On December 3, 2021, a unanimous Supreme Court of Canada (“SCC”) dismissed the Crown’s appeal in Canada v. Loblaw Financial Holdings Inc. (2021 SCC 51). In doing so, the Court held that capital contributions and corporate oversight are not relevant to determining whether a controlled foreign affiliate conducts business with arm’s length parties. Matthew Williams, Robert Carvalho, and Michael Colborne of Thorsteinssons LLP represented the intervener Canadian Bankers’ Association.

Factual Background

Loblaw Financial Holdings Inc. (“Loblaw Financial”) is a Canadian corporation and part of the Loblaw Group of corporations. In 1992, Loblaw Financial incorporated Glenhuron Bank Limited (“Glenhuron”), a bank incorporated, licensed and regulated in Barbados. The Loblaw Group made capital investments in Glenhuron between 1992 and 2000 in excess of $750 million.

Although most of the assets managed by Glenhuron came from related parties, eighty-six percent of its income came from third parties through various elements of its investment business. Glenhuron was dissolved in 2013 to provide Loblaw Companies Ltd., its parent corporation, with funds for a major acquisition.

Legal Background

Under the foreign accrual property income (“FAPI”) rules in the federal Income Tax Act (the “Act”), Canadian taxpayers must generally include passive income earned by controlled foreign affiliates (“CFAs”) in their Canadian tax returns on a current basis unless it fits into one of the specific exceptions in the Act. One of those exceptions is for CFAs that operate as “financial institutions” that meet specific requirements found in the definition of “investment business”.

Loblaw Financial’s position was that Glenhuron qualified for the exception. The position of the Minister of National Revenue (the “Minister”) was that Glenhuron did not qualify for the exception because it did not conduct its business principally with arm’s-length persons. On that basis, the Minister reassessed Loblaw Financial for approximately $470 million of unreported income over the seven years.

The Tax Court ruled against Loblaw Financial, finding that Glenhuron conducted business principally with non-arm’s length persons because: (i) most of its capital contributions came from corporations within the Loblaw Group; and (ii) Glenhuron was subject to significant oversight from its parent company. The Federal Court of Appeal (“FCA”) allowed the appeal, holding that the Tax Court misinterpreted the FAPI rules when it decided that capital contributions and corporate oversight are relevant to whether a CFA conducts business principally with non-arm’s length persons.

Principles of Statutory Interpretation

The SCC’s task was to interpret a complex set of rules to resolve a discrete question: what does it mean to conduct business? Does conducting business in this context include capitalization and oversight?

Justice Cô…….

Source: https://www.lexology.com/library/detail.aspx?g=bec12492-673c-447c-b00e-7f6755e16ac3