Son Inc. and Daughter Inc. (wholly-owned by Son and Daughter) and Father Inc. (owned by Father, Son and Daughter and a family trust with them as the beneficiaries) wholly-owns Holdco Inc. which, in turn, wholly-owns Opco 1 Inc. and a portion of the shares of Opco 2 Inc. (with the balance held by a third party). Son Inc. and Daughter Inc. are not related for s. 55(3)(a) purposes (and similarly their shareholders), but are related to Holdco Inc. and Holdco 2 Inc. In order “to create a centralized real estate rental corporation”:
- Father Inc., Son Inc. and Daughter Inc. will transfer their preferred shares of Holdco Inc. on a s. 85(1) rollover basis to a corporation incorporated by Father Inc. (“Holdco 2 Inc.”) in exchange for the issuance of preferred shares
- Holdco Inc. will transfer a rental property and its shares of Opco 1 Inc. to Holdco 2 Inc. on a s. 85(1) rollover basis in consideration for the issuance of preferred shares
- the resulting cross preferred shareholdings will be redeemed and the resulting notes settled.
Would s. 55(2) apply to the deemed dividends arising on the cross-redemption? Before turning to the potential application of s. 55(4) in light of the fact that “Father controls Father Inc., Holdco Inc., Holdco 2 Inc. as well as Opco 1 Inc.”, CRA stated:
[T]he dividend recipients are Holdco Inc. and Holdco 2 Inc.
In general … the exception in paragraph 55(3)(a) would appear to apply in respect of deemed dividends resulting from the cross-redemptions between Holdco Inc. and Holdco 2 Inc.