Loblaw – Supreme Court of Canada finds that a Barbados bank sub conducted its business of investing Loblaw cash principally with arm’s length persons

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 predominantly to generate income from U.S.-dollar short-term debt obligations and swaps. Whether this income was foreign accrual property income (FAPI) turned on whether Glenhuron’s business was “conducted principally with persons with whom [it did] not deal at arm’s length,” being the relevant exclusion from the “financial institution” exception from the investment business definition.

Côté J rejected the Crown’s submission that this exclusion applied because Glenhuron received its capital mostly from the taxpayer and was subject, in the conduct of its business, to the corporate oversight of its direct and indirect parents. She stated:

Raising capital is a necessary part of any business, and capital enables business to be conducted. But one would not generally speak of capitalization itself as the conduct of the business.

Furthermore, although it is “part of a bank’s business to accept deposits,” this point was not relevant to “receiving funds from shareholders.”

This reading was confirmed by the context of the FAPI regime, which classified a foreign affiliate’s income and did “not provide a method for assigning capital to the different businesses within a single corporation.”

Regarding the alleged relevance of the parents’ corporate oversight as part of the conducting of Glenhuron’s business, “[f]undamentally, a corporation is separate from its shareholders” and its conducting its business “in accordance with policies adopted by the board of directors on behalf of the shareholders … does not change the fact that the corporation remains the party conducting business.”

Neal Armstrong. Summaries of Canada v. Loblaw Financial Holdings Inc, 2021 SCC 51 under s. 95(1) – investment business – para. (a), s. 248(1) - Business, s. 91(1), Statutory Interpretation - Certainty, Expressio Unius, General Concepts - Foreign Law.