An arrangement under which the taxpayer maintained control of a company that it effectively had sold to a purchaser until all the taxpayer's shares were redeemed was found to be an arrangement that was structured to circumvent the application of s. 55(2) and, therefore, to be covered by s. 55(4).
This is amended by 2018-0778931R3.
Parent will control DC and each TC in order to retain control over the property currently owned by DC and the investment decisions related thereto in the same manner as before and to protect his economic interest in the Parent Note and Parent Note 2.
Parent has no intention of ceasing to control the TCs, is in good health and expects to continue to be fully involved in the day-to-day management of DC.
[N]one of the purposes of Parent acquiring and maintaining voting control of the [TCs] is to cause his children to be related to the [TCs] so that subsection 55(2) would not apply to any of the deemed dividends resulting from the Proposed Transactions since Parent intends to exercise the same degree of control over each of the [TCs] that he currently exercises over DC.
The reason that Holdco 1 will acquire super-voting shares and redeemable, preferred shares of Newco 1 and Newco 2 as part of the Proposed Transactions is to preserve Holdco 1’s economic interest in the underlying assets as it was before the Proposed Transactions.
Parent holds all of the (controlling) special voting shares of Holdco as well as wholly-owning Parent Holdco which, in turn, owns more than half of the common shares and preferred shares of Opco. The balance (under 50%) of the common and preferred shares of Holdco is held by Child Holdco whose preferred shares and (controlling) special voting shares are hold by Child and whose common shares are held by Child Trust, whose beneficiaries include not only Child but also an unrelated beneficiary, so that Child Trust is an unrelated person.
Thus, subsection 55(2) would not apply in the situation described above to the extent that none of the occurrences set out in subparagraphs 55(3)(a)(i) to 55(3)(a)(v ) occurred as part of a transaction or event or a series of transactions or events as a part of which the dividend was received.
CRA has accepted that the s. 55(3)(a) exemption may apply where the share ownership includes siblings, as long as the presence of their parents as shareholders allows the s. 55(3)(a) exemption to apply. However, this exemption will not be available under s. 55(4) where one of the purposes of the transactions was to cause persons to be related or a corporation to control a corporation so that s. 55(2) did not apply.
CRA has indicated that s. 55(4) should not apply where the parent retains control of the corporate group in order to continue being involved in the management of the underlying business and in order to protect the parent's investment - or in order to maintain a significant dividend income.