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FEDERAL INCOME TAX - Principles of statutory interpretation - Foreign income

Wednesday, June 03, 2020 @ 6:51 AM  


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Appeal by Loblaw Financial Holdings from the Tax Court’s dismissal of its appeal from income tax reassessments. The reassessments required the appellant to pay tax on the income of its Barbados subsidiary, Glenhuron Bank on the basis it was foreign accrual property income. During the years at issue, Glenhuron purchased low risk U.S. denominated short-term debt securities, entered into cross-currency and interest rate swaps, entered into an arrangement with the Weston group, related the appellant, to purchase a portfolio of loans, managed investments on behalf of related corporations, made two loans to non-arm’s length corporations, and entered into equity forward contracts to purchase Loblaw shares. Glenhuron’s major source of funding was capital invested by corporations in the Loblaw group. The Minister determined Glenhuron’s income did not qualify for an exclusion provided to foreign banks. The Tax Court agreed the foreign bank exclusion did not apply on the basis Glenhuron conducted business principally with affiliated corporations and therefore did not conduct business principally with arm’s length persons.

HELD: Appeal allowed. The Tax Court erred in concluding that Glenhuron did not conduct business principally with arm’s length persons for the purposes of the definition of “investment business” in s. 95(1) of the Income Tax Act. There was no reasonable basis to conclude that the arm’s length test required both business receipts and uses. The Tax Court’s focus on competition inferred a purposive interpretation from unexpressed legislative intent and was a legal error. The court erred in not respecting the fundamental principle that a corporation and its shareholders were separate and distinct entities. It was an error of law for the court to consider that Glenhuron’s money belonged to the appellant.

Loblaw Financial Holdings Inc. v. Canada, [2020] F.C.J. No. 511, Federal Court of Appeal, J.M. Woods, J.B. Laskin and A.L. Mactavish JJ.A., April 23, 2020. Digest No. TLD-June12020005