2020 FCA 79, 2020 FCA 79

A-321-18 2020 FCA 79 Loblaw Financial Holdings Inc. ( Appellant ) v. Her Majesty the Queen ( Respondent ) Indexed as: Loblaw Financial Holdings Inc. v. Canada Federal Court of Appeal, Woods, Laskin and Mactavish JJ.A.—Toronto, October 15, 2019; Ottawa, April 23, 2020.

Income Tax — Income Calculation — Foreign accrual property income — Appeal from Tax Court of Canada decision upholding Minister of National Revenue’s determination that income from appellant’s Barbados subsidiary, Glenhuron Bank Limited, foreign accrual property income (FAPI), appellant required to pay tax thereon — Glenhuron licensed as offshore bank under Barbados banking legislation — During taxation years at issue, Glenhuron’s funding increasing mainly through its own retained earnings — FAPI scheme requiring that passive income earned by Canadians in foreign corporation be included in Canadian shareholder’s income — Definition of “investment business” in Income Tax Act ( ITA ), s. 95(1) central to present appeal, setting out specific exclusions — One condition having to be satisfied in order to qualify for exclusion is arm’s length requirement — Tax Court finding, inter alia, Glenhuron principally conducting business with non-arm’s length persons — Consequently, its income was from investment business, required to be included in appellant’s income as FAPI — Tax Court determining that proper

interpretation of arm’s length test in banking context requiring examination of bank’s activities from perspective of receipt, use of funds — Also concluding that all persons with whom Glenhuron conducted business should be taken into account — Whether Tax Court erring in concluding that Glenhuron not conducting business principally with arm’s length persons — Tax Court erring on arm’s length issue — Particular question to be determined was who did Glenhuron principally conduct business with — Receipts, uses not always necessary requirement to carry on banking business — Use of term “bank” in entity name, whether entity regulated, factors to be considered rather than actual activities conducted — Tax Court’s approach at odds with Supreme Court decision in Canadian Pioneer Management Ltd. et al. v.

Labour Relations Board of Saskatchewan et al. — Arm’s length test not requiring both business receipts, uses — Receipt side of business not implying element of competition, necessity for business receipts not meaning that exclusion not applying if business simply managing its own funds — Tax Court inferring purposive

interpretation from unexpressed legislative intent — Emphasis on unexpressed intention of competition not appropriate here as FAPI scheme drafted with mind-numbing detail — Tax Court conflating rationale of legislation for purposes of general anti-avoidance rule analysis with purpose of legislation in statutory

interpretation analysis — Parliament not explicitly requiring competition as element of foreign bank exclusion at issue — Tax Court not respecting principle that corporation, shareholders separate, distinct entities — Glenhuron’s FAPI limited to its income in relation to investment management services provided to non-arm’s length persons — Parliament not intending that foreign bank exclusion should be denied as result of support, oversight provided by parent corporation — Capital invested by appellant’s group not occupying time, attention of Glenhuron in any meaningful way — This approach consistent with long-standing case law — Reassessments referred back to Minister for reconsideration — Appeal allowed.

This was an appeal from a decision of the Tax Court of Canada (Tax Court) upholding the Minister of National Revenue’s determination that the income from the appellant’s Barbados subsidiary, Glenhuron Bank Limited (Glenhuron), was foreign accrual property income (FAPI) and ordering that the relevant taxation years be reassessed only with respect to foreign exchange. The appeal concerned whether the FAPI provisions in the Income Tax Act (ITA) applied to the appellant in relation to Glenhuron.

The Minister issued reassessments for the 2001 to 2005, 2008 and 2010 taxation years requiring the appellant, a Canadian corporation, to pay tax on Glenhuron’s income on the basis that it was FAPI. By way of background, the appellant obtained a licence for Glenhuron as an offshore bank under Barbados banking legislation pursuant to the Barbados’ Off-shore Banking Act (OSBA), later replaced by the International Financial Services Act (IFSA). When Glenhuron became licensed, it was permitted to use the term “bank” in its name.

Under the IFSA (and similarly under the OSBA), Glenhuron engaged in several types of financial activities such as interest rate and cross-currency swaps, the purchase of a portfolio of loans, and managing investments on behalf of other corporations in the appellant’s groups. Prior to the taxation years at issue, Glenhuron’s major source of funding was capital invested by corporations in the appellant’s group (either as share capital or interest-free debt). During the taxation years at issue, Glenhuron’s funding increased mainly through its own retained earnings, which were substantial.

