Supreme Court of Canada Dismisses Crown Appeal in Loblaw Financial


Canada v. Loblaw Financial Holdings Inc. 2021 SCC 51


Loblaw Financial Holdings Inc. (“Loblaw”) was reassessed which required it to pay tax on a subsidiary’s income on the basis that it was FAPI. The Minister of National Revenue (“Minister”) concluded that the subsidiary’s income did not qualify for an exclusion provided to foreign banks. Loblaw appealed to the Tax Court of Canada (“TCC”). The TCC agreed with the Minister that the foreign bank exclusion did not apply on the basis that the subsidiary did not conduct business principally with arm’s length persons, as required by the applicable legislation. Loblaw appealed to the FCA, which allowed the appeal. The Minister’s appeal to the Supreme Court of Canada was dismissed.


The primary issue in the underlying TCC appeal was whether, during the 2001-2005, 2008, and 2010 taxation years, the income of Glenhuron Bank Limited (“GBL”) was Foreign Accrual Property Income (“FAPI“) and thus taxable in the hands of its parent, Loblaw.

GBL carried on business in Barbados and was engaged in transactions involving intercompany loans, short-term debt securities, distributor loans, and intercorporate loans. Swaps (both cross-currency and interest rate) also yielded returns.

This involved using the money from the investments in loans and securities to enter cross-currency swaps which would yield Canadian income, and then using interest rate swaps to exchange Canadian floating rate payments for Canadian fixed-rate payments. The swap activity yielded greater income than the loans and debt security transactions.

The TCC found that GBL was carrying on an investment business. FAPI includes income from an investment business, but the definition of “investment business” in the Act exempts a business, other than a business conducted principally with non-arm’s length persons, of a regulated foreign bank with greater than the equivalent of five fulltime employees.

The question became: was GBL exempted from the definition of “investment business”?  The exemption would apply if GBL could establish it was a) a foreign bank, b) with more than five full-time employees and c) that the business was not conducted principally with non-arm’s length persons.

The TCC found that GBL was a foreign bank under the Bank Act.  The TCC further found that GBL met the test of employing the equivalent of five full-time employees.  In laying the groundwork for the arm’s length test analysis, the TCC indicated that the two basic elements of a banking business are a) the receipt of funds and b) the use of funds, and that the plain wording of the provision would suggest that a bank must not principally have related customers and must not principally invest in related persons.

Furthermore, the TCC found that there should be emphasis on the receipt component, as that is where one would expect to find the competition element.  On GBL’s receipt side, all funds came from non-arm’s length parties.   As to the use-of-funds side of the equation, the TCC first found that GBL’s investment in short-term debt securities was not done at arm’s length.

The TCC then found that taking a non-arm’s length person’s money and buying short-term debt securities could be viewed as conducting business, although simply buying that type of investment would not involve any negotiation or active conduct of business.

Loblaw’s position was that because those investments were with third parties, GBL was conducting business with those persons. The TCC did not accept this position.  The Court’s point was that work done to  determine where to obtain the best rates would be something carried on for the benefit of the money’s owner, and the money’s owner in this circumstance was not at arm’s length.

With respect to the loan portfolio, Loblaw pointed to thousands of independent operators that received loans from GBL, which  Loblaw argued demonstrated it was conducting business with arm’s length persons. However, the Court found that the element of competition was missing.

The borrowers were, in the Court’s view, simply handed over to GBL by its parent Loblaw. The TCC also found that GBL was not paid by the borrowers directly, but rather through a related company. This aspect of the business was found to be conducted as much with Loblaw as with the borrowers.

The TCC found that the business of intercompany loans and equity forwards was also conducted with non-arm’s length persons.  Furthermore, the swap activity indicated the conducting of business with non-arm’s length persons because the swaps were subject to Loblaw derivative policies.

Thus, the TCC concluded that GBL did not qualify for the foreign institution exemption because GBL’s business was principally with non-arm’s length persons.  This finding was influenced by the Court’s consideration that both sides of GBL’s banking business lacked the requisite competitive element.

Did the General Anti-Avoidance Rule (“GAAR”) Apply?

