Bump room is determined by the ACB of the target corporation’s shares minus the net tax cost of the underlying assets and the amounts in ITA subparagraph 88(1)(d)(i.1), which include taxable dividends and capital dividends. Accordingly, a target corporation that has life insurance and pays capital dividends before undertaking a bump could find that the bump room has been reduced by the dividends. Waiting to pay the dividend doesn’t help either because the life insurance cash in the corporation reduces the bump room under subparagraph 88(1)(d)(i). The target corporation can avoid this issue by paying a capital dividend before its shares are transferred to newco.
The authors note the complicated relationships among the 164(6) carryback, the bump and the pipeline. They recommend careful modelling to work through the trade-offs entailed by the relationships.
Henry Shew and Florence Marino “The Interaction Between Corporate-Owned Life Insurance and Bump Transactions” Tax for the Owner-Manager 26:2 (April 2026)
