Double-edged ruling for offshore banks

An Appeals Court in Canada has sided with one of its biggest and best-known companies in reversing a lower court ruling that it had used a bank it owned in Barbados to evade hundreds of millions of dollars in taxes to Ottawa.

As a result, Loblaw, a major Canadian supermarket chain, will no longer have to pay approximately $523 million (CAN$368 million) in taxes, while the Federal Government, which brought the original case, must pay Loblaw $2.5 million (CAN$1.8 million ) plus legal costs. Canada’s Minister of National Revenue must now undertake a new assessment of the tax responsibility.

The Appeal Court ruling last week may have been an important victory for the Canadian company, but the decision has motivated anti-offshore advocacy groups such as the Canada Taxpayers’ Association to target Barbados and push for further tightening of Canada’s tax administration.

The group’s federal director Aaron Wudrick told Canada’s National Post newspaper: “This decision should concern anyone worried about corporations exploiting tax loopholes to offshore money and avoid paying taxes in Canada.”

Loblaw set up Glenhuron Bank Ltd. in Barbados in late 1993 purportedly to sidestep proposed tax changes in the Netherlands until it was liquidated in 2013, according to court documents.

The case centred on how Glenhuron Bank should be taxed based on the complex provisions in the Canadian Income Tax Act, while Loblaw argued that it should be exempt because it was a regulated foreign bank under the laws of Barbados.

Canada Revenue Agency (CRA) argued that because the Glenhuron Bank in Barbados got most of its money from the parent company, it was not “arm’s length” and therefore effectively a subsidiary of Loblaw.

However, the company argued that because most of the bank’s transactions were done with arm’s length parties on the open market, the bank’s operations were effectively arm’s length from Loblaw’s business.

Government lawyers contended that if the court sided with Loblaw, it would basically nullify the whole point of the foreign accrual property income rules.

Another group that has Barbados in its crosshairs is Canadians for Tax Fairness, whose director Toby Sanger said the Appeal Court’s ruling in favour of Loblaw was a demonstration that the international tax system was fundamentally broken.

Sanger said Ottawa had talked a good game about international efforts to prevent tax evasion, but he accused the government of not being aggressive about actual enforcement.

“I’ve been a bit frustrated that the Canadian government has simply said we’re going to see what the outcome of this is, instead of pushing for reforms ourselves,” Sanger said.

Sanger said he was worried that the Canadian government losing a long-running, high-profile case like this would result in them being less aggressive about future enforcement.

In a statement, Loblaw said it pays all of the taxes it owes to the Government.

“We know that Canadians expect us to pay our taxes fully and fairly — and we do,” said Kevin Groh, Loblaw’s senior vice-president of corporate affairs and communication. “We are pleased that the Court of Appeal reversed the decision of the lower court, confirming that we were compliant in our tax filings and that we had paid all amounts due.”