The common shares of X Corp. and Y Corp are held equally by two unrelated corporations (A Corp. and B Corp.). Is Y Corp. connected to X Corp. so that a deemed dividend arising on the redemption by Y Corp. of non-voting redeemable preferred shares held by X Corp. (following the mutual agreement of A Corp. and B Corp. to cause the redemption) would not be subject to Part IV tax under s. 186(1)(a)?
After noting that this turned under s. 186(2) on “whether A Corp. and B Corp., which together hold more than 50% of the issued shares of the capital stock of Y Corp., with full voting rights under all circumstances, are not dealing at arm's length with X Corp.”, CRA stated:
Folio S1-F5-C1 … states that “[i]n the case of a closely-held corporation (for example, where there are two or three unrelated shareholders, none of which individually controls the corporation) the CRA considers that there is a presumption that the shareholders of such a closely-held corporation will act together to control the corporation. In order to rebut this presumption, it would be necessary to show that no one is controlling the corporation and that the decision-making process in the corporation is effectively deadlocked.”
On the basis of the limited facts submitted … A Corp. and B Corp. could a priori be considered not to be dealing at arm's length with X Corp.