There are three conditions for the GAAR to apply, namely, a tax benefit, an avoidance transaction, and misuse or abuse of the provisions of the Act.  The TCC found that there was a tax benefit (avoidance of tax on FAPI) and that it was achieved through a misuse of the provisions of the Act, but there was no avoidance transaction, since the Court was not persuaded of any transactions having been entered into for purposes other than to make money from an elaborate investment strategy in a low tax jurisdiction.

FCA Decision & Analysis

Loblaw appealed the TCC decision to the FCA.  The main issue raised on appeal was whether the TCC had erred by in concluding that GBL did not conduct business principally with arm’s length persons.  Loblaw alleged the TCC made four errors of law:

  • it read in an unlegislated competition requirement;
  • it focussed on capitalization rather than sources of income;
  • it characterized the conduct of business as including capital receipts; and
  • it failed to treat Glenhuron as separate and distinct from Loblaw.[1]

The FCA found that the TCC did in fact commit a series of errors and allowed Loblaw’s appeal.  First, the TCC erred by reading in a requirement to examine the receipt as well as the use of funds in its banking business, relying on the definition of “international banking business” in Barbados legislation to read in the receipt requirement.

This was found to be an error, with the FCA stating that simply because “…Barbados legislation defines international banking in a particular manner does not mean that receipts and uses are always a necessary requirement to carry on a banking business – in Barbados or elsewhere.”[2]  Furthermore, the TCC’s approach to defining BGL’s banking activities was found to conflict with prior Supreme Court of Canada (“SCC”) jurisprudence[3] which favoured a formal, institutional approach in defining a banking business.

The FCA further found that the TCC committed a legal error by focussing on competition, as this represented an example of a court inferring a purposive interpretation from unexpressed legislative intent.

The emphasis in the Tax Court’s reasons on an unexpressed intention of competition is not appropriate in this case which involves a FAPI scheme that is drafted with mind-numbing detail.[4]

The FCA found that the TCC also erred by conflating the rationale of the legislation for purposes of a GAAR analysis with the purpose of the legislation in a statutory interpretation analysis, and furthermore in not respecting the fundamental principle that a corporation and its shareholders are separate and distinct entities.

The latter error was demonstrated by the TCC’s finding that  activities involving the purchase of short-term debt securities and its swap transactions were conducted with Loblaw. The FCA found that the TCC committed a legal error by concluding that GBL’s money belonged to Loblaw.

The FCA concluded that GBL principally conducted business with arm’s length persons.  The majority of GBL’s assets were invested in US denominated short-term debt securities, cross-currency swaps, and interest rate swaps, and these activities generated the majority of  GBL’s income.

The FCA found that this business activity was conducted entirely with arm’s length persons. The FCA also awarded costs to Loblaw in the TCC ( of $1.8 million) and at the FCA. The Crown appealed the FCA decision to the SCC.

SCC Decision

The SCC essentially found that Loblaw’s foreign affiliate was conducting business with arm’s length persons, which meant that Loblaw was able to avail itself of the financial institution exception.

Côté J., writing for the unanimous Court, indicated that the dispute boiled down to the meaning of the phrase “business conducted principally with”. The SCC was essentially tasked with the duty to determine whether providing corporate capital and exercising corporate oversight equated to the conduct of business with a foreign affiliate.

In framing the interpretive exercise, the SCC reiterates critical principles of statutory interpretation in the tax context[5]:

This narrow question of statutory interpretation requires us to draw upon the well-established framework that “statutory interpretation entails discerning legislative intent by examining statutory text in its entire context and in its grammatical and ordinary sense, in harmony with the statute’s scheme and objects” (Michel v. Graydon, 2020 SCC 24, at para. 21). Where the rubber hits the road is in determining the relative weight to be afforded to the text, context and purpose. Where the words of a statute are “precise and unequivocal”, their ordinary meaning will play a dominant role (Canada Trustco Mortgage Co. v. Canada, 2005 SCC 54, [2005] 2 S.C.R. 601, at para. 10). In the taxation context, a “unified textual, contextual and purposive” approach continues to apply (Placer Dome Canada Ltd. v. Ontario (Minister of Finance), 2006 SCC 20, [2006] 1 S.C.R. 715, at para. 22, quoting Canada Trustco, at para. 47). In applying this unified approach, however, the particularity and detail of many tax provisions along with the Duke of Westminster principle (that taxpayers are entitled to arrange their affairs to minimize the amount of tax payable) lead us to focus carefully on the text and context in assessing the broader purpose of the scheme (Placer Dome, at para. 21; Canada Trustco, at para. 11). This approach is particularly apposite in this case, where the provision at issue is part of the highly detailed and precise FAPI regime.

Crown’s Arguments

The Crown argued that the meaning of conducting business can be understood by reference to Barbadian law. The SCC disagreed, indicating that the Crown had failed to persuade the Court of the relevance of Barbadian law to Canadian tax provisions.

The Crown further argued that the term ‘business’ should be construed broadly. Although the SCC agreed that the term is broad, it indicated that the relevant term was ‘business conducted’. The SCC specified that adding the word ‘conducted’ meant that the analysis should focus on the active carrying out of the business rather than on the establishment of prerequisite conditions that enable a foreign affiliate to conduct business.[6]

Supreme Court Decides

The SCC did not mince words when suggesting that raising capital is a necessary part of business but that it is not the conduct of the business. The Court reviewed the various definitions contained in the FAPI regime to show that the legislation is more concerned with activities related to income generation rather than capitalization.

The SCC also dismissed the Crown’s argument that the purpose of the arm’s length test was to act as an anti-avoidance measure. The Court indicated that there was no evidence on this point and that it was more likely that the arm’s length requirement was incorporated by Parliament to balance conflicting goals of economic efficiency on one hand and capital export neutrality on the other.

The SCC also found that corporate oversight by a parent does not form part of an affiliate’s conduct of business. The Court stated that treating oversight “…by a parent corporation as shifting the responsibility for conducting business is also incompatible with the rest of the FAPI regime. The regime applies only where there is a controlled foreign affiliate. If there is a controlled affiliate, there is necessarily corporate oversight by its parent.”[7]

The Crown’s appeal was dismissed.

Key Takeaway

The SCC found that Parliament did not intend capital injections to be considered as part of the conduct of business. And in a particularly damning paragraph, the SCC referred to CRA’s own Rulings which clearly indicate that capital was not a relevant consideration when determining the actual business being conducted by an affiliate:

In a 1995 Ruling, the CRA said that the criteria for conducting business are “primarily directed at measuring sources of income, income earning activities, and the assets, etc., used in each business (i.e. the revenue side of corporate operations)” (Foreign Affiliates — Investment Business, Ruling No. 9509775, July 14, 1995). The CRA further stated that “the fact that a foreign affiliate receives funding to carry on its income earning activity by way of debt or equity from a related party would have little if any relevance in the determination of whether its business is carried on with persons with whom it does not deal at arm’s length” (emphasis added).

Similarly, in 2000, the CRA reiterated its position, stating that the relevant criteria are “directed at measuring sources of income, employee time and effort and assets used in each business and no indication is given whether or how the amount of the debt or equity or the amount of time that is spent by employees administering debt or equity associated with a business would be relevant” (Ruling No. 2000‑0006565 (emphasis added)). It further noted that the aforementioned set of criteria is “in most cases, a complete set of relevant criteria in the determination of whether a business is conducted principally with persons with whom the affiliate does not deal at arm’s length and the source of a corporation’s debt and equity financing would generally not be material to that determination”

Amit Ummat
Ummat Tax Law PC

[1] Loblaw Financial Holdings Inc. v. Canada 2020 FCA 79 (“Loblaw”), at para. 33.

[2] Loblaw, at para. 54.

[3] Canadian Pioneer Management Ltd. v. Labour Relations Board of Saskatchewan (1979), [1980] 1 S.C.R. 433, 107 D.L.R. (3d) 1

[4] Loblaw, at para. 58.

[5] Canada v. Loblaw Financial Holdings Inc. 2021 SCC 51 (“Loblaw SCC”) at para. 41.

[6] Loblaw SCC, at para. 45.

[7] Loblaw SCC, at para. 64.