written on behalf of Feigenbaum Law

Proceedings between Loblaw Companies Ltd. (Loblaws) and the Canada Revenue Agency (CRA) began earlier this week in Tax Court. The CRA claims that Loblaws’ banking subsidiary has been used as part of a tax avoidance scheme. Depending on the outcome of the case, Loblaws may be liable for more than $400 million.

The Details

The CRA is alleging that Loblaws established Glenhuron Bank Ltd. (Glenhuron), a “phoney” bank in Barbados, in order to circumvent the rules and avoid taxes on hundreds of millions in investment income.

The bank’s history can be traced back 1992. That year, Loblaws incorporated a regular offshore company in Barbados named Loblaws Inc. About a year later, the company changed its name to Glenhuron Bank Ltd. and obtained a Barbadian banking license.  Glenhuron was funded largely with money from other arms of its global business.

The CRA’s Position

The CRA claims that Loblaws took steps to have Glenhuron appear to be a foreign bank in order to avoid paying taxes. Despite its location in the Caribbean, the CRA claims that Glenhuron was not permitted to accept deposits from or provide international financial services to Barbados residents. Instead, the bank’s used its funding money to invest in financial derivatives for the Loblaws group of companies, including interest and currency swaps, and managing loans and funds, earning hundreds of millions of dollars.

The CRA says that some of the investment income earned by Glenhuron should be treated and taxed as income in Canada, rather than treating the bank as a foreign bank, which would qualify for an exemption under Canadian tax rules.

CRA auditors reassessed the 2001-2010 tax filing of the bank’s Canadian parent company (a Loblaws subsidiary) and determined that the bank does not qualify for the exemption because its activities “did not constitute banking or a banking business”.

The CRA argued that Glenhuron is more like a treasury centre (an in-house bank for a multinational corporation) rather than a foreign bank, since it does not, among other things, conduct business or provide services to arms-length entities.

Loblaws’ Position

Loblaws argues that Glenhuron has met the requirements for a foreign bank under both Canadian and Barbadian regulations, that it was viewed as a foreign bank by Barbados’ central bank, and that the CRA’s “epic” allegations are without merit. Loblaws further argued that Glenhuron has paid taxes in the jurisdictions where the entity had to and any income earned outside of Canada should not be taxable. The retailer also noted that Glenhuron had previously been audited and its compliance had not been questioned.

Loblaws argues that the case is largely about “a difference of opinion regarding the interpretation of tax policy and law”.

Glenhuron was liquidated in 2013 when Loblaws decided to use that capital to buy Shoppers Drug Mart.

The Proceedings So Far

The case has been pending since 2015, and due to a series of procedural issues, has been delayed for more than a year after its originally scheduled start date. Earlier this year, a senior judge warned both parties that the court would not look kindly upon any further procedural delays.

This is one of the largest offshore corporate tax-avoidance cases in Canada.

If you are facing a tax controversy issue or are involved in tax litigation, contact Mark Feigenbaum for superior representation. We have achieved favorable resolutions for our clients in various levels of court in both Canada and the U.S. Contact us to learn more about how we can help or call us at (416) 777-8433 or toll free at (877) 275-4792.

Sources:

http://business.financialpost.com/news/retail-marketing/loblaw-cra-face-off-in-court-in-404m-dispute

http://www.cbc.ca/news/business/loblaws-cra-glenhuron-bank-barbados-tax-1.4490564

http://www.cbc.ca/news/business/loblaws-barbados-taxes-1.4631827