Section 88 wind-up

A buyer that purchases a company’s shares may later wind that company up into its own corporation. When its conditions are met, subsection 88(1) of the Income Tax Act sets the tax result for a taxable Canadian subsidiary wound up into a taxable Canadian parent. CRA’s archived IT-126R2 says subsections 88(1) and (2) apply only where the appropriate corporate procedures are followed to end the corporation’s existence.

What the subsection does

Subject to paragraphs 88(1)(a.1) and (a.3), paragraph 88(1)(a) deems the subsidiary to have disposed of each property, other than an interest in a partnership, distributed to the parent, for proceeds worked out under that paragraph. Subject to paragraph 87(2)(e.3), as modified by paragraph 88(1)(e.2), paragraph 88(1)(c) sets the parent’s cost of each property received, and for certain capital property adds an amount the parent designates in its return within the limits in paragraph 88(1)(d), as how the bump in tax cost works after a share purchase explains. Each paragraph carries exceptions.

What to check or ask

• Do both corporations meet the taxable Canadian corporation condition, and does the parent meet the ownership condition?
• Who will complete the corporate steps that end the subsidiary’s existence?
• Does the T2 return answer the line 072 wind-up question and attach Schedule 24?
• Does subsection 88(2), rather than 88(1), govern?