Retractable preferred shares ("Rollover Preferred Shares") of a CCPC (“Subco”) held by a public corporation (“Pubco”) which had ceased to be related to Subco were redeemable for their redemption price, plus a premium. The redemption price of the shares, which were short-term preferred shares, was set at the fair market value of the assets (transferred on a rollover basis to Subco) in consideration for which they were issued, which originally had been set at an amount of $2M, but was subsequently reduced by agreement with CRA and pursuant to a price adjustment clause to $1M. Rollover Preferred Shares then were redeemed based on the reduced FMV of $1M plus the premium, giving rise to deemed dividends in the same amount, given the shares’ nominal ACB and PUC. All the voting and participating shares of Subco were held by another CCPC (“Holdco”).
In finding that s. 55(2) would apply, CRA stated:
[T]he redemption of the Rollover Preferred Shares would be caught by subparagraphs 55(3)(a)(ii) and (v) as it would result in a significant increase in the total direct interest in Subco (the "dividend payer") of Holdco, a person unrelated to Pubco (the "dividend recipient") immediately before the redemption. In addition, the exception for a disposition of shares for proceeds of disposition at least equal to fair market value in subparagraph 55(3)(a)(ii) would not apply in the circumstances (see, in particular, paragraph (j) of the definition of "proceeds of disposition" in section 54, and paragraph 55(3.01)(d)).
The redemption of the Rollover Preferred Shares would also be caught by subparagraphs 55(3)(a)(i) and (iii) since this transaction would result in a disposition of property (shares of the capital stock of Subco, the dividend payer) to Subco (see subsection 84(9) on this point) which would be a person unrelated to Pubco (the "dividend recipient") immediately before the redemption. The exception for a disposition of property for proceeds that are not less than fair market value in subparagraph 55(3)(a)(i) would not apply in the circumstances (see, for example, paragraph (j) of the definition of "proceeds of disposition" in section 54, and paragraph 55(3.01)(d)).