Case information

Taxation - Income tax - Tax avoidance - Legislation - Interpretation - Interpretation of foreign accrual property income provisions - Whether the business of the respondent’s foreign affiliate as a foreign bank was conducted principally with persons with whom it does not deal at arm’s length - Did the Federal Court of Appeal err in its interpretation of the definition of “investment business” in s. 95(1) of the Income Tax Act, particularly the phrase other than any business conducted principally with persons with whom the affiliate does not deal at arm’s length in the financial institution exception- Income Tax Act, R.S.C. 1985, c. 1 (5th Supp) ss. 91 and 95.

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The issue in dispute is whether, during the 2001 to 2005 and 2008 and 2010 taxation years, the income of Glenhuron Bank Limited (“GBL”), a bank licenced in Barbados, was foreign accrual property income (“FAPI”) pursuant to ss. 91 and 95 of the Act. If so, the taxable income of Loblaw Financial Holdings Inc. in Canada must include a percentage of its affiliate’s FAPI equivalent to the participating percentage of the respondent’s shares in GBL. FAPI includes income from an investment business. The definition of investment business in s. 95(1) of the Act 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. The respondent appealed its tax reassessments on the basis that as GBL was a regulated foreign bank that met the added conditions, its income for the taxation years in question was not FAPI. The appellant argued that GBL was not a foreign bank, did not have greater that five full-time employees and was not conducting business principally with non-arm’s length persons, since it was not in competition with anyone. The Crown also argued that the general anti-avoidance rule applied to a series of transactions by the respondent and GBL to give the appearance of compliance with the “investment business” exception.

The Tax Court allowed the respondent’s appeals in part, holding that the foreign exchange gains or losses arising on GBL’s investment in short term securities should be on income account. However, the Court determined that while GBL is a regulated foreign bank with more than the equivalent of five full-time employees, it was conducting business principally with related persons and therefore could not benefit from the financial institution exemption from investment business. It found, in obiter, that there had been no tax avoidance transactions. The Federal Court of Appeal allowed the respondent’s appeal, set aside the decision of the Tax Court, and referred the reassessment back to the Minister for reconsideration and reassessment on the basis that GBL’s FAPI consists only of income from investment management services provided to non-arm’s length parties. In its view, the receipts side of banking should not be considered when determining whether the investment business was conducted principally with non-arm’s length parties.