A significant percentage increase in the direct share interests of shareholders occurring as a result of a preferred share redemption will engage the exemption-denial rule in s. 55(3)(a)(ii) even if there is no change in their indirect interest in the corporate assets

A and B each directly hold 50% of the common shares of a company (Quebeco 2) and indirectly each hold 50% of the preferred shares of Quebeco 2 "through" an intermediate holding company. If a redemption by Quebeco 2 of its preferred shares results in a "significant increase" in their percentage interest in the shares of Quebeco 2 held by them directly, s. 55(3)(a)(ii) or (v) will not exempt the resulting deemed dividend, notwithstanding that there is no change in their indirect 50/50 corporate ownership of the corporate assets now represented by the redemption proceeds. Further, such application of s. 55(3)(a)(ii) will result in any other deemed dividend occurring as part of the same series also being tainted.

Neal Armstrong. Summary of 25 April 2014 T.I. 2014-0528011E5 F under s. 55(3)(a).