The Premier Trust Company ("Premier") acquired all the shares of the taxpayer and other shareholders of the Security Loan and Savings Company ("Security") in consideration for (at the option of the shareholder) 1.5 shares of Premier for each Security share, or a combination of cash of $102 and 0.5 shares of Premier for each Security share. The taxpayer opted to receive cash and shares. Security then amalgamated with Premier. The Minister assessed under s. 19(1) of the Income War Tax Act, which provided that:
on the winding-up, discontinuance or reorganization of the business of any incorporated company, the distribution in any form of the property of the company shall be deemed to be the payment of a dividend to the extent that the company has on hand undistributed income.
A portion of the consideration so received by the taxpayer would have been includable in her income (under s. 19(1)) to the extent of her share of the "undistributed income" (i.e., accumulated retained earnings) - but for the fact that the Act was interpreted as excluding from undistributed income the income which Premier had earned prior to 1935 (the point on which the case was reversed in the Supreme Court of Canada). McLean J. noted that on the facts there clearly was a discontinuance ("whether that was bought about by a sale to or amalgamation with the Premier Company") or a winding-up of the business (notwithstanding the absence of a formal liquidation procedure), and that the transactions resulted in a distribution of Security property notwithstanding "that the consideration received by the Appellant for her shares happened to reach her directly from the Premier Company and not through the medium of the Security Company (p. 516).