The FAPI scheme is intended to prevent Canadians from avoiding tax on passive income by earning such income in foreign corporations located in low-tax jurisdictions. The scheme requires the foreign corporation’s passive income to be included in the Canadian shareholder’s income as it is earned. The definition of “investment business” in subsection 95(1) of the ITA was central to this appeal. It sets out specific exclusions for particular types of businesses. One of the conditions that must be satisfied in order to qualify for one of the exclusions is an arm’s length requirement set out in paragraph (

a) of the definition of “investment business”. The Tax Court found, inter alia , that Glenhuron was principally conducting business with non-arm’s length persons and, consequently, its income was from an investment business and was required to be included in the appellant’s income as FAPI. The Tax Court determined that a proper

interpretation of the arm’s length test in a banking context requires one to examine the bank’s activities from the perspective of both the receipt and use of funds. It concluded that competition is not a requirement of the arm’s length test, but it is relevant to the analysis. It also concluded that all persons with whom Glenhuron conducted business should be taken into account. The appellant submitted, inter alia , that a proper

interpretation of the arm’s length test frames the issue as whether the foreign bank generated income by investing in, or with, arm’s length persons. This follows, the appellant suggested, by the definition of “investment business” which focuses on income from investments. At issue was whether the Tax Court erred in concluding that Glenhuron did not conduct business principally with arm’s length persons for purposes of the definition of “investment business” in subsection 95(1) of the ITA. Held , the appeal should be allowed. The Tax Court’s conclusion on the arm’s length issue was built on an

interpretation of the applicable legislation that significantly

overreached and contained errors of law. The term “investment business” requires that, to be eligible for the exclusions described inparagraphs 95(1)(a), (

b) and (c), the business must be “other than any business conducted principally with persons with whom theaffiliate does not deal at arm’s length.” The particular question to be determined in the appeal was with who did Glenhuron principallyconduct business. One error concerned how the arm’s length test is to be interpreted in the specific context of foreign banks. Simplybecause Barbados legislation defines international banking in a particular manner does not mean that receipts and uses are always anecessary requirement to carry on a banking business.

The use of the term “bank” in the name of the entity, and whether it is regulated,are factors to be considered, rather than the actual activities that are conducted. The Tax Court’s approach was at odds with the SupremeCourt decision in Canadian Pioneer Management Ltd. et al. v. Labour Relations Board of Saskatchewan et al., which details that aformal, institutional approach should be taken to define a banking business. Using this approach, there was no reasonable basis toconclude that the arm’s length test required both business receipts and uses.

Since the term “banking” depends on formal factors ratherthan functions, it was a legal error for the Tax Court to infer that the receipt side of the business implies an element of competition andthat the necessity for business receipts means that the exclusion does not apply if a business simply manages its own funds. The TaxCourt’s focus on competition was an example of a court inferring a purposive

interpretation from unexpressed legislative intent. This wasalso a legal error. The emphasis in the Tax Court’s reasons on an unexpressed intention of competition was not appropriate in this casewhich involved a FAPI scheme that was drafted with mind-numbing detail. The Tax Court also erred by conflating the rationale of thelegislation for purposes of a general anti-avoidance rule analysis with the purpose of the legislation in a statutory

interpretation analysis.Parliament has not explicitly required competition as an element of the foreign bank exclusion at issue. The Tax Court also erred in notrespecting the fundamental principle that a corporation and its shareholders are separate and distinct entities. It determined thatGlenhuron’s activities involving the purchase of short-term debt securities and its swap transactions were conducted with the appellantand that Glenhuron was acting on its behalf. However, Glenhuron was not managing Loblaw’s money but its own.

Glenhuron’s FAPI was limited to its income in relation to investment management services provided to non-arm’s length persons.Glenhuron principally conducted business with persons with whom it entered into contracts with respect to short-term debt securities andswap transactions. It dealt with all such persons on an arm’s length basis. The FAPI regime as a whole, and the foreign bank exclusion inparticular, is intended to encourage Canadians to carry on active businesses outside Canada.

Parliament could not have intended that theforeign bank exclusion should be denied as a result of support and oversight provided by a parent corporation. The legislative intentwould be frustrated if these interactions with the appellant were to be given significant weight. For purposes of the ITA, the term“business” generally means “anything which occupies the time and attention and labour of a man for the purpose of profit”.

