TORONTO -- Loblaw Companies Ltd.'s Barbadian banking subsidiary was "playing with its own money" rather than acting as an active business with outside customers and is obligated to pay tax back home, government lawyers told a Toronto court on Wednesday.
Barbados-based Glenhuron Bank Ltd. did not meet the requirements to be considered a foreign bank under Canadian law and be exempt from paying tax to the Canada Revenue Agency, Justice Department lawyer Elizabeth Chasson said in her closing arguments at the Tax Court of Canada.
There is "absolutely nothing" connecting Glenhuron to Barbados, she told Justice Campbell Miller, and the subsidiary was established to avoid paying tax.
"It has no customers in Barbados. It's not trying to break into the financial services business in Barbados, because it's only earning profit for itself in a very sophisticated, very complicated system."
The trial centred on the federal government's reassessments of Loblaw's subsidiary for several tax years dating as far back as 2001, and began after the company filed an appeal in 2015. The Minister of Finance concluded the income earned by Glenhuron was from an "investment business" and therefore subject to income tax, according to court documents.
The reassessments, which were received between 2015 and 2018, are for the 2000 to 2013 taxation years and total $437 million of taxes, interest and penalties owed, according to Loblaw's latest quarterly financial report.
Loblaws Inc. was incorporated as an international business corporation in Barbados in September 1992 and its activities included investing in short-term securities and holding cross-currency swaps, according to court documents.
Loblaws Inc. changed its name to Glenhuron Bank Ltd. in November 1993 and in December 1993 it became a licensee under the Offshore Banking Act of Barbados.
Glenhuron was liquidated in 2013, when Loblaw decided to use that capital domestically to buy Shoppers Drug Mart.
Department of Justice lawyers had argued during the trial, which began in April, that Loblaw Financial took steps to make Glenhuron Bank appear to be a foreign bank in order to avoid paying tax.
Loblaw has argued that Glenhuron qualified for the "regulated foreign bank" exception.
The majority of Glenhuron's activities involved arms-length entities, such as swap contracts with large banks, and its banking licence from Barbadian authorities is further evidence that it fits the profile of a bank, Loblaw lawyer Al Meghji has told the court.
Although Glenhuron had a banking license from the Barbados authorities, it did not take deposits or provide financial services to outside customers, Chasson argued on Wednesday, but rather largely used its own funds in transactions such as buying short-term securities.
Banks typically take customers' deposits and use it for lending and investments, she noted.
"The key difference is it comes from the customers, from the public," Chasson said. "But here, it's all within the Loblaw/Weston family."
By entering into swap contracts and purchasing short-term securities Glenhuron is acting as a customer, rather than conducting business with arms-length parties and generating profits, Chasson argued.
"Glenhuron could have been operated anywhere," she told the court. "It has nothing to do with Barbados in particular. The only thing about Barbados is it's a low tax jurisdiction. That's it."
