La Cour d’appel fédérale infirme un jugement de la Cour de l’impôt et précise le critère du lien de dépendance relativement à l’exclusion d’une banque étrangère des règles sur le REATB

28 mai 2020

La Cour d’appel fédérale (la « CAF ») a rendu dernièrement sa décision Loblaw Financial Holdings Inc. v. Her Majesty the Queen, qui infirme un jugement de la Cour canadienne de l’impôt (la « CCI »). La CAF a affirmé que Glenhuron Bank Limited (« Glenhuron »), filiale de Loblaw Financial, était une banque étrangère et l’a exclu de la définition d’« entreprise de placement » en application des règles sur le « revenu étranger accumulé, tiré de biens » (le « REATB »). La décision de la CAF fournit une directive d’interprétation portant sur les exclusions établies par les règles sur le REATB et, plus généralement, sur les aspects des activités d’une société qui sont pertinents en vue d’établir si elle exploite une entreprise aux fins de l’impôt sur le revenu canadien. 

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The Federal Court of Appeal (FCA) recently rendered its decision in Loblaw Financial Holdings Inc. v. Her Majesty the Queen[1], which reversed the decision of the Tax Court of Canada (TCC). The FCA held that Glenhuron Bank Limited (“Glenhuron”), a subsidiary of Loblaw Financial, was a “foreign bank” and excluded from the “investment business” definition of the “foreign accrual property income” (FAPI) rules. The decision of the FCA provides interpretive guidance with respect to the FAPI exclusions and, more generally, on what aspects of a corporation’s activities are relevant in determining whether it carries on a business for Canadian income tax purposes.

Facts and Case History

Loblaw Financial is a Canadian corporation that is wholly owned by Loblaws Companies Limited (“Loblaw”), a Canadian public corporation that is controlled by George Weston Limited (“Weston”). In the early 1990s, Loblaw Financial incorporated a new Barbadian subsidiary which was regulated by the Central Bank of Barbados.  Prior to the taxation years at issue, Glenhuron’s major source of funding was capital invested by corporations in the Loblaw group. During the taxation years at issue, Glenhuron’s funding increased through its own retained earnings resulting from business activities, which according to expert evidence satisfied the requirements of the definition of “international banking business” under the applicable Barbadian laws.

The Minister of Finance reassessed the taxpayer on the basis that approximately $473 million of income earned by Glenhuron over seven years between 2001 and 2010 was FAPI. Loblaw Financial took the position that Glenhuron’s income was not FAPI on the basis that Glenhuron was a “foreign bank” and was excluded from the “investment business” definition of the FAPI rules. Income from a business that qualifies for one of the exclusions from the “investment business” definition is generally considered income from an active business and, thereby, excluded from FAPI. One such exclusion applies to regulated foreign banks, which generally earn interest income in the context of an active business.

The taxpayer’s appeal from the reassessments was initially unsuccessful – the TCC found that the foreign bank exclusion did not apply as Glenhuron did not conduct its business principally with arm’s length persons, as required by the exclusion. The taxpayer appealed the decision to the FCA, except with respect to income earned by Glenhuron from the investment management services provided by Glenhuron to corporations in the Loblaw and Weston groups. The FCA overturned the decision of the TCC, finding that the TCC’s conclusion was based on an “interpretation of the applicable legislation which significantly overreaches and contains errors of law”.[2]

FCA Decision

The definition of "investment business" under the FAPI rules exempts a business, other than a business conducted principally with non-arm's length persons, of a regulated foreign bank with greater than five full-time employees or the equivalent thereof. It was accepted by both the TCC and the FCA that Glenhuron was a “foreign bank” for purposes of the “investment business” definition and that the full-time employee test was satisfied.  Accordingly, the only issue before the FCA was whether the TCC erred in concluding that Glenhuron did not conduct its business principally with arm's length persons.