Applying themeaning of “business,” there was no reason to conclude that the capital invested by the appellant’s group would have occupied the timeand attention of Glenhuron in any meaningful way. This approach is consistent with long-standing case law that draws a distinctionbetween “capital to enable [people] to conduct their enterprises” and “the activities by which they earn their income”. The reassessments were referred back to the Minister for reconsideration and reassessment on the basis that Glenhuron’s FAPI consistedonly of income from investment management services provided to non-arm’s length parties.

STATUTES AND REGULATIONS CITED Income Tax Act, R.S.C., 1985 (5th Supp.), c. 1, ss. 91(1), 95(1) “foreign bank”, “investment business”,(2)(b),(2.4),(2.11), 248(1)“business”. International Financial Services Act, Cap. 325, s. 4(2) (Barbados). Off-shore Banking Act, Cap. 325 (Barbados). CASES CITED APPLIED: Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235; Canada Trustco Mortgage Co. v. Canada, 2005 SCC 54, [2005] 2 S.C.R. 601;Canadian Pioneer Management Ltd. et al. v. Labour Relations Board of Saskatchewan et al., (SCC), [1980] 1 S.C.R.433, (1980), 107 D.L.R. (3d) 1; Shell Canada Ltd. v.

Canada, (SCC), [1999] 3 S.C.R. 622, (1999), 178 D.L.R. (4th)26; Smith v. Anderson (1880), 15 Ch. D. 247 (C.A.). CONSIDERED: Bennett & White Construction Co. v. Minister of National Revenue, (SCC), [1949] S.C.R. 287, [1948] 4 D.L.R. 817. REFERRED TO: Loblaw Financial Holdings Inc. v. The Queen, 2018 TCC 263; Canada v. Oxford Properties Group Inc., 2018 FCA 30, [2018] 4 F.C.R.3, [2018] 6 C.T.C. 1; Copthorne Holdings Ltd. v. Canada, 2011 SCC 63, [2011] 3 S.C.R. 721; Chevron Corp. v. Yaiguaje, 2015 SCC 42,[2015] 3 S.C.R. 69; Montreal Coke and Mfg. Co. Ltd. v.

Minister of National Revenue, (UK JCPC), [1944] 3 D.L.R.545, [1944] A.C. 126 (P.C.). APPEAL from a decision of the Tax Court of Canada (2018 TCC 182) upholding the Minister of National Revenue’s determination thatthe income from the appellant’s Barbados subsidiary was foreign accrual property income and ordering that the relevant taxation yearsbe reassessed only with respect to foreign exchange. Appeal allowed. APPEARANCES Al Meghji, Mary Paterson, Pooja Mihailovich and Robert Raizenne for appellant. Elizabeth Chasson, Aleksandrs Zemdegs, Laurent Bartleman, Cherylyn Dickson and Isida Ranxi for respondent.

SOLICITORS OF RECORD Osler, Hoskin & Harcourt LLP , Toronto, for appellant. Deputy Attorney General of Canada for respondent.

The following are the reasons for judgment rendered in English by [ 1 ] Woods J.A. : This appeal concerns whether the foreign accrual property income (FAPI) provisions in the Income Tax Act , R.S.C., 1985 (5th Supp.), c. 1 . ( ITA ) apply to Loblaw Financial Holdings Inc. in relation to its Barbados subsidiary, Glenhuron Bank Limited. [ 2 ] The Minister of National Revenue issued reassessments to Loblaw Financial which required it to pay tax on Glenhuron’s income on the basis that it was FAPI.

In doing so, the Minister took the view that Glenhuron’s income did not qualify for an exclusion provided to foreign banks. Loblaw Financial appealed from the reassessments to the Tax Court. [ 3 ] In a decision reported as 2018 TCC 182 , the Tax Court agreed with the Minister that the foreign bank exclusion did not apply.

The basis for the Court’s conclusion was that Glenhuron conducted business principally with affiliated corporations and therefore it did not conduct business principally with arm’s length persons, as required by the applicable legislation. [ 4 ] Loblaw Financial has appealed further to this Court. The appeal relates to Loblaw Financial’s taxation years from 2001 to 2005, 2008 and 2010. Factual background [ 5 ] The background facts are helpfully set out in detail in the Tax Court’s reasons.

