The appellant incorporated a family holding company for tax planning and income splitting purposes.
His wife, who made no contribution to the company, was elected sole director and declared dividends on her own shares, which she then loaned to the appellant.
The Minister reassessed the appellant, attributing the wife's dividend income to him under s. 56(2) of the Income Tax Act.
The Supreme Court of Canada held that s. 56(2) does not apply to dividend income, as a dividend is a return on capital and not a diverted benefit to which the taxpayer was otherwise entitled, regardless of whether the transaction was non-arm's length or whether the recipient made a legitimate contribution to the corporation.
