The taxpayers were a married couple. Mrs. Paajanen ran a retail business, and formed a partnership with her sister, whose husband had died and who was facing financial hardship. While Mrs. Paajanen and her sister contributed equal labour to the business, Mrs. Paajanen took only around 15% of the partnership income in many taxation years, and as little as 6.5% in one of the years under review. Mr. Paajanen claimed personal credits based on his wife's reported income. Woods J. allowed the credits, stating that "it would be wrong in my view to state as a general principle that allocations between non-arm's length partners must always be based solely on business criteria." She determined (at para. 24):
In this case, the agreement between Mrs. Paajanen and Mrs. Andet to share income unequally was not at all motivated by tax considerations. There was a modest tax saving to Mr. Paajanen with respect to personal credits, about $1000 per year. It does not make sense that this factor influenced the partners' agreement to share income unequally.