The 'Bump': How Buyers Increase the Tax Cost of Assets After a Share Purchase in Ontario

Buyers usually prefer an asset purchase over a share purchase for one big reason: buying assets directly lets them set a fresh, higher tax cost on those assets going forward. A share purchase does not do that automatically — the corporation you buy keeps whatever tax cost it already had in its own assets, no matter what you paid for the shares.

That gap is exactly what a technique sometimes called a "bump" tries to close. It is a specialized piece of Canadian tax planning that lets a buyer, after a share purchase, increase the tax cost of certain assets inside the corporation it just bought — but only in narrow circumstances, and only for certain kinds of assets. This article explains what a bump is trying to achieve and why it belongs firmly in your accountant's or tax lawyer's hands, not a do-it-yourself plan.

Why Buyers Care About Tax Cost

The tax cost of an asset (sometimes called its cost base) matters because it affects the tax consequences the next time that asset is sold, depreciated, or otherwise dealt with. When you buy a business's assets directly, you generally get a new cost base equal to what you paid — a real, ongoing tax benefit. When you buy shares instead, the corporation's own assets keep their old, often much lower, historical cost base, even though you may have paid a price that reflects today's market value.

For a buyer who specifically wanted an asset purchase but ended up in a share deal — because the seller preferred shares, or because key contracts and licences were easier to keep in place inside the existing corporation — that gap in tax cost can be a real economic loss over time.

What a Bump Is Trying to Achieve

In general terms, a bump is a post-closing step (or series of steps) that lets a buyer allocate part of what it paid for the target's shares onto the tax cost of certain assets the target corporation already held — increasing, or "bumping," that cost going forward. It is typically achieved through a later corporate reorganization, such as winding up the target into the buyer or amalgamating the two corporations, carried out in a specific way that Canadian tax law recognizes for this purpose.

The goal is narrow: to let some of the economic reality of what the buyer actually paid be reflected in the tax cost of specific assets, rather than leaving that value permanently trapped at the target's old, historical cost.

How This Generally Fits Into a Deal

1. The deal is structured and priced as a share purchase. The bump is not a way to avoid a share purchase — it is a technique applied after one has already happened.
2. The buyer (often through a holding company) completes the acquisition of the target's shares.
3. A subsequent reorganization step is carried out — commonly a wind-up or amalgamation of the target into the buyer or an affiliate — structured to meet the specific technical conditions Canadian tax law requires for a bump to be available.
4. Only certain categories of the target's assets can have their tax cost increased this way. Others are excluded entirely (see below), regardless of how the reorganization is structured.
5. The result, when it works, is a higher tax cost in the eligible assets going forward — but the calculation of how much of a bump is actually available is its own technical exercise, deal by deal.

What a Bump Generally Cannot Do

• It generally does not apply to depreciable property, such as equipment, vehicles, or buildings used in the business.
• It generally does not apply to inventory.
• It is typically limited to certain non-depreciable capital property the target already held — such as land held as an investment, or shares of another corporation — not to the operating assets that actually run the business day to day.
• It does not eliminate the need for careful purchase price allocation, due diligence, or proper corporate approvals for the reorganization step itself.
• It is not automatic — the technical conditions that make a bump available are specific, and a transaction that misses one of them may not qualify at all.

Why This Is Specialist Territory

The rules governing whether, and how much of, a bump is available depend on detailed technical requirements — the type of reorganization used, timing, the target's asset mix, and how the transaction is structured from the very beginning of the deal. Getting any of this wrong can mean the buyer simply does not get the benefit it was counting on. If a bump is something your deal might benefit from, it needs to be raised with a tax lawyer or accountant before the purchase agreement is finalized, not after closing.

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