Loblaw - Federal Court of Appeal finds that a Barbados bank sub of Loblaw conducted its business of investing in short-term debt principally with arm’s length persons (no FAPI)

The taxpayer, an indirect wholly-owned subsidiary of the Loblaw public company, wholly-owned a Barbados subsidiary (Glenhuron), that was licensed in Barbados as an international bank and that used funds mostly derived from equity injections by the taxpayer to invest in U.S.-dollar short-term debt obligations, loans to several thousand independent U.S. distributors of Weston baked goods (i.e., drivers) and intercorporate loans – and entered into cross-currency and interest rate swaps with an arm’s length bank to effectively convert much of its income stream into fixed rated Canadian-dollar interest. CRA assessed on the basis that Glenhuron had realized $473 million of foreign accrual property income (FAPI) between 2001 and 2010.

In allowing the taxpayer’s appeal, Woods JA found that Glenhuron have conducted its business principally with arm’s length persons, stating:

Parliament could not have intended that the foreign bank exclusion should be denied as a result of support and oversight provided by a parent corporation … .

[T]he vast majority of Glenhuron’s assets were invested in US denominated short-term debt securities, cross-currency swaps, and interest rate swaps … [which] generated by far the most income. Except for Loblaw’s supporting role discussed above, this business activity was conducted entirely with arm’s length persons.

In finding that what the Crown argued to be the “receipt side” of Glenhuron’s business, i.e., “the capital investments by the Loblaw group [,] were not part of Glenhuron’s conduct of business” she stated:

Applying the meaning of “business,” there is no reason to conclude that the capital invested by the Loblaw group would have occupied the time and attention of Glenhuron in any meaningful way. ...

[T]his approach is consistent with long-standing jurisprudence which draws a distinction between “capital to enable [people] to conduct their enterprises” and “the activities by which they earn their income” … .

Neal Armstrong. Summaries of Loblaw Financial Holdings Inc. v. Canada, 2020 FCA 79 under s. 95(1) - investment business - (a), s. 248(1) - business, General Concepts - Separate Existence and Statutory Interpretation - Reading in Words.