Tax compliance or tax avoidance? Supreme Court rules in Loblaw’s favour

The Supreme Court’s recent tax appeal ruling in favour of Loblaw Financial Holdings ended a lengthy and complicated dispute over how a dissolved subsidiary company – run from Barbados – should be taxed. Here’s what happened and why businesses should be paying attention:

Case background

Loblaw Financial, owned by grocery retailer Loblaw Companies Ltd., set up a subsidiary in Barbados in 1992. Named Glenhuron Bank, it was issued an offshore bank license by the Central Bank of Barbados and conducted corporate banking – primarily short-term debt securities, cross-currency swaps and interest swaps. Glenhuron was dissolved in 2013 and the assets were liquidated and used to purchase Shoppers Drug Mart.

This is where the tax dispute arises. For numerous tax years between 2001 and 2010, Loblaw Financial didn’t include income earned from Glenhuron on its Canadian tax returns, claiming the revenue was exempt. Canadian companies are required to pay taxes on money made by controlled foreign affiliates or companies they own abroad. Revenue from controlled foreign affiliates is called foreign accrual property income (FAPI). As a licensed bank, Glenhuron claimed it qualified for a tax exception as it was doing business with companies unrelated to it under the arm’s length requirement.

The National Revenue Minister denied the tax exception, so Loblaw’s appealed to the Tax Court of Canada. The case has wended its way through the Federal Court of Appeal and finally, to the Supreme Court.

Supreme Court Ruling

In a recent 7-0 decision, the top court sided with Loblaw Financial, saying the tax exception did in fact apply. Loblaw does not have to pay Canadian taxes on the approximately $475 million of income earned outside of Canada by the Barbados-based subsidiary.

“This was very, very difficult litigation — it took forever, and there were completely unwarranted allegations of tax avoidance made against Loblaw.” Al Meghji told Canadian Lawyer Magazine. Meghji is a partner in Osler, Hoskin & Harcourt LLP in Toronto, who was lead counsel for Loblaw.


Clarification on definition of ‘doing business’

In order for foreign accrual property income to qualify for the financial institution exception, Genhuron had to meet four criteria for all taxation years. The fourth and final requirement was in dispute:

“Glenhuron’s business must have been conducted principally with persons with whom it dealt at arm’s length.”

On the receipt side, the CRA argued that Loblaw Financial was “doing business” with its own controlled foreign affiliate when it provided capital and exercised corporate oversight, thereby negating the arm’s length requirement.

Writing for the Supreme Court, Justice Côté explained “the FAPI regime is one of the most complicated statutory regimes in Canadian law”. But when the requirement is read in the plain language sense, the court said it was clear that contributing money and management to Glenhuron did not constitute “doing business.”

The ruling clarifies the interpretation of conducting business by distinguishing between income-earning activities and activities relating to capitalization and collaboration between the corporate group members.


The ruling in favour of the taxpayer, i.e. Loblaw, sets a strong precedent, giving Canadian businesses confidence in how the complex tax code should be read and applied. A significant portion of this case depended on Loblaw’s ability to present the necessary evidence to establish the key facts in court, highlighting the importance of creating and preserving financial records.

Having a trusted partner like Zeifmans to guide your tax planning and ensure proper record keeping can help you avoid complicated legal proceedings. Contact us today for all your tax planning needs


Q&A with Partner, Jennifer Chasson

Q&A with Partner, Jennifer Chasson

With over 25 years of experience and 100+ successful transactions under her belt, Partner, Jennifer Chasson, brings invaluable expertise to the table. Whether it’s guiding as an advisor, mentor underwriter, ...