Supreme Court of Canada unanimously rules that Loblaw Financial Holdings Inc. was entitled to benefit from the “financial institution” exception in the "FAPI" rules
For the second time in two weeks, the Supreme Court of Canada (“SCC”) has issued a significant decision in a tax case. Again, the SCC has ruled in favour of the taxpayer and affirmed certain fundamental principles of tax law.
In Canada v. Loblaw Financial, 2021 SCC 51 (“Loblaw Financial”), the SCC unanimously agreed with the Federal Court of Appeal (“FCA”), that the income earned by Glenhuron Bank Limited. (“GBL”), a Barbados subsidiary of Loblaw Financial Holdings Inc. (“Taxpayer”) was not foreign accrual property income (“FAPI”) and therefore not taxable to the Taxpayer in Canada. In reaching this conclusion, the SCC provided helpful guidance on two issues come frequently arise in complex tax planning: (i) how courts (and taxpayers) should interpret provisions of the Income Tax Act (“Act”), such as the FAPI regime; and (ii) the relationship between a parent company and its controlled foreign affiliate.
- The SCC held that, in applying a unified textual, contextual and purposive interpretative approach courts should focus on the text and context and “give full effect to Parliament’s precise and unequivocal words”, not read-in additional meaning under the guise of a “purposive” interpretation; and
- A Canadian parent corporation does not “conduct business” (as defined in subsection 95(1) with its controlled foreign affiliate simply by providing capital and exercising corporate oversight.
The Taxpayer is an indirectly wholly-owned subsidiary of Loblaw Companies Limited (“Loblaw”), a Canadian public corporation controlled by George Weston Limited (“GWL”).
In 1992, the Taxpayer incorporated Glenhuron Bank Limited (“GBL”). GBL was a regulated foreign bank under the Barbadian International Financial Services Act (“IFSA”).The IFSA limited GBL’s activities to include receiving foreign funds and property and using those funds for loans, investments, or similar activities. GBL’s activities were limited to the definition of “international banking business” pursuant subsection 4(2) of the IFSA. In 2013, GBL was liquidated to provide Loblaw with funds for a major acquisition.
Prior to the taxation years at issue, GBL’s major source of funding was capital provided by Loblaw, its parent company. During the taxation years at issue, GBL’s funding increased mainly through its own retained earnings.
The FAPI regime in section 95 of the Act provides that income earned by a controlled foreign affiliate (such as GBL) is not taxable immediately in Canada to the Canadian parent corporation as long as that income is “active business income”. The Minister of National Revenue (“Minister”) reassessed the Taxpayer for its 2001-2005, 2008, and 2010 taxation years (“Taxation Years”) on the basis that GBL had not met the criteria for its income to qualify as “active business income” under section 95, and the income was therefore FAPI and immediately taxable in Canada to the parent corporation. The CRA also relied on the general anti-avoidance rule (“GAAR”) in section 245 of the Act.
Lower Courts Decisions
The Tax Court of Canada concluded, at first instance, that GBL’s income was FAPI and therefore taxable in Canada. One of the requirements that GBL needed to satisfy to obtain the benefit of the FAPI regime is that it needed to “conduct business” principally with non-arm’s length persons. The Tax Court held that GBL did not meet this requirement, because it conducted business principally with Loblaw, its parent company, which provided GBL with capital and corporate oversight.
The FCA reversed the Tax Court’s decision. The FCA found that the Tax Court erred in concluding that GBL did not conduct business principally with arm’s length persons for the purposed of the definition of “investment business” in subsection 95(1) of the Act. The FCA held that a parent company providing capital and oversight of a controlled foreign affiliate does not mean the foreign affiliate “conducts business” principally with its parent.
The Supreme Court of Canada decision
At the SCC, the sole issue was whether GBL conducted business principally with a person with whom it was dealing at arm’s length during the Taxation Years. The appeal boiled down to a narrow question of statutory interpretation: what it means to “conduct business principally with” under section 95(1).
In a unanimous decision, the SCC agreed with the FCA and rejected the Minister’s arguments. The SCC began its analysis by characterizing the FAPI regime as “one of the most complex tax schemes, with hundreds of definition, rules, and exceptions” in the Act. To decipher this complex statutory framework, the Court re-iterated and re-affirmed certain fundamental principles of statutory interpretation in the taxation context. Specifically (internal citations omitted):
- “Where the words of a statute are ‘precise and unequivocal’, their ordinary meaning will play a dominant role.”
- “In the taxation context, a ‘unified textual, contextual and purposive approach continues to apply’… In applying this unified approach, however, the particularity and detail of many tax provisions along with the Duke of Westminster principle (that taxpayers are entitled to arrange their affairs to minimize the amount of tax payable) lead us to focus carefully on the text and context in assessing the broader purpose of the scheme.”
- “This approach is particularly apposite in this case, where the provision at issue is part of the highly detailed and precise FAPI regime. I must emphasize again that this is not a case involving a general anti-avoidance rule. The provision at issue is part of an exception to the definition of “investment business” within the highly intricate, highly defined FAPI regime.”
- “If taxpayers are to act with any degree of certainty under such a regime, then full effect should be given to Parliament’s precise and unequivocal words.”
Applying these principles in this case, the grammatical and ordinary meaning of the words "business conducted", read in the context and light of the purpose of the FAPI regime, clearly showed that Parliament did not intend “conduct business” to refer to the receipt of capital injections from a parent company. Loblaw’s corporate oversight of GBL, its controlled foreign affiliate, did not transform GBL’s business into one that was carried on principally with non-arm’s length parties.
The SCC concluded:
Once corporate oversight and the capital investments received by Glenhuron are excluded, only Glenhuron’s investment activities remain part of the business that is relevant for the application of the arm’s length requirement. The vast majority of these activities were conducted with arm’s length persons. Therefore, I conclude that this requirement was met during the years in issue and that Loblaw Financial was thus entitled to rely on the financial institution exception. The appeal should be dismissed.
The SCC’s decision in Loblaw Financial provides an important affirmation that, when dealing with complex provisions of the Act, taxpayers are entitled to rely on the clear language of the statute to organize their affairs in a tax efficient manner, and courts should be reluctant to interpret these provisions too broadly in a way that deviates from the clear text of the statute.
International Financial Services Act, SC 2018, C27, S659.
 The taxation years at issue were 2001, 2002, 2003, 2004, 2005, 2008 and 2010.
 Referring to the decisions of the Tax Court of Canada and the Federal Court of Appeal. See Loblaw Financial Holdings Inc. v The Queen, 2018 TCC 182; and Canada v Loblaw Financial Holdings Inc., 2020 FCA 79, respectively.
Loblaw Financial, at para 239 of the Tax Court decision.
Canada v Loblaw Financial Holdings Inc., 2021 SCC 51 (“Loblaw Financial”)
Loblaw Financial, at para 41.
Loblaw Financial, at paras 62 to 64.
Loblaw Financial, at para 67.