It is sufficient for purposes of this appeal to provide a brief overview. [ 6 ] Loblaw Financial is a Canadian corporation and an indirect wholly owned subsidiary of Loblaw Companies Limited (Loblaw). Loblaw is a Canadian public corporation which is controlled by George Weston Limited (Weston). Accordingly, Loblaw and Weston, as well as their subsidiaries, deal with one another on a non-arm’s length basis. [ 7 ] In the early 1990s, Loblaw Financial became concerned about proposed tax changes that could negatively impact its financing subsidiary in the Netherlands.

It decided to incorporate a new subsidiary in Barbados. [ 8 ] In 1993, Loblaw Financial approached the Central Bank of Barbados about licensing its Barbados subsidiary as an offshore bank under Barbados banking legislation. The Central Bank agreed to issue the licence and did so late in 1993 pursuant to the Off-shore Banking Act , Cap. 325 [Barbados] (OSBA).

In 2002, the OSBA was replaced by the International Financial Services Act , Cap. 325 [Barbados] (IFSA) and the subsidiary became subject to the IFSA at that time. [ 9 ] When the subsidiary became licensed, it was permitted to use the term “bank” in its name and the name was changed to Glenhuron Bank Limited. [ 10 ] In accordance with Barbados legislation, Glenhuron was a bank and subject to Barbados banking regulations if the Central Bank of Barbados issued it a licence under the OSBA or the IFSA.

Accordingly, once the licence was issued the Central Bank began to regulate Glenhuron’s activities. [ 11 ] Over time, capital was invested in Glenhuron by the Loblaw group, including by Loblaw Financial’s Netherlands subsidiary. For the most part, these funds were invested prior to the taxation years at issue. [ 12 ] Under the IFSA (and similarly under the OSBA), Glenhuron’s activities were limited to activities described in the definition of “international banking business” . It is reproduced below: IFSA subsection 4(2) 4. (1) …

(2) For the purposes of subsection (1), “international banking business” means (

a) the business of receiving foreign funds through (

i) the acceptance of foreign money deposits payable upon demand or after a fixed period or after notice; (ii) the sale or placement of foreign bonds, foreign certificates, foreign notes or other foreign debt obligations or other foreign securities; or (iii) any other similar activity involving foreign money or foreign securities; (

b) the business of using the foreign funds so acquired, either in whole or in part, for (

i) loans, advances and investments;

(ii) the activities of the licensee for the account of or at the risk of the licensee; (iii) the purchase or placement of foreign bonds, foreign certificates, notes or other foreign debt obligations or other foreign securities; or (iv) any other similar activity involving foreign money or foreign securities; or (

c) the business of accepting in trust from persons resident outside Barbados or from prescribed persons (

i) amounts of money in foreign currencies or in foreign securities or both; (ii) foreign personal property or foreign movable property; or (iii) foreign real property or foreign immovable property. [ 13 ] According to expert evidence of Barbados law introduced by Loblaw Financial, the Barbados legislation required Glenhuron to satisfy both the receipt and use requirements as set out above. The expert also opined that Glenhuron satisfied these requirements.

I note that the assumptions provided by Loblaw Financial on which the expert based her opinion did not include an assumption that Glenhuron’s receipts were part of its business. Accordingly, this finding was part of the expert’s opinion. [ 14 ] Glenhuron remained in existence until 2013 when it was liquidated to provide Loblaw with funds for a major acquisition. Glenhuron’s activities [ 15 ] The activities undertaken by Glenhuron are central to this appeal, and the Tax Court’s reasons describe these activities in detail. In light of this, it is necessary to provide only a brief

summary. [ 16 ] During the years at issue, Glenhuron engaged in several types of financial activities: it purchased low risk U.S. denominated short-term debt securities; it entered into interest rate swaps which were generally intended to provide Glenhuron with a rate of return equivalent to a fixed rate on a long-term borrowing; it entered into cross-currency swaps so that Glenhuron was not exposed to fluctuations in currency relative to the Canadian dollar; it entered into an arrangement with the Weston group to purchase a portfolio of loans that had been extended by arm’s length banks to independent drivers of Weston bakery products in the United States.

Glenhuron subsequently made additional loans to the drivers. A few years later, Glenhuron sold the loan portfolio to another corporation in the Loblaw or Weston group and Glenhuron managed the portfolio on its behalf; it managed investments on behalf of other corporations in the Loblaw and Weston groups for a fee. It also managed funds on behalf of one arm’s length corporation.

