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 for their shareholders), but are related to Holdco Inc. and Holdco 2 Inc.
- Father Inc., Son Inc. and Daughter Inc. will transfer their preferred shares of Holdco Inc. on a s. 85(1) rollover basis to corporation incorporated by Father Inc. (“Holdco 2 Inc.”) in exchange for the issuance of preferred shares
- [T]his Directorate has previously taken the position that subsection 55(4) should not apply where the principal reason for a shareholder holding a sufficient number of shares of the capital stock of a corporation to control it was to protect the economic interests of the shareholder.
- 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
and the resulting cross preferred shareholdings will be redeemed and the resulting notes settled.
After finding that the s. 55(3)(a) exceptions otherwise applied respecting the deemed dividends arising on the cross-redemptions, CRA turned to s. 55(4) and stated:
… Father controls Father Inc., Holdco Inc., Holdco 2 Inc. as well as Opco 1 Inc.
… .Under [s. 55(4)] it must be demonstrated that none of the main reasons for the events or transactions is to cause persons to become related to each other so that subsection 55(2) would not apply to a dividend.
… Based solely on the information provided in your request, it is not possible for us to determine whether subsection 55(4) could be applicable in the Particular Situation. ...
[T]his Directorate has previously taken the position that subsection 55(4) should not apply where the principal reason for a shareholder holding a sufficient number of shares of the capital stock of a corporation to control it was to protect the economic interests of the shareholder.