CRA considers that the application of s. 55(2) to cross-share redemptions by connected CCPCs gives rise to a Part IV tax circularity problem

If two connected Canadian-controlled private corporations cross-redeem shareholdings in each other with the resulting deemed dividends being subject to capital gains tax under s. 55(2), CRA considers that a circularity problem will arise: the capital gains tax on the deemed dividend received by each corporation will result in an addition to its refundable dividend tax on hand account, which will result in a dividend refund on the deemed dividend paid by it to the other corporation, which will result in Part IV tax to the other corporation, which will result in an addition to that corporation's RDTHOH account, which will generate a dividend refund to it and Part IV tax to the first corporation, and so on.

Furthermore, circularity is a sword and not a shield.  In light of 943963, the exclusion from Part I tax under s. 55(2) for dividends subject to Part IV tax applies only to "normal" Part IV tax and not Part IV tax arising from the application of s. 55(2).

Neal Armstrong.  Summary of 27 June 2014 T.I. 2013-0498191E5 F under s. 55(2).