Principales Questions: Xco and Yco own respectively 60% and 40% of the common shares of the capital stock of Opco. A corporate freeze would be implemented. Xco and Yco, the corporate taxpayers, would receive preferred shares having a redemption amount equal to the value of the common shares they held. 60 common shares would be issued to the child of Xco's shareholder and 40 common shares would be issued to Yco. The safe income is lower than the redemption amount of the preferred shares.
1. Would the issuance of the common shares to the child of Xco's shareholder constitute a significant increase in the direct interests in Opco of that child?
2. Would 55(2) apply with respect to the redemption of the preferred shares held by Yco?
3. Would 55(2) apply with respect to the redemption of the preferred shares held by Xco where there is a proportionate number of preferred shares held by Yco and Xco that are redeemed at the same time?
4. Would 55(2) apply with respect to the redemption of the preferred shares held by Xco where there is a proportionate number of preferred shares held by Yco and Xco that are redeemed in the same day but where the redemption of Xco's shares occurs first?
Position Adoptée: 1. Yes.
2. Yes.
3. No.
4. Yes.
Raisons: 1. The son acquires 60% of the future value of Opco.
2. Yco and the child of Xco's shareholder are not related persons. Yco and Opco are not related persons. The exception provided for in subsection 55(3)(a) does not apply because the transactions will result in significant increase in interests described in paragraphs 55(3)(a)(ii) and (v) and in a disposition described in paragraphs 55(3)(a)(i) and (iii). According to the example provided, there is a significant reduction of the gain that would be realized on a disposition at fair market value of the redeemed shares and that could be attributable to anything other than the safe income.
3. There is no significant increase of the interests of Yco and the child of Xco's shareholder is related to Xco. Therefore, the exception provided for in subsection 55(3)(a) applies.
4. There may be a significant increase of the interest of an unrelated person, Yco, in Opco that would be described in paragraphs 55(3)(a)(ii) and (v). Therefore, the exception provided for in subsection 55(3)(a) may not apply. According to the example provided, there would be a significant reduction of the gain that would be realized on a disposition at fair market value of the redeemed shares and that could be attributable to anything other than the safe income.
