Opco is wholly-owned by Holdco except that preferred shares of Opco are held by Employeeco, a CCPC whose common shares are held by employees who are individuals unrelated to Holdco, and whose high-low redeemable preferred shares are held by Holdco (giving Holdco control of Employeeco). Holdco had acquired the preferred shares of Employeeco (having no significant safe income) over the past five years as consideration for the transfer in each year of Opco common shares to Employeeco on a s. 85(1) rollover basis. Would the annual redemption of a small proportion of the preferred shares of Employeeco held by Holdco engage s. 55(2)?
CRA indicated that the series of transactions included the subscription by the employees for the common shares of Employeeco, thereby entailing a significant increase in the direct interest in the dividend payer (Employeeco) of unrelated person. Consequently, the exclusion in s. 55(3)(a)(ii) applied.