The investment strategy employed on behalf of these corporations was very similar to Glenhuron’s own investment strategy; it made two short-term loans to non-arm’s length corporations; and it entered into equity forward contracts to purchase Loblaw shares. Loblaw’s consolidated financial statements stated that the purpose of these transactions was to “manage its exposure to fluctuations in its stock-based compensation cost as a result of changes in the market price of its common shares.” [ 17 ] In this Court, Loblaw Financial provided a

summary of the asset value and income from Glenhuron’s activities. The

summary, which is reproduced in an appendix to these reasons, was largely based on financial statements in the record. The

summary was prepared for purposes of this appeal. [ 18 ] The source of funds for these activities is also relevant in this appeal. There were two main sources of funds. Prior to the taxation years at issue, Glenhuron’s major source of funding was capital invested by corporations in the Loblaw group (either as share capital or interest-free debt). During the taxation years at issue, Glenhuron’s funding increased mainly through its own retained earnings, which were substantial.

Applicable legislation [ 19 ] The FAPI scheme is intended to prevent Canadians from avoiding tax on passive income by earning such income in foreign corporations located in low-tax jurisdictions. The scheme aims to achieve this result by requiring the foreign corporation’s passive income to be included in the Canadian shareholder’s income as it is earned. [ 20 ] Below I reproduce the introductory FAPI provision which requires the FAPI to be included in the shareholder’s income.

The brevity of this provision is not representative of the FAPI legislation as a whole which is notoriously complex [subsection 91(1) of ITA]: Amounts to be included in respect of share of foreign affiliate 91

(1) In computing the income for a taxation year of a taxpayer resident in Canada, there shall be included, in respect of each share owned by the taxpayer of the capital stock of a controlled foreign affiliate of the taxpayer, as income from the share, the percentage of

the foreign accrual property income of any controlled foreign affiliate of the taxpayer, for each taxation year of the affiliate ending in the taxation year of the taxpayer, equal to that share’s participating percentage in respect of the affiliate, determined at the end of each such taxation year of the affiliate. [ 21 ] At a very basic level, the FAPI scheme operates by distinguishing between active business income, which is not FAPI, and passive income, which is.

As described in the Tax Court’s reasons, after the FAPI legislation had been in force for several years the government was concerned that the legislation did not have sufficient teeth to achieve its purpose. The problem was perceived to be that there were no legislative

definitions of “active business income” or “passive income” . Accordingly, in 1995 the legislation was overhauled to provide detailed

definitions, including a definition of “investment business” which in general terms represents passive income. [ 22 ] The definition of “investment business” in subsection 95(1) of the ITA is central to this appeal. It is sufficient for present purposes to look at the current version of the definition and it is reproduced in an appendix. This appeal focusses on the part of the definition that sets out specific exclusions for particular types of businesses, such as financial businesses which earn interest income in the context of an active business (paragraphs (a), (

b) and (c)). [ 23 ] One of the conditions that must be satisfied in order to qualify for one of the exclusions is an arm’s length requirement set out in paragraph (

a) of the definition of “investment business” . This requirement is drafted as an exclusion to the exclusions : “other than any business conducted principally with persons with whom the affiliate does not deal at arm’s length.” [ 24 ] Loblaw Financial submits that Glenhuron satisfies the requirements for an exclusion as a foreign bank. The term “foreign bank” is also defined in subsection 95(1) . The Tax Court decision [ 25 ] There were many issues before the Tax Court, and the Court’s key findings were helpfully summarized in the formal judgment.

There are three findings with respect to FAPI: Glenhuron was a regulated foreign bank with the equivalent of greater than five full-time employees in the taxation years at issue. However, it was principally conducting business with non-arm’s length persons, and consequently, Glenhuron’s income was from an investment business and was required to be included in Loblaw Financial’s income as FAPI; pursuant to paragraph 95(2) (

b) of the ITA , Glenhuron’s fee income from managing investments for non-arm’s length persons was FAPI as the income was deemed to be income from a separate business other than an active business.

Certain fees paid by Weston subsidiaries were also FAPI even if they were not subject to paragraph 95(2) (b), as this activity would otherwise be part of Glenhuron’s “investment business” ; and in the calculation of FAPI, foreign exchange gains and losses in respect of Glenhuron’s investment in short-term debt securities was on income account. [ 26 ] As a result of these findings, the Tax Court ordered that the relevant taxation years be reassessed only with respect to foreign exchange.

