each specific piece of land or subsidiary share.
How Much Does an M&A Bump Strategy Cost?
Because the 88(1)(d) bump often saves companies millions in future capital gains taxes, the professional fees required to navigate the complex legislation are significant. 💰 As of May 2026, corporate buyers should expect these estimated costs in CAD:
- M&A Tax Lawyer Fees: Structuring the acquisition, checking prohibited property rules, and executing the amalgamation generally costs between $25,000 CAD and $75,000+ CAD depending on the deal size.
- Valuation Fees: Determining the precise Fair Market Value of the land and subsidiary shares usually requires independent appraisers, costing $10,000 CAD to $30,000 CAD.
- CPA Accounting Fees: Calculating the precise bump room and filing the complex CRA tax schedules ranges from $10,000 CAD to $25,000 CAD.
| Asset Type Inside Target | Is it Eligible for the Bump? | Reasoning |
|---|---|---|
| Raw Land | Yes | It is a non-depreciable capital property. |
| Shares in a Subsidiary | Yes | It is a non-depreciable capital property. |
| Factory Equipment / Buildings | No | Depreciable property is strictly excluded by the CRA. |
How Long Does the Process Take?
M&A transactions move at the speed of business, but tax reporting operates on government deadlines. ⌖ The initial share purchase, valuation, and subsequent amalgamation can often be completed within 2 to 4 months. However, the official bump designation must be filed with the CRA in the Parent company’s corporate tax return for the taxation year in which the amalgamation occurred, giving you up to 6 months after the corporate year-end to finalize the precise math.
Frequently Asked Questions (FAQ)
Can I bump the value of a building?
Generally, no. A building is considered depreciable property because you claim Capital Cost Allowance (CCA) on it. However, you can bump the value of the actual dirt (the land) the building sits on, which is often highly valuable in Canadian cities.
What happens if the CRA denies the bump?
If your lawyer misses a “bump denial” rule and the CRA successfully challenges the filing, the assets revert to their original, low historical cost. When you sell them, you will face massive, unexpected capital gains taxes, plus potential interest and penalties.
Can I use a Section 85 rollover to buy the target?
No. To qualify for a Section 88 bump, the acquiring Parent company must buy the shares in a fully taxable transaction. If the seller uses a Section 85 tax-deferred rollover to trade their shares for shares of the Parent, the bump is completely disqualified.
Do we have to liquidate the target company immediately?
There is no strict statutory deadline in the Income Tax Act dictating how quickly you must amalgamate or wind up the Target after buying it. However, waiting too long can complicate the valuation and bump room calculations.
Why not just buy the assets instead of shares?
While buying assets solves the cost base issue directly, the seller will usually refuse the deal. Sellers want to sell shares to use their $1.25 million Lifetime Capital Gains Exemption. The bump strategy is the legal compromise to keep both the buyer and seller happy.
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