The taxpayer ("TD") held common and preferred shares in a Canadian real estate company ("Oxford"). TD received dividends from Oxford over a number of years, which it used to buy new "Class E" shares having low paid-up capital, so that Oxford could use the resulting surplus to pay off existing obligations. With the surplus thus depleted, TD sold its Oxford shares at a capital loss and used the proceeds of sale to buy shares in an Oxford affiliate.
The Court found that s. 112(3) did not apply to reduce the taxpayers' loss on the Class E shares because no dividends had been paid on them. The Minister's argument that the Class E shares were "virtually identical" to the other shares was not accepted, because the shares had substantive differences in voting rights and paid-up capital. Furthermore, even if they were virtually identical, the wording of s. 112(3) clearly applied to the sale of a Class E share only if it actually were "the share on which the dividend was received."