Supreme Court to settle Loblaw offshore tax case that feds say risks $1 billion in revenue
The Supreme Court of Canada on Thursday announced it will hear an offshore tax case the federal government claims has jeopardized more than $1 billion in revenue and undermined its ability to combat corporate tax avoidance.
© Provided by Financial Post The Loblaw headquarters in Brampton, Ont.
Canada’s highest court granted the government’s application for leave to appeal a Federal Court of Appeal decision released in April involving a Barbados-based subsidiary of another subsidiary of Loblaw Cos. Ltd., the grocery and pharmacy chain controlled by the billionaire Weston family.
That decision, the government claimed in June , “imperilled” the collection of approximately $1.18 billion in federal and provincial tax thus far, partly “by failing to properly articulate the anti-avoidance purpose” of the rules for foreign accrual property income (FAPI). This can be rent, interest or other forms of passive income earned by non-Canadian companies that are controlled by a Canadian taxpayer.
The government’s statement of facts to the Supreme Court said the Canada Revenue Agency had estimated there were tax matters involving 14 Canadian multinational corporate groups, including Loblaw, that could be affected by the appeal court’s reading of FAPI. The government appealed to the Supreme Court to get a ruling on how to properly interpret the rules, which the judges are now teed up to deliver.
Canada’s highest court granted the government’s application for leave to appeal a Federal Court of Appeal decision released in April involving a Barbados-based subsidiary of another subsidiary of Loblaw Cos. Ltd., the grocery and pharmacy chain controlled by the billionaire Weston family.
That decision, the government claimed in June , “imperilled” the collection of approximately $1.18 billion in federal and provincial tax thus far, partly “by failing to properly articulate the anti-avoidance purpose” of the rules for foreign accrual property income (FAPI). This can be rent, interest or other forms of passive income earned by non-Canadian companies that are controlled by a Canadian taxpayer.
The government’s statement of facts to the Supreme Court said the Canada Revenue Agency had estimated there were tax matters involving 14 Canadian multinational corporate groups, including Loblaw, that could be affected by the appeal court’s reading of FAPI. The government appealed to the Supreme Court to get a ruling on how to properly interpret the rules, which the judges are now teed up to deliver.
“We respect the decision to grant leave to appeal and we are ready to present our arguments to the Supreme Court of Canada as we did successfully at the Federal Court of Appeal,” Loblaw said in a statement to the Post. “We continue to believe that we have been fully compliant in our tax filings and that was confirmed by the previous decisions. Canadians expect us to pay our fair share of taxes and we do.”
Loblaw has said in financial filings that it has already recorded a $367-million charge regarding the matter, which is made up of $176 million in interest and $191 million in income taxes to cover the “ultimate liability” if its appeal was unsuccessful. As of July, Loblaw said it had not reversed any part of the charge.
The Supreme Court’s decision (which, as is standard practice, did not come with an explanation) arrives as Prime Minister Justin Trudeau has faced pressure to crack down on offshore tax havens.
It also comes as the federal government is on pace to post the largest budget deficit since the Second World War, as a result of massive spending on support programs for people and businesses during the coronavirus pandemic.
“The leave application was made in the context of the government’s ongoing efforts to protect Canada’s tax base and uphold its commitments to address international profit shifting,” a CRA spokesperson said in an email. “We are pleased with this decision and will now take steps to file the appeal documents.”
Loblaw has said in financial filings that it has already recorded a $367-million charge regarding the matter, which is made up of $176 million in interest and $191 million in income taxes to cover the “ultimate liability” if its appeal was unsuccessful. As of July, Loblaw said it had not reversed any part of the charge.
The Supreme Court’s decision (which, as is standard practice, did not come with an explanation) arrives as Prime Minister Justin Trudeau has faced pressure to crack down on offshore tax havens.
It also comes as the federal government is on pace to post the largest budget deficit since the Second World War, as a result of massive spending on support programs for people and businesses during the coronavirus pandemic.
