Everything is soluble in everything else? Close --- needs some qualifications regarding stabilities at T, P, and chemical potentials of solvent and solute.
Water in Kool-aid? Sure --- think about dry Kool-aid vs. the stuff that's been sitting in the cupboard all summer in 100% humidity. Pouring water into Kool-aid that's already in solution? Nope, that's a dilution process.
Be careful (or caution your friend to be careful) using a dictionary to support scientific arguments --- Merriam Webster, Roget, and the Oxford are NOT recognized authorities on the very specific uses of words within scientific contexts.