Amounts that had been earned for work done by the taxpayer (James) for a corporation ("K.C.R. Investments") and that were paid by K.C.R. Investments at his direction to his common-law spouse ("Kirsten") were included in his income under s. 56(2).
Counsel for the taxpayer submitted that in order for s. 56(2) to apply, there must be evidence that the actual recipient of the amounts (Kirsten) would not be subject to tax on the amounts. The Court found that this submission represented a misinterpretation of the Winter case (90 DTC 6681), which simply recognized that s. 56(2) cannot apply to an amount that is properly taxable as income in the hands of the person who actually received it and that such an amount must be an amount that only the taxpayer is entitled to receive as income.
In this regard, after referring (at para. 36) to the fourth condition for the application of s. 56(2), that “the payment would have been included in the reassessed taxpayer's income if it had been received by him or her,” the Court stated (at paras. 46-47):
It is implicit in the fourth condition that the payment in question must be an amount that only the taxpayer, in this case Mr. James, is entitled to receive as income… .
…[T]he payments made by K.C.R. Investments Ltd. to Ms. Kirsten could not be remuneration for Ms. Kirsten's services and at the same time be remuneration for the services of Mr. James. … If the payments were remuneration payable to Ms. Kirsten for her services, subsection 56(2) would not require the payments to be taxed in the hands of Mr. James. However, if Ms. Kirsten did not provide services that would justify an entitlement to the payments in question, but Mr. James did, the inescapable conclusion is that subsection 56(2) must be applied to cause the payments to be taxable in the hands of Mr. James.