Two brothers (X and Y) each hold half the shares of Opco which, in turn, holds 35% of the shares (being common shares) of Subco. They jointly incorporate Holdco, transfer all their Opco shares on a s. 85(1) rollover to Holdco in consideration for Holdco pref shares, Opco transfers to Holdco its Subco shares in consideration for pref shares of Holdco on a s. 85(1) rollover basis, Holdco redeems those prefs for a note, which note is then extinguished by Opco transferring the note to Holdco as a dividend-in-kind.
After noting that X and Y, as brothers, would not be related to Holdco and Opco pursuant to s. 55(5)(e)(i), so that they would be "unrelated persons" under s. 55(3.01)(a) vis-à-vis the Holdco and Opco dividend recipients, CRA found that the s. 55(3)(a)(ii) exclusion applied, stating:
[T]here would be, at the time of the acquisition by Mr. X and Mr. Y of the preferred shares of the capital stock of Holdco, a significant increase in the direct interest in a corporation (Holdco) of persons (Mr. X and Mr. Y) who were unrelated persons immediately before the particular time … .