Canada: Relieving And Clarifying Changes To Canadian Basis Bump Rules

On December 21, 2012, the Minister of Finance released for consultation draft legislative proposals (the December 21 Proposals) to implement certain technical amendments to the Income Tax Act (Canada) (the ITA). Included in the December 21 Proposals are draft changes to the Canadian basis "bump" rules. Such changes are, for the most part, relieving in nature and should reduce uncertainty and risk when utilizing the bump. The government has invited comments by February 19, 2013.


Typically, a purchaser seeking to acquire a Canadian target corporation (Target) will form a Canadian acquisition company (Canco) to acquire the shares of Target, following which Canco will amalgamate with Target (to form Amalco), or, less frequently, Target will be wound-up into Canco. Such a merger allows for the push-down of acquisition financing (Canada has no tax consolidation) and the step-up of cross-border paid-up capital (PUC), subject to the application of the recently enacted foreign affiliate (FA) "dumping" rules in section 212.3 of the ITA.

It is generally not tax efficient for a Canadian corporation to be "sandwiched" in between a foreign parent and foreign subsidiaries, especially given the potential impact of the FA dumping rules. (For a detailed discussion of the FA dumping rules, see our October 2012 Blakes Bulletin.) Where a foreign purchaser (Parent) acquires a Target which owns shares of foreign subsidiaries, it will generally be desirable to distribute the foreign subsidiaries out from under Canada following the merger described above. On such a transfer, Amalco (including, in this bulletin, Canco if Target is wound-up into it) will be deemed to dispose of the shares of the foreign subsidiaries for proceeds equal to their fair market value. Assuming that such fair market value is greater than the adjusted cost base (i.e., tax cost) to Amalco of those shares at the time of disposition (which apart from the bump will be the historic tax cost to Target), Amalco will recognize a gain that will be taxable in Canada.

When shares of a Target are acquired, there is generally no ability to "push-down" the tax cost of the acquired shares to the assets of the acquired corporation. A limited exception is the basis bump rule in paragraph 88(1)(d) of the ITA, which generally allows for an elective step-up in basis of non-depreciable capital property (including shares of foreign subsidiaries), potentially to fair market value at the time of the change of control of Target. A bump election, if available, is made in respect of the winding-up or amalgamation of a wholly owned acquired corporation with its Canadian parent (i.e., Target and Canco, respectively). If the bump is available, any shares of foreign subsidiaries can generally be transferred by Amalco out of Canada promptly after acquisition without recognizing any gain or loss. Further, the distribution may be effected free from Canadian non-resident withholding tax by way of return of PUC or intercompany debt repayment. However, no bump is available if the "bump denial" rule applies.


The purpose of the bump denial rule is to preclude the bump from applying in circumstances where selling shareholders (beyond those who held a de minimis aggregate interest in Target) have somehow retained an indirect interest in Target. While the bump denial rule is quite complex in its application, basically, the bump is denied if, as part of the overall series of transactions, any "restricted persons" acquire any property of Target (distributed property) or any "substituted property".

Restricted persons generally mean one or more persons who own or are deemed to own 10% or more of the shares of any class or series of Target. Also included are any one or more persons who own or are deemed to own 10% or more of the shares of any class or series of a corporation that is related to Target, and that has a significant direct or indirect interest in any issued shares of the capital stock of Target. "Specified persons" (i.e., Canco and entities that are related to Canco prior to the acquisition) are carved out of restricted persons.

"Substituted property" generally includes any property (other than certain "specified property") the fair market value of which is wholly or partly attributable to any property of Target. Substituted property also includes any property the fair market value of which is determinable primarily by reference to the fair market value of, or the proceeds from a disposition of, any property of Target. This extremely broad definition of substituted property is frequently problematic, as explained below.

Persons are deemed to own shares actually owned by other persons who are "related" or otherwise not dealing at "arm's length" under Canadian tax rules. This feature of the rule has proven to be challenging to apply even where the essential requirements of the bump are otherwise readily satisfied.

The potential consequences of the bump denial rule are significant. Because the bump does not offer protection for any post-acquisition appreciation in value, it is generally considered advisable to distribute any foreign subsidiary shares out of Canada promptly after the acquisition of Target. It is therefore important to be reasonably sure that the bump is available before closing, because the distribution will crystallize any gain or loss. If it is determined after the fact that the bump denial rule applied, remediation may be difficult.

Because of the absolute nature of the bump denial rule (i.e., the whole bump is denied), purchasers and their tax advisers devote considerable resources to obtaining as much comfort as possible that the bump denial rule will not apply in a given situation. In certain circumstances, as is explained in greater detail below, the commercial aspects of a transaction can be affected by bump considerations.

Over time the Canadian tax community has identified seemingly remote "technical" issues that can arise in circumstances that in no way offend tax policy or are inconsistent with the legislative context of the bump. In many instances the Department of Finance has responded by issuing "comfort letters" (agreeing to recommend relieving changes) that are typically relied upon for planning and financial reporting purposes. The Canada Revenue Agency also has a number of favourable (and practical) administrative positions that address some of the more arcane technical concerns.

