Avoiding s. 55(2) may turn on the family patriarch or matriarch staying alive

A technical interpretation illustrates the proposition that if Opco is owned by holding companies which are controlled by Father (Fatherco), a grandchild (Nephewco) and an uncle of that grandchild (Uncleco), a redemption of Fatherco shares by Opco (giving rise to a deemed dividend) will be exempted under s. 55(3)(a), as Nephewco and Uncleco are related to Fatherco.  However, as Nephewco and Uncleco are not related, a redemption of Uncleco shares could be subject to capital gains treatment under s. 55(2) unless this redemption does not result in a "significant" increase in the percentage interest of Nephewco in Opco (as opposed to a "small percentage" change.)  The application of this test was unclear where Nephewco started off with 5% of the Opco common shares, and somewhat under half of the Opco preferred shares were redeemed by Uncleco - even if it were assumed that the prior introduction of Nephew Co into the structure was not part of the same series.

Neal Armstrong.  Summary of 3 January 2014 T.I. 2013-0514021E5 F under s. 55(3)(a).