Winding-Up of a Subsidiary – Subsection 88(1)

Winding-Up of a Subsidiary: Subsection 88(1)


Section 88 rollover is used in the winding up a subsidiary into its parent corporation

Criteria for Section 88(1) to apply:

The Section 88(1) rollover can only be used where the parent owns at least 90% of each class of the subsidiary’s shares

What is a Windup?

A wind up occurs when a company has decided to discontinue its operations; it pays off its creditors and distributes the remaining assets to the shareholders

  • In a Parent/Subsidiary relationship; the subsidiary will distribute the remaining assets to the parent
  • Normally, without Section 88(1), there will be a deemed disposition at fair value and capital gains and recaptures may result
  • Section 88 (1) provides a tax free rollover of assets transferred to the parent, provided that there is substantial evidence that the subsidiary will be dissolved within a short period of time

Transfer of Assets and Flow through of Balances

  • The assets are all transferred at tax values just like in an amalgamation (see amalgamation notes for details)
  • Balances such as the non and net-capital losses, GRIP, LRIP all flow through to the parent

Section 88(1) and Bump-up Rule

  • The Bump-up rule in section 88(1) is the exact same as the rule in Section 87
  • The only difference is that in Section 87 the bump-up is only available for a vertical amalgamation involving a 100% owned subsidiary
  • Section 88(1) applies to a winding-up of a 90% or more owned subsidiary
What is a Windup?

The Bump-up of the ACB of the depreciable capital properties mentioned above is the lesser of:

  1. ACB of the Sub’s shares – the tax values of Net Asset of Sub on date of amalgamation – dividends paid by sub to parent (including capital dividends); and
  2. FMV of the Sub’s non-depreciable property – ACB of Sub’s non-depreciable property at the time the parent acquired control of the sub

Please see amalgamation notes for a detailed example.

Is there a deemed Year End?

  • No deemed year when winding up a subsidiary into the parent (unlike amalgamations)
  • This makes sense because the subsidiary will be dissolved shortly, and the parent will continue with its own year-end (no new corporation formed)

Loss Utilization

  • The non-capital losses and the net-capital losses of the subsidiary are deductible by the parent; however, there is a condition:
    • The parent must wait until the first taxation year following the taxation year in which the winding-up began before utilizing the losses against its income


If Winding up began on March 31, 2012 and the Parent has a December 31 year end. The winding-up took place in the December 31, 2012 taxation year. Therefore, the parent must wait till December 31, 2013 tax year before claiming losses against its income.

  • Implications of this condition:
    • This will cause the carryforward period of the non-capital losses to age by one year (just like an amalgamation)

Disadvantages of Winding-up (compared to vertical amalgamation)

Winding-up is costly, you need to start the winding up procedures such as liquidating assets and paying off liabilities to show CRA proof that the subsidiary will be dissolved within a short time frame

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