Words and Phrases - "banking"

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 the taxpayer on the basis that Glenhuron had realized $473 million of foreign accrual property income (FAPI) between 2001 and 2010.

It was accepted that Glenhuron qualified, for purposes of the exclusion from the investment business definition, as being a foreign bank and as employing the equivalent of more than five full-time employees in the business’ active conduct. The sole issue was whether the Tax Court had erred in finding that such business was conducted principally with the Loblaw group (i.e., it was not conducted principally with arm’s length persons), as the receipt of funds of the business came from Loblaw and, even on the fund use side of the Glenhuron business, the purchases of the short-term debt were made on behalf of a non-arm’s length party (Loblaw).

After noting (at para. 55) that the Canadian Pioneer case ([1980] 1 S.C.R) had found that the meaning of “banking … should be based on a formal, institutional approach rather than a substantive approach, in the sense of the functions of banking” so “that the use of the term ‘bank’ in the name of the entity, and whether it is regulated, are factors to be considered, rather than the actual activities that are conducted”, Woods JA found that the Tax Court had erred in finding that there was an implied requirement in “banking” that the receipt side of the business have an element of competition and that “the exclusion does not apply if a business simply manages its own funds “ (para. 57) and, indeed “Parliament has not explicitly required competition as an element of the foreign bank exclusion” para. 60). Furthermore, the Tax Court erred in finding that Glenhuron’s activities of purchasing short-term debt securities and its swap transactions were conducted with Loblaw, as “Glenhuron was not managing Loblaw’s money but its own” (para. 62).

In finding that the receipt side i.e., “the capital investments by the Loblaw group [,] were not part of Glenhuron’s conduct of business” she stated (at paras. 84-85):

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” … .

In concluding that Glenhuron principally conducted business with arm’s length persons, Woods JA noted (at para. 73) that “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” and (at para. 74):

[T]he vast majority of Glenhuron’s assets were invested in US denominated short-term debt securities, cross-currency swaps, and interest rate swaps. These activities also 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.