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Court of Appeal sides with Loblaw in $368 million tax evasion case involving Barbados bank

Loblaw headquarters in Brampton in 2018.
Loblaw headquarters in Brampton in 2018.

Loblaw Companies Ltd. is off the hook for $368 million in taxes, after the Federal Court of Appeal overturned a 2018 ruling that found the company used a Barbados bank as a tax shelter.

The ruling from a three-judge panel on Thursday sent the matter back to the Minister of National Revenue for reassessment.

In an emailed statement, Loblaw said that it pays all of the taxes it owes.

“We know that Canadians expect us to pay our taxes fully and fairly — and we do,” said the statement from Kevin Groh, Loblaw’s senior vice-president of corporate affairs and communication. “We are pleased that the Court of Appeal reversed the decision of the lower court, confirming that we were compliant in our tax filings and that we had paid all amounts due.”

The details of the case are extremely long, and the specific rules around foreign accrual property income (FAPI) are “extremely complex,” in the words of Judge Judith Woods, who authored the written decision from the case.

Loblaw owned Glenhuron Bank Ltd. in Barbados from the early 1990s, when it was set up to avoid some proposed tax changes in the Netherlands, until it was liquidated in 2013.

The crux of the case boils down to how Glenhuron should be taxed based on those complex provisions in the Income Tax Act; Loblaw argued that it should be exempt from the FAPI rules because it was a regulated foreign bank under the laws of Barbados.

This led to some difficult questions being tackled by the Court of Appeal judges, such as: what is a bank?

Referring to a Supreme Court decision on the topic, Woods said that “‘banking’ is an elusive concept, difficult to define, and its meaning should be based on a formal, institutional approach rather than a substantive approach, in the sense of the functions of banking.”

Canada Revenue Agency argued that because the Glenhuron bank in Barbados got most of its money from the parent company, it was not “arm’s length” and therefore effectively a subsidiary of Loblaw.

The company argued that because most of the bank’s transactions were done with arm’s length parties on the open market, the bank’s operations were effectively arm’s length from Loblaw’s business.

Government lawyers argued that if the court sided with Loblaw, it would basically nullify the whole point of the foreign accrual property income rules.

“Finally, the Crown submits that if Loblaw Financial’s position is accepted, the very target of the FAPI legislation, which is an investment portfolio held offshore, would be exempt. The concern is a valid one, but it does not enable a court to give the legislation a broader interpretation than it can reasonably bear,” Woods wrote.

She also noted that the federal government appears to have since amended the law to change the definition of a foreign bank specifically to address the issue.

Toby Sanger, director of Canadians for Tax Fairness, said the whole situation is a demonstration that the international tax system is fundamentally broken.

Sanger said Ottawa has talked a good game about international efforts to handle tax evasion, but the government hasn’t been aggressive about actual enforcement.

“I’ve been a bit frustrated that the Canadian government has simply said we’re going to see what the outcome of this is, instead of pushing for reforms ourselves,” Sanger said.

“Federal and also provincial governments are losing billions of dollars from this.”

Sanger said he worries that the government losing a long-running, high-profile case like this will lead them to be less aggressive about future enforcement.

Aaron Wudrick federal director of the Canadian Taxpayers’ Federation, said that the federal ruling is a cause for worry that corporate tax law is too loose in Canada.

“This decision should concern anyone worried about corporations exploiting tax loopholes to offshore money and avoid paying taxes in Canada,” Wudrick said.

The Court of Appeal ordered the federal government to pay $1.8 million “plus reasonable disbursements” to cover Loblaw’s legal costs.

CRA declined to comment, except to say that it will be “analyzing the decision in due course” and the agency couldn’t comment on specifics due to confidentiality rules.

Copyright Postmedia Network Inc., 2020

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