Each of the two individual taxpayers, who owned one-half of the shares of a Canadian-controlled private corporation ("Comcare") having an accrued gain of approximately $12.4 million and safe income of approximately $1.9 million, transferred his shares of Comcare to his own newly-incorporated holding company ("Holdco") in consideration for a promissory note and common shares of Holdco, thereby realizing a deemed dividend of approximately $10.4 million. Comcare then paid taxable dividends of $1.9 million to the two Holdcos, and the two Holdcos each sold its shares of Comcare to a third-party purchaser for approximately $10.4 million.
Woods J. accepted the taxpayers position that all of the dividends paid by Comcare to the Holdcos should be considered to come out of safe income and rejected the position of the Minister that only one-sixth of the $1.9 million safe income had been inherited by the Holdco. Woods J. noted (at p. 2913) that "the accepted approach is that gain is first allocated to 'income earned or realized' and, only if dividends exceed this amount, is gain allocated to 'unrealized appreciation in the value of underlying assets'; and in these transactions no tax had been avoided as the individuals had received a deemed dividend equal to the accrued gain on the Comcare shares that was not represented by safe income.