The TCC erred in law

The FCA held that the TCC erred in law and set aside the decision of the TCC, except for its finding with respect to investment management services which was not appealed. The TCC relied on the definition of “international banking business” in the IFSA to find that the proper interpretation of the arm’s length test in a banking context requires an examination of the bank’s activities from the perspective of both the receipt and use of funds. The FCA found that this finding blurred the requirements for carrying on a banking business for Canadian law purposes with the law of Barbados. Canadian jurisprudence suggests that a formal, institutional approach should be taken to define a banking business. The FCA emphasized that a “bank” is generally defined by the level of regulation and not the activities that are conducted. Similarly, the conditions of the foreign bank exclusion generally depend on whether the corporation is licensed and regulated and not directly on types of activities.

According to the FCA, this incorrect conclusion resulted in two further conclusions that were also errors in law.  First, the TCC found that the receipt side of the business implies an element of competition. Competition is not an explicit requirement of the foreign bank exclusion at issue and therefore, the FCA held that the TCC’s focus on competition resulted from an incorrect inference of a purposive interpretation from unexpressed legislative intent, which is inappropriate in a statutory interpretation analysis. Second, the TCC held that the necessity for business receipts means that the exclusion does not apply if a business simply manages its own funds. The TCC suggested that with respect to certain activities conducted with Loblaw, Glenhuron was acting on behalf of Loblaw and therefore Glenhuron’s money belonged to Loblaw. The FCA found that the TCC failed to respect the fundamental principle that a corporation and its shareholders are separate and distinct and therefore Glenhuron was in fact managing its own money.

The FCA’s interpretation of the arm’s length principle

The FCA held that a proper interpretation of the arm’s length principle first requires an assessment of Glenhuron’s business relationships, including transactions that are not income-earning transactions, which must then be weighed to determine with whom Glenhuron principally conducted business. In applying the arm’s length test, the FCA found that Glenhuron’s business activities generally involved interactions with Loblaw Financial and with the persons with whom Glenhuron entered into income-earning transactions but that a predominate weighting should be given to persons with whom Glenhuron dealt with in the context of acquiring short-term debt securities and swaps since the vast majority of Glenhuron’s assets were invested in U.S. denominated short-term debt securities, cross-currency swaps, and interest rate swaps and generated by far the most income. This business activity was conducted entirely with arm’s length persons and therefore, the FCA held that Glenhuron principally conducted business with arm’s length persons and satisfied the foreign bank exemption.

Although Loblaw Financial provided direction, support and oversight to Glenhuron, which perhaps resulted in Glenhuron effectively conducting business with its parent corporation, this did not affect whether Glenhuron principally conducted business with arm’s length persons. The FCA reached this conclusion on the basis that the legislative intent of the FAPI regime is to encourage Canadians to carry on active business outside Canada and therefore Parliament could not have intended that the foreign bank exclusion should be denied as a result of support and oversight provided by a parent corporation. The FCA also considered other core aspects of Glenhuron’s business, such as the loans to drivers of Weston bakery products and the equity forwards, but ultimately concluded that these activities were not significant compared to Glenhuron’s main activities and thus did not need to be considered to satisfy the arm’s length test.

Finally, in considering the arguments of the Crown, the FCA undertook an analysis of the meaning of “business” and found the term generally means “something occupying the time and attention and labour of man for the purpose of profit”. As a result, the FCA found there was no reason to include the capital investments by the Loblaw group as part of Glenhuron’s conduct of business.


  • While the decision of the FCA is a significant win for the taxpayer in terms of dollar value, it fundamentally deals with a gap in the FAPI rules that has since been closed by Parliament.
  • Nevertheless, it does provide insight in how courts interpret the complex provisions which underlie the FAPI rules and Canada’s foreign affiliate system more generally.
  • Perhaps most significantly, the FCA decision provides support for the proposition that a corporation’s capital raising activities are not, in and of themselves, relevant in assessing whether it carries on a business or whether it carries on its business in a particular place.

[1] 2020 FCA 79, reversing Loblaw Financial Holdings Inc. v. The Queen, 2018 TCC 182.

[2] Ibid., at para 51.

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