Late-Filed Bump Designation Made Outside the Normal Reassessment Period

In a recent view of the Canada Revenue Agency (the “CRA”) (2019-0806761I7), the CRA considered whether a late-filed “bump” designation pursuant to paragraph 88(1)(d) of the Income Tax Act (Canada) (the “Act”)[1] on a vertical amalgamation could be made outside the normal reassessment period[2] in relation to a transfer pricing adjustment that was made during the six- or seven-year extended reassessment period.[3] The CRA’s comments provide welcome guidance through the use of a common sense approach while the facts at hand highlight some interesting bump considerations.

Background

Generally, on a winding-up to which subsection 88(1) applies or a vertical amalgamation to which subsection 87(11) applies,[4] the cost of the property distributed to the parent is equal to the cost of the property to the subsidiary immediately before the winding-up or amalgamation pursuant to paragraph 88(1)(c). Accordingly, where the adjusted cost base (“ACB”) to the parent of its shares of the subsidiary exceeds the cost of the subsidiary’s properties immediately before the winding-up or amalgamation, the parent loses the excess “outside” cost basis as a result of the cancellation of the shares of the subsidiary.

However, in certain circumstances, paragraphs 88(1)(c) and 88(1)(d) permit a “bump” to increase the cost of certain non-depreciable capital property (“eligible property”, as determined by subparagraphs 88(1)(c)(iii)-(vi)) that is distributed to the parent from the subsidiary on the winding-up or amalgamation. In general terms, the parent can bump the cost of eligible property by an amount equal to the difference between the “outside” basis (i.e., the ACB to the parent of its shares of the subsidiary) and the “inside” basis of that property (i.e., the cost to the subsidiary of its eligible property), up to the amount of the fair market value (“FMV”) of the eligible property at the time the parent last acquired control of the subsidiary.[5]

From a compliance perspective, for winding-ups, accessing the “bump” requires the parent to make a designation in its tax return for its taxation year in which the subsidiary was wound up and, for amalgamations, the amalgamated corporation must make the bump designation in its first taxation year (i.e., the first taxation year ending after the amalgamation), based on paragraphs 1.37 and 1.39 of Income Tax Folio S4-F7-C1, Amalgamations of Canadian Corporations (the “Amalgamation Folio”). There is no election form prescribed by the Act. The bump designation is also outside the scope of Regulation 600, which permits certain prescribed elections to be filed late in certain circumstances.[6]