Canada vs Loblaw Companies Ltd., September 2018, Canadian tax court, Case No 2018 TCC 182

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The Canada Revenue Agency had issued a reassessments related to Loblaw’s Barbadian banking subsidiary, Glenhuron, for tax years 2001 – 2010.

The tax authorities had determined that Glenhuron did not meet the requirements to be considered a foreign bank under Canadian law, and therefore was not exempt from paying Canadian taxes.

Loblaw took steps to make Glenhuron look like a bank in order to avoid paying tax. Government lawyers said Glenhuron did not qualify because, among other things, it largely invested the grocery giant’s own funds and was “playing with its own money.

Tax Court found the transactions entered into by Loblaw regarding Glenhuron did result in a tax benefit but “were entered primarily for purposes other than to obtain the tax benefit and consequently were not avoidance transactions.”

The Tax Court concludes as follows:
I do not see any extending the scope of paragraph 95(2)(l) of the Act. No, had there been any avoidance transactions the Appellant would not be saved by the fact it is not caught by a specific anti-avoidance provision.

The FAPI rules are complicated, or convoluted as counsel on both sides reminded me, though I needed no reminding. GAAR can be complicated. Taken together they weave a web of intricacy worthy of the 400 pages of written argument presented to me by the Parties. It has not been necessary for me to cover in exhaustive detail every strand of the web. Once I determined how to interpret the financial institution exemption, the complexity disappeared and the case could be readily resolved on the simple basis that Loblaw Financial’s foreign affiliate, a regulated foreign bank with more than the equivalent of five full time employees was conducting business principally with Loblaw and therefore could not avail itself of the financial institution exemption from investment business.

With respect to the calculation of the FAPI that arises from my determination, I agree with Loblaw Financial that the financial exchange gains/losses should not be treated on capital account but on income account. It does not matter whether the management fees from the Disputed Entities fall within paragraph 95(2)(b) of the Act as they would be part of GBL’s investment business caught by FAPI in any event.

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