Decision has imperilled over $1 billion in tax ‘so far,’ Supreme Court hears

A Federal Court of Appeal resolution issued final 12 months supplies a roadmap for tax avoidance and ought to be overturned, the Supreme Court heard in oral arguments May 13.The battle between the Canada Revenue Agency (CRA) and Loblaw Financial Holdings offers with whether or not the overseas accrual property (FAPI) provisions in the Income Tax Act (ITA) apply to the grocery big’s former Barbados subsidiary Glenhuron Bank Limited (GBL). The FAPI scheme is meant to forestall Canadians from avoiding tax on passive revenue, which is revenue earned that requires little to no effort to acquire, by incomes such revenue in overseas companies positioned in low-tax jurisdictions. The scheme goals to attain this outcome by requiring the overseas company’s passive revenue to be included in the Canadian shareholder’s revenue as it’s earned however accommodates an exclusion for overseas banks.The CRA issued reassessments to Loblaw requiring it to pay tax on Glenhuron’s revenue on the premise that exclusion didn’t apply to it, a transfer which was upheld by Tax Court Justice Campbell Miller (Loblaw Financial Holdings v. Canada 2018 TCC 182). But Federal Court of Appeal Justice Judith Woods sided with Loblaw, concluding that Glenhuron principally carried out enterprise with arm’s size individuals on contracts involving short-term debt securities and swap transactions (Loblaw Financial Holdings Inc. v. Canada 2020 FCA 79).“The FAPI regime as an entire, and the overseas financial institution exclusion in specific, is meant to encourage Canadians to hold on lively companies outdoors Canada. Parliament couldn’t have meant that the overseas financial institution exclusion ought to be denied on account of help and oversight supplied by a father or mother company,” she wrote. “The legislative intent could be pissed off if these interactions with Loblaw Financial have been to be given vital weight.”But Canada argued the courtroom’s resolution had imperilled over $1 billion in tax “thus far” by failing to offer applicable consideration to the anti-avoidance goal of the FAPI regime and by “just about ignoring” the receipt of funds aspect of Glenhuron’s enterprise. The courtroom handled the monetary establishment exemption as a broad tax incentive, slightly than because the slender exemption to the funding enterprise anti-avoidance rule that it’s, the federal authorities submitted — a outcome which was an “absurdity.”Government counsel Eric Noble stated the choice supplies a roadmap for Canadian monetary establishments to keep away from FAPI by parking investments offshore and the correct final result is to reinstate the trial choose’s ruling.“The trial choose discovered Glenhuron’s exercise amounted to the managing of an funding portfolio for its father or mother group. These are exactly the type of circumstances in which the FAPI guidelines have been meant to use,” he stated. “The query earlier than the Court of Appeal was not what’s a financial institution or banking enterprise beneath Canadian legislation, however slightly what was Glenhuron’s enterprise and was that enterprise carried out principally with non-arm’s size individuals.”
Justice Russell Brown

Loblaw argued the Federal Court of Appeal resolution didn’t present the so-called roadmap Ottawa was involved about, including the corporate had been discovered to not have engaged in a tax avoidance scheme at trial. Counsel Al Meghji stated the federal government was asking the courtroom to “upset a superbly well-working system that’s in line with our basic ideas of company and tax legislation.”“Their entire case is about avoidance — they’re saying in case you don’t settle for this pressured interpretation of the laws you will have opened up a large tax avoidance scheme in the system,” he stated. “In the present zeitgeist the place there’s concern about tax avoidance that’s not a foul play to make to this courtroom, however that concern is wholly misplaced.”For his half, Justice Russell Brown stated he discovered among the authorities’s arguments to be “astonishing.”“You say even in a 12 months when [Glenhuron] is doing nothing with the father or mother company and simply utilizing the cash to do all of its different enterprise that it’s nonetheless doing enterprise with the father or mother company,” he stated. “That is totally nonsensical — however I’ve an open thoughts.”The courtroom reserved judgment in the matter.Photo of Justice Russell Brown by Andrew Balfour PhotographyIf you have got any data, story concepts or information suggestions for The Lawyer’s Daily please contact Ian Burns at [email protected] or name 905-415-5906.

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