Practically, it is often challenging to identify all circumstances that can put the bump at risk, especially where Target is a public company (thus making it difficult if not impossible to identify all restricted persons). This is made even more difficult where Parent is a public company, because Parent cannot control who acquires its publicly traded securities.

The December 21 Proposals implement changes proposed in the comfort letters (reaching back as far as 2001), and in some cases go even further, to eliminate many of the technical and factual concerns that have led to uncertainty and/or commercial constraints.


Set out below are some common examples of issues presented by planning to effect a bump which can give rise to uncertainty (prior to release of the December 21 Proposals).

Transaction Financing

Generally, any equity or debt issued by Parent, Canco (except as described below) or other entities in the chain of ownership in connection with the acquisition would typically be considered to be substituted property, since some of its value seemingly would be attributable to assets of Target. If the holders of such debt or equity (combined with any other persons acquiring substituted property) in aggregate own 10% or more of the shares of any class or series of Target, then the bump could be denied. Where Target is public, or owned by one or more entities with ultimate disparate ownership such as a private equity fund, it may be very difficult, if not often impossible, to identify all restricted persons without some residual uncertainty. Thus issues can arise if Parent is public (as its equity could be acquired by restricted persons as part of the series, especially if Parent finances the acquisition with an equity offering), or if debt is offered to the public or loaned by a bank syndicate, as Parent would want to be reasonably certain that the persons acquiring indebtedness, or members of the public acquiring equity, as part of an acquisition do not, in aggregate, own 10% or more of the shares of Target.

Incentives for Target Employees/Directors

Any equity-based compensation to be received by management of Target (or its subsidiaries) as part of their future compensation package, especially if received as an inducement to continue on with the company post-closing, possibly could be considered to be substituted property. If, for example, senior management of Target and its subsidiaries (combined with any other persons acquiring substituted property) own in total 10% or more of the shares of any class or series of Target, and those individuals are to receive options or other equity-based management incentives post-closing in connection with the transaction, then that could disqualify the bump.

Equity Rollover

Under existing bump rules, shares of Canco issued in consideration for the shares of Target are specified property, meaning that shareholder rollovers at the Canadian level will not typically taint a bump. However, any equity "rollover" that Parent may be prepared to entertain is typically at the Parent level, especially where Parent owns other assets. Equity of a foreign Parent is not included in specified property, which means that acquisitions of foreign Parent equity as part of the series is problematic as described above.


There are three key elements of the December 21 Proposals that should ease the uncertainty and administrative and commercial burdens associated with bump planning. In particular, these elements should alleviate the concerns described above in certain circumstances, while reinforcing the legislative policy of the bump:

  • Introduction of a de minimis threshold for attributable property – From and after December 21, 2012, substituted property will exclude property 10% or less of the fair market value of which at the time of acquisition is attributable to distributed property. Thus, where Parent's value is "large" relative to the value of Target, the acquisition by restricted persons of debt, equity, options and other property the value of which is based on the value of Parent will generally not invalidate the bump. This is a new measure, not previously announced in a comfort letter.
  • Indebtedness issued for money is specified property – This rule now confirms, from and after 2001, that indebtedness issued solely for consideration consisting of money will not generally cause a bump problem if acquired by restricted persons. This alleviates much of the concern when acquisition financing is provided by a bank (or banking syndicate) and the lender's related entities may have been shareholders of a public Target. This also alleviates concerns regarding the need to obtain historic Target ownership information from bondholders in a public debt offering.
  • References to a share in the definition of specified property includes a right to acquire a share – This rule now confirms, from and after 2001, that the right to acquire a share is assimilated to a share for purposes of the relieving definition of specified property. This means that certain transactions involving options and warrants (e.g., the issuance by Canco of options in consideration for options or shares of Target, or the acquisition by Canco of Target options in exchange for Canco shares or indebtedness) will not create any additional bump risk.

The December 21 Proposals also included other measures that "fix" some of the more obscure technical issues, such as the concern that where Target had a controlling shareholder, each of Target's subsidiaries would be a restricted person, and the concern that Parent entities above Canco would not be specified persons before Canco is incorporated.

These new provisions should provide more commercial flexibility when structuring transactions, especially where Parent is comfortable that the 10% de minimis fair market value threshold is met. Also, elimination of many of the more technical concerns should allow for smoother M&A transactions, as the more onerous practical requirements of bump planning are less likely to interfere with the transaction.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
14 Nov 2018, Speaking Engagement, Ontario, Canada

Join members of the Blakes Environmental and Enterprise Risk & Crisis Response groups for a discussion of hot topics and trends in Canadian environmental law.

15 Nov 2018, Webinar, Toronto, Canada

Join us for a live webcast with partners from our Employment & Labour and Litigation & Dispute Resolution groups as they discuss employment-related challenges and considerations surrounding the recent legalization of recreational cannabis in Canada.

15 Nov 2018, Webinar, Toronto, Canada

Join us for a live webcast with partners from our Employment & Labour and Litigation & Dispute Resolution groups as they discuss employment-related challenges and considerations surrounding the recent legalization of recreational cannabis in Canada.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions