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Tax Insights: Loblaw Financial Holdings ─ Supreme Court of Canada interprets the foreign accrual property income regime

December 08, 2021

Issue 2021-31

In brief

On December 3, 2021, the Supreme Court of Canada (SCC) rendered its judgment in The Queen v. Loblaw Financial Holdings Inc., 2021 SCC 51. The SCC dismissed the government’s appeal from the decision of the Federal Court of Appeal (FCA), finding that Glenhuron Bank Limited (Glenhuron) (a controlled foreign affiliate of the taxpayer) conducted business principally with arm’s length persons for purposes of the foreign bank exclusion1 in the definition “investment business” in subsection 95(1) of the Income Tax Act (Canada) (ITA).

The SCC held that Glenhuron’s business qualified for the foreign bank exclusion, meaning that the income from the business was not foreign accrual property income (FAPI) and was therefore not taxable in Canada.

The SCC affirmed the FCA’s approach for determining whether a business of a foreign affiliate (FA) is conducted principally with arm’s length persons (the “arm’s length test”). This test focuses on the FA’s income-earning activities and not its capital receipts (e.g. capital invested in the FA by related parties). As well, the SCC’s decision reaffirms the importance of giving full effect to Parliament’s precise and unequivocal words as a means to ensuring certainty for taxpayers.

This decision comes on the heels of the SCC’s decision in The Queen v. Alta Energy Luxembourg SARL, 2021 SCC 49.2 In both cases, the SCC found for the taxpayer and dismissed the Crown’s appeal.

In detail


The taxpayer, Loblaw Financial Holdings Inc. (Loblaw Financial), is a Canadian company and an indirect subsidiary of Loblaw Companies Limited (Loblaw), a Canadian public company.

Glenhuron was a Barbadian corporation and a direct subsidiary of Loblaw Financial. Glenhuron was licensed as an offshore bank under Barbadian banking legislation and was regulated by the Central Bank of Barbados. During the years under appeal, Glenhuron engaged in several types of financial activities. It invested in short-term debt securities of arm’s length parties, and entered into interest rate and cross‑currency swaps in respect of these investments. Glenhuron purchased a portfolio of loans owed by arm’s length distributors of a related company’s products (and made new loans to the distributors). It also engaged in more limited activities involving managing investments for related corporations, making short-term loans to related companies, and entering into equity forwards to purchase Loblaw shares. Glenhuron was funded initially by capital investments from corporations in the Loblaw group, and later through retained earnings generated by its business activities.

The Minister of National Revenue (Minister) reassessed Loblaw Financial on the basis that Glenhuron’s business was an investment business, meaning that the income earned from this business was FAPI. Loblaw Financial appealed to the Tax Court of Canada (TCC) and then to the FCA.

Tax Court of Canada and Federal Court of Appeal decisions

The primary issue considered by the TCC, and the only issue considered by the FCA, was whether Glenhuron’s business qualified for the foreign bank exclusion in the definition “investment business,” with the effect that its business income would be excluded from FAPI. This turned on whether Glenhuron conducted business principally with arm’s length persons.

The TCC found that Glenhuron satisfied all the requirements of the foreign bank exclusion, except that its business was conducted principally with non-arm’s length persons. The TCC therefore concluded that Glenhuron’s business was an investment business, and that the income from this business was required to be included in Loblaw Financial’s income as FAPI.

The Minister had also argued that if Glenhuron’s business was not an “investment business,” the general anti-avoidance rule (GAAR) in section 245 of the ITA would apply. Although the TCC did not need to consider this issue in reaching its decision, it made several obiter comments on the GAAR. The TCC stated that the GAAR could not have applied because there were no avoidance transactions in the years under appeal. However, the TCC did suggest that Glenhuron’s activities could be considered a misuse of the foreign bank exclusion.

The FCA allowed the taxpayer’s appeal, finding that the TCC had made several errors. The FCA reviewed the facts and concluded that Glenhuron’s business was conducted principally with arm’s length persons. The FCA held that Glenhuron’s business qualified for the foreign bank exclusion, meaning that the income from the business was not FAPI and was therefore not taxable in Canada.

For more information on the TCC and FCA decisions, see our Tax InsightsFederal Court of Appeal reverses Tax Court of Canada’s decision in Loblaw Financial ─ Arm’s length test in foreign affiliate rules focuses on income-earning transactions.”

Supreme Court of Canada decision

The Minister appealed the FCA’s decision and the sole issue before the SCC was whether Glenhuron conducted business principally with arm’s length persons. If so, Loblaw Financial would be able to avail itself of the foreign bank exclusion and the relevant amounts would not be included in its FAPI. At the SCC, a unanimous panel of seven justices found for the taxpayer, dismissing the appeal.

The Minister argued, among other things, that determining with whom Glenhuron was conducting business should be understood with reference to Barbadian law, under which the definition of foreign bank contemplates both the receipt of foreign funds and the use of those foreign funds. If the source of funds was considered (including capital invested by the Loblaw group), then Glenhuron may have been found to have primarily conducted business with non-arm’s length persons.

The SCC rejected this argument. It held that raising capital is a necessary part of any business and it is capital that enables business to be conducted. The SCC specifically rejected the argument that receiving funds from shareholders is part of a bank’s business. The SCC held that capital received from shareholders is not determinative of whether the arm’s length test has been met.

The SCC also considered the purpose of the arm’s length test. The SCC found there was no evidence that the purpose of the arm’s length test is anti-avoidance, as had been alleged by the Minister. In the SCC’s view, the specific FAPI provisions were enacted to balance capital export neutrality and protect the competitiveness of Canadian businesses operating abroad, by targeting passive income.

In reaching its conclusion to dismiss the appeal, the SCC referred to the Duke of Westminster principle that taxpayers are entitled to arrange their affairs to minimize the amount of tax payable and emphasized the importance of taxpayer certainty:

[4] If capital and corporate oversight are excluded from consideration, the vast majority of business was conducted between Loblaw Financial’s foreign affiliate and persons with whom it was dealing at arm’s length. Therefore, Loblaw Financial can avail itself of the financial institution exception. Given the text, context and purpose of the provision at issue, there is no reason for a court to deny Loblaw Financial the ability to arrange its affairs so as to minimize its tax payable. As Lord Tomlin famously said:

Every man is entitled, if he can, to order his affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax.

(Inland Revenue Commissioners v. Westminster (Duke of), [1936] A.C. 1 (H.L.), at pp. 19‑20).

The SCC held (at paragraphs 41 and 61) “[i]f taxpayers are to act with any degree of certainty [under the FAPI regime], then full effect should be given to Parliament’s precise and unequivocal words.”

The takeaway

The SCC decision in Loblaw Financial Holdings should give taxpayers comfort. At a technical level, the SCC rejected the notion that a business’s capital structure is a significant factor in determining with whom that business is conducted. Although the foreign bank exclusion has been amended since the taxation years at issue in this case so that it generally applies only to large financial services entities, the SCC’s findings remain relevant to those entities.

As well, the SCC clearly recognized the importance of certainty, predictability and fairness for taxpayers and reaffirmed in no uncertain terms that taxpayers should be able to rely on “Parliament’s precise and unequivocal words” when interpreting the ITA. Finally, this is the second time in two back-to-back tax cases that the SCC has sided with the taxpayer and dismissed an appeal by the Minister.


1. In general terms, income earned by a controlled foreign affiliate from an investment business is included in foreign accrual property income. An “investment business” includes a business whose principal purpose is to derive income from property, subject to certain exceptions. The foreign bank exclusion provides an exception from the definition “investment business.” This exclusion generally applies to a business carried on as a regulated foreign bank that employs more than five full-time employees (or their equivalent), other than a business conducted principally with non-arm's length persons.
2. See our Tax InsightsAlta Energy: Supreme Court of Canada finds no misuse/abuse of tax treaty.” 


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