Case Summary: Loblaw Financial Holdings Inc. v. Canada, 2020 FCA 79 (CanLII), [2020] 3 FCR 481

In the case of Loblaw Financial Holdings Inc. v. Canada (2020), the Federal Court of Appeal dealt with whether income earned by Loblaw’s Barbados-based subsidiary, Glenhuron Bank, should be taxed in Canada. The government argued that this income should be taxed as it was considered passive income earned in a low-tax country. However, Loblaw argued that Glenhuron was conducting active business with independent parties, and thus the income should not be taxed in Canada. The court ruled in favor of Loblaw, finding that Glenhuron mainly did business with outside companies, meaning the income was not taxable under Canadian law designed to target passive income from non-arm’s length sources.

Court

Federal Court of Appeal

Citation

Loblaw Financial Holdings Inc. v. Canada, 2020 FCA 79 (CanLII), [2020] 3 FCR 481

Date

April 23, 2020

Docket

A-321-18

Coram

Justices Woods, Laskin, and Mactavish

Reasons for Judgment

Justice Woods

Appellants

Loblaw Financial Holdings Inc.

Respondent

Her Majesty the Queen

On Appeal From

Tax Court of Canada, Loblaw Financial Holdings Inc. v. The Queen, 2018 TCC 182

Overview

The appeal concerned whether the foreign accrual property income (FAPI) provisions in the Income Tax Act (ITA) applied to Loblaw Financial Holdings Inc. regarding its Barbados subsidiary, Glenhuron Bank Limited. The Tax Court of Canada upheld the Minister of National Revenue’s determination that Glenhuron’s income was FAPI. Loblaw Financial argued that Glenhuron’s income should not be considered FAPI under the foreign bank exclusion. The Federal Court of Appeal examined whether the Tax Court erred in its interpretation of the arm’s length requirement within the definition of “investment business” under subsection 95(1) of the ITA.

Facts

Loblaw Financial Holdings Inc., a Canadian corporation, owned Glenhuron Bank Limited, a licensed offshore bank under Barbados legislation. Glenhuron’s main activities included purchasing short-term debt securities and managing investments. The Minister of National Revenue reassessed Loblaw Financial for several years, claiming that Glenhuron’s income was FAPI because it was primarily conducting business with non-arm’s length entities, mainly within the Loblaw group.

Legal Issue

Did Glenhuron Bank Limited conduct business principally with arm’s length persons for the purposes of qualifying for the foreign bank exclusion under the definition of “investment business” in subsection 95(1) of the ITA?

Decision

The Federal Court of Appeal allowed the appeal, concluding that the Tax Court erred in its interpretation of the arm’s length requirement. The court set aside the Tax Court’s decision and referred the reassessments back to the Minister for reconsideration based on the finding that Glenhuron principally conducted business with arm’s length persons.

Reasoning

1. Standard of Review: The court applied the standard of correctness for questions of law, as established in Housen v. Nikolaisen.
2. Interpretation of Legislation: The court determined that the Tax Court overreached in its interpretation of the legislation by requiring Glenhuron to demonstrate competition as a criterion for the foreign bank exclusion. This approach conflicted with established legal principles and the legislative text.
3. Arm’s Length Requirement: The Tax Court incorrectly concluded that the receipt and use of funds by Glenhuron needed to meet an implied competition standard, which was not legislatively required. The court emphasized that the focus should be on the business’s principal transactions and relationships with external entities.
4. Separate Entity Principle: The Tax Court erred in conflating Glenhuron’s activities with those of Loblaw Financial, disregarding the fundamental principle that a corporation and its shareholders are distinct entities.
5. Business Conduct: The Federal Court of Appeal found that Glenhuron’s business activities primarily involved arm’s length transactions, particularly in the purchase of short-term debt securities and swaps with independent third parties.

Conclusion

The Federal Court of Appeal concluded that Glenhuron conducted its business principally with arm’s length persons, making the foreign bank exclusion applicable to its activities. The court allowed the appeal and ordered the reassessment of Glenhuron’s FAPI based on income from non-arm’s length investment management services.

Implications

This decision clarifies the interpretation of the arm’s length requirement in the context of FAPI and foreign bank exclusions, reinforcing the distinction between passive and active business income. It underscores the importance of adhering to legislative text and avoiding inferring unexpressed legislative intentions.

Cited Authorities

• Housen v. Nikolaisen, 2002 SCC 33
• Canada Trustco Mortgage Co. v. Canada, 2005 SCC 54
• Canadian Pioneer Management Ltd. et al. v. Labour Relations Board of Saskatchewan et al., 1979 CanLII 180 (SCC)
• Shell Canada Ltd. v. Canada, 1999 CanLII 647 (SCC)

Statutes and Regulations Cited

• Income Tax Act, R.S.C., 1985 (5th Supp.), c. 1, ss. 91(1), 95(1)
• International Financial Services Act, Cap. 325, s. 4(2) (Barbados)
• Off-shore Banking Act, Cap. 325 (Barbados)

Treaties and Other International Instruments

None cited.

Authors Cited

None cited.

Solicitors

• Appellant: Osler, Hoskin & Harcourt LLP, Toronto
• Respondent: Deputy Attorney General of Canada

 

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