Supreme Court Of Canada Unanimously Rules That Loblaw Financial Holdings Inc. Was Entitled To Benefit From The "financial Institution" Exception In The "FAPI" Rules

• Published date: 14 December 2021
• Subject Matter: Finance and Banking, Corporate/Commercial Law, Tax, Financial Services, Corporate and Company Law, Income Tax
• Law Firm: McCarthy Tétrault LLP
• Author: Point De Vue Fiscal, De McCarthy Tétrault, Prince S. Arora, Mike Hegedus, Matthew Kraemer and Anu Koshal

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 Loblaw Financial Holdings Inc. ("Taxpayer"), a Barbados-based subsidiary of Loblaw Companies Limited, was not foreign accrual property income ("FAPI") and therefore not taxable 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.

Specifically:

• 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.

Background

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").¹The 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.²

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...