In other respects, the Minister’s determination that Glenhuron’s income was FAPI was upheld. [ 27 ] In concluding that Glenhuron did not conduct business principally with arm’s length persons, which is the only issue in this appeal, the Court rejected both of the parties’ submissions. As for submissions by the Crown, the Court disagreed with the Crown that the arm’s length test required that Glenhuron compete for business.

As for submissions by Loblaw Financial, the Court disagreed with its contention that the arm’s length test applies only to persons with whom Glenhuron had entered into income-earning arrangements. [ 28 ] Instead, the Court concluded that competition is not a requirement of the arm’s length test, but it is relevant to the analysis.

The Court also concluded that all persons with whom Glenhuron conducted business should be taken into account. [ 29 ] The Court’s conclusions regarding the arm’s length test also included the following: the arm’s length test as applied to foreign banks requires an examination of a bank’s receipts and uses of funds; the term “principally” means greater than 50 percent, and this is to be determined based on all relevant circumstances.

However, in the context of the foreign bank exclusion there should be a greater relative weighting to the receipt side of the business because this is where competition would be expected; with respect to the receipt side, “it all came from non-arm’s length parties” (paragraph 239); and on the use side, the Court used the awkward wording from the arm’s length test and stated: “[t]he Appellant has not satisfied me that even the use of funds … was not principally conducting business with non-arm’s length persons” (paragraph 248). [ 30 ] In a separate decision reported as 2018 TCC 263 , the Tax Court ordered that each party bear its own costs.

Position of Loblaw Financial [ 31 ] In this section, I provide an overview of the submissions of Loblaw Financial concerning the arm’s length requirement, which is the only issue in the appeal. [ 32 ] I have not provided a

summary of the submissions of the Crown here because the Crown generally endorses the reasons of the

Tax Court. More will be said about the Crown’s submissions later in the reasons. [ 33 ] Loblaw Financial submits that the Tax Court made four errors of law: it read in an unlegislated competition requirement; it focussed on capitalization rather than sources of income; it characterized the conduct of business as including capital receipts; and it failed to treat Glenhuron as separate and distinct from Loblaw. [ 34 ] Loblaw Financial submits that a proper

interpretation of the arm’s length test frames the issue as whether the foreign bank generated income by investing in, or with, arm’s length persons.

This follows, it is suggested, by the definition of “investment business” which focusses on income from investments. [ 35 ] The key factors one should consider in determining who Glenhuron conducted business with, Loblaw Financial suggests, are (1) the value of Glenhuron’s income-generating assets, (2) the amount of income derived from those assets, and (3) the time, attention and effort devoted to its income-generating activities. [ 36 ] Applying these principles, Loblaw Financial suggests that Glenhuron’s business is conducted principally with the arm’s length persons involved in its three core activities: (1) persons from whom Glenhuron purchased short-term debt securities, (2) counterparties to Glenhuron’s swaps, and (3) banks from whom Glenhuron acquired a portfolio of loans issued to independent drivers of Weston bakery products in the United States, and the drivers to whom Glenhuron issued new loans. [ 37 ] The only non-arm’s length dealings that Glenhuron had with respect to these core activities, it is suggested, are dealings with the Weston bakery group relating to the loans to drivers.

Reference was made to the Tax Court’s reasons, at paragraphs 56, 60 and 243. Analysis Introduction [ 38 ] The question to be determined is whether the Tax Court erred in concluding that Glenhuron did not conduct business principally with arm’s length persons for purposes of the definition of “investment business” in subsection 95(1) of the ITA . For the reasons that follow, I conclude that the Tax Court did make reviewable errors, which are errors of law, and that the Tax Court’s decision should be set aside.

Accordingly, it is also necessary to consider the appropriate remedy. [ 39 ] The analysis below is organized into the following parts: What is the applicable standard of review? What is the proper

interpretation of the legislation? Did the Tax Court err? What is the appropriate remedy? Did Glenhuron conduct business principally with arm’s length persons? What is an appropriate award of costs? What is the applicable standard of review? [ 40 ] In an appeal from the Tax Court, this Court is to apply the standards of review set out in Housen v. Nikolaisen , 2002 SCC