Subsection 55(4)

See Also

H.T. Hoy Holdings Ltd. v. The Queen, 97 DTC 1180 (TCC)

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).

Administrative Policy

2018 Ruling 2018-0749491R3 - 55(3)(a) Reorganization

Parent reps that he will control the TCs for commercial reasons
This is amended by 2018-0778931R3.

A DC which holds a rental property and an investment portfolio and is owned by Parent and his four children will spin off its investment portfolio in reliance on the s. 55(3)(a) exception to four TCs mostly owned by each of the four children. However, parent will have control of each TC by being issued special voting shares on their incorporation.

The CRA tags mention s. 55(4) as a provision that it considered relevant: access to the s. 55(3)(a) exception was assisted by or depended on Parent controlling all the corporations involved in the transactions; the special voting shares of Parent likely had minimal economic attributes; and Parent’s will bequeathed them to the respective children. In this regard, the ruling letter indicates that:

  • 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.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 55 - Subsection 55(3) - Paragraph 55(3)(a) - Subparagraph 55(3)(a)(ii) spin-off of investment portfolio (but not rental property) by DC to 4 children’s respective TCs which father controls with special voting shares 524
Tax Topics - Income Tax Act - Section 186 - Subsection 186(1) - Paragraph 186(1)(b) circularity avoided through intervening TC year end 109

2017 Ruling 2016-0675881R3 - Paragraph 55(3)(a) Internal Reorganization

s. 55(3)(a) split-up between Newcos for two siblings which were related due to multiple-voting shares held by the father’s and mother’s Holdco
clarifications re division between beneficial and registered ownership of buildings were made in 2017-0704351R3

CRA has ruled on a s. 55(3)(a) split-up of a real estate rental corporation (Canco) whose common shares were held by Son Holdco and Daughter Holdco and whose prefs were held by a Holdco for the father and mother of Son and Daughter (Holdco 1). Before the split up of the real estate between Newco 1 (whose common shares and prefs were acquired on the spin-off by Son Holdco and Holdco 1, respectively) and Newco 2 (whose common shares and prefs were acquired on the spin-off by Daughter Holdco and Holdco 1, respectively), Holdco 1 subscribed (presumably a nominal amount) for “super” voting shares of Canco and of Newco 1 and 2, so that at all relevant times, Canco, Newco 1 and Newco 2 were controlled by the two parents. The Additional Information states:

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.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 55 - Subsection 55(3) - Paragraph 55(3)(a) division of rental real estate company between holdcos for 2 children but with parents' holdco retaining voting control 529
Tax Topics - Income Tax Act - Section 85 - Subsection 85(1) - Paragraph 85(1)(e) UCC on s. 55(3)(a) spin-off prorated based on relative capital cost rather than FMV 160
Tax Topics - Income Tax Act - Section 186 - Subsection 186(1) - Paragraph 186(1)(b) where circular RDTOH calculation arises on spin-off transaction, it is for the TSOs to sort out which corporations should bear Part IV tax 241

14 August 2012 External T.I. 2012-0450041E5 F - subsection 55(4)

s. 55(4) not engaged where transactions eliminate shareholdings but not unrelated status of unrelated person

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.

The wholly-owned subsidiary of Holdco (Opco) redeems preferred shares, following which Holdco redeemed preferred shares held by Child Holdco, following which Child Holdco redeemed preferred shares of Child. There otherwise would have been a resulting significant increase in the direct interest of an unrelated person (Child Trust) in the dividend recipient (e.g., Child Holdco). In order to avoid this result, at the beginning of the above series of transactions, Child Trust distributes its common shares of Child Holdco to Child qua beneficiary (i.e., to a person related to the dividend recipients). In finding that s. 55(4) does not apply, CRA stated:

[T]he purpose of the transaction was not to have people become related to each other. In fact, despite the transaction, Child Trust would continue to be an unrelated person for the purposes of section 55 respecting the other taxpayers in the situation described. In addition, all taxpayers in the described situation, other than Child Trust, would continue to be related to each other for the purposes of section 55. …

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.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 55 - Subsection 55(3) - Paragraph 55(3)(a) - Subparagraph 55(3)(a)(ii) s. 55(3)(a)(ii) exclusion avoided by distributing shares out of unrelated-person trust 146

7 October 2011 Roundtable, 2011-0399401C6 - Butterfly, life insurance policies, grandfathering

s. 55(4) inapplicable if the principal reason for parent’s control of DC was parent's economic interests

If a butterfly split-up of a distributing corporation (DC) between the two corporations of the two children of a deceased parent had instead been effected during the lifetime of the parent (controlling DC), would it have been necessary to deal with the proportionality test in the division of the property?

CRA indicated that it 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. In this regard, it stated:

[T]he CRA has already taken the position that subsection 55(4) should not apply where the primary reason for a shareholder to hold a sufficient number of shares of the capital stock of a corporation to control it was to protect its economic interests.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 55 - Subsection 55(1) - Distribution CSV of life insurance policy was a cash asset - FMV excess could be an investment asset if no cash-out intention 204
Tax Topics - Income Tax Act - Section 55 - Subsection 55(3.1) - Paragraph 55(3.1)(a) a policy loan under a life insurance policy to reduce its CSV would trigger s. 55(3.1)(a) 163

9 November 2010 External T.I. 2010-0380661E5 F - Internal Reorganization

potential application of s. 55(4) where increase of interest of siblings companies is sheltered by control of Father – unless he held his shares to protect his “economic interests”

Son Inc. and Daughter Inc. (wholly-owned by Son and Daughter) and Father Inc. (owned by Father, Son and Daughter and a family trust with them as the beneficiaries) wholly-owns Holdco Inc. which, in turn, wholly-owns Opco 1 Inc. and a portion of the shares of Opco 2 Inc. (with the balance held by a third party). Son Inc. and Daughter Inc. are not related for s. 55(3)(a) purposes (and similarly for their shareholders), but are related to Holdco Inc. and Holdco 2 Inc.

  • Father Inc., Son Inc. and Daughter Inc. will transfer their preferred shares of Holdco Inc. on a s. 85(1) rollover basis to corporation incorporated by Father Inc. (“Holdco 2 Inc.”) in exchange for the issuance of preferred shares
  • [T]his Directorate has previously taken the position that subsection 55(4) should not apply where the principal reason for a shareholder holding a sufficient number of shares of the capital stock of a corporation to control it was to protect the economic interests of the shareholder.
  • Holdco Inc. will transfer a rental property and its shares of Opco 1 Inc. to Holdco 2 Inc. on a s. 85(1) rollover basis in consideration for the issuance of preferred shares

and the resulting cross preferred shareholdings will be redeemed and the resulting notes settled.

After finding that the s. 55(3)(a) exceptions otherwise applied respecting the deemed dividends arising on the cross-redemptions, CRA turned to s. 55(4) and stated:

… Father controls Father Inc., Holdco Inc., Holdco 2 Inc. as well as Opco 1 Inc.

… .Under [s. 55(4)] it must be demonstrated that none of the main reasons for the events or transactions is to cause persons to become related to each other so that subsection 55(2) would not apply to a dividend.

… Based solely on the information provided in your request, it is not possible for us to determine whether subsection 55(4) could be applicable in the Particular Situation. ...

[T]his Directorate has previously taken the position that subsection 55(4) should not apply where the principal reason for a shareholder holding a sufficient number of shares of the capital stock of a corporation to control it was to protect the economic interests of the shareholder.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 55 - Subsection 55(3) - Paragraph 55(3)(a) - Subparagraph 55(3)(a)(ii) two siblingcos, although not related to each other, were related to dividend recipient on spin-off transaction 244

Articles

Michael N. Kandev, Abraham Leitner, "Through the Looking Glass: Dividing up a Family Business in a Canada-US Cross-Border Context", Selected US Developments, 2011 Canadian Tax Journal, Vol 59, No. 4, p. 899

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.