“The leave application was made in the context of the government’s ongoing efforts to protect Canada’s tax base and uphold its commitments to address international profit shifting,” a CRA spokesperson said in an email. “We are pleased with this decision and will now take steps to file the appeal documents.”
© Peter J. Thompson/National Post files
Loblaw has said in financial filings that it has already recorded a $367-million charge regarding the matter.
Ottawa’s tax issue with Loblaw boils down to FAPI, which is supposed to be included in a taxpayer’s income. The rules for that income also form “the cornerstone of the government’s efforts to prevent the erosion of the Canadian tax base through the use of foreign affiliates in low tax jurisdictions,” the government’s notice of the application to the Supreme Court said.
The Canada Revenue Agency had reassessed a Loblaw subsidiary for tax years between 2001 to 2010 that required it to pay tax on income earned by another subsidiary, Glenhuron Bank Ltd. Glenhuron was licensed as a bank in Barbados in 1993, before it was wound up in 2013 to help fund Loblaw’s purchase of Shoppers Drug Mart.
However, Loblaw had pushed back against the reassessments, saying Glenhuron was a regulated foreign bank mostly doing business at arm’s length with others, which would exempt its investment activities from FAPI. The government disagreed.
Following a long trial, a Tax Court judge ruled in 2018 that Glenhuron had mostly been doing business with related parties and didn’t qualify for the exemption.
Loblaw appealed, and an April decision by the Federal Court of Appeal found Glenhuron — which received funds from Loblaw-related companies, bought short-term U.S. debt and entered into swap contracts, among other things — had mostly done business at arm’s length with its debt and swap partners.
The Federal Court of Appeal set aside the Tax Court’s decision and referred the reassessment back to the government for adjustment based on its ruling that Glenhuron’s FAPI had only been the income it received from managing investments for Loblaw-related companies.
“The proposed appeal further raises the correct interpretation of provisions within the FAPI regime, and in particular the due consideration to be given to its anti-avoidance purpose,” the government said in its notice of application. “Both are important questions of law that have never been addressed by this Court, and are matters of public importance.”
Financial Post
Ottawa’s tax issue with Loblaw boils down to FAPI, which is supposed to be included in a taxpayer’s income. The rules for that income also form “the cornerstone of the government’s efforts to prevent the erosion of the Canadian tax base through the use of foreign affiliates in low tax jurisdictions,” the government’s notice of the application to the Supreme Court said.
The Canada Revenue Agency had reassessed a Loblaw subsidiary for tax years between 2001 to 2010 that required it to pay tax on income earned by another subsidiary, Glenhuron Bank Ltd. Glenhuron was licensed as a bank in Barbados in 1993, before it was wound up in 2013 to help fund Loblaw’s purchase of Shoppers Drug Mart.
However, Loblaw had pushed back against the reassessments, saying Glenhuron was a regulated foreign bank mostly doing business at arm’s length with others, which would exempt its investment activities from FAPI. The government disagreed.
Following a long trial, a Tax Court judge ruled in 2018 that Glenhuron had mostly been doing business with related parties and didn’t qualify for the exemption.
Loblaw appealed, and an April decision by the Federal Court of Appeal found Glenhuron — which received funds from Loblaw-related companies, bought short-term U.S. debt and entered into swap contracts, among other things — had mostly done business at arm’s length with its debt and swap partners.
The Federal Court of Appeal set aside the Tax Court’s decision and referred the reassessment back to the government for adjustment based on its ruling that Glenhuron’s FAPI had only been the income it received from managing investments for Loblaw-related companies.
“The proposed appeal further raises the correct interpretation of provisions within the FAPI regime, and in particular the due consideration to be given to its anti-avoidance purpose,” the government said in its notice of application. “Both are important questions of law that have never been addressed by this Court, and are matters of public importance.”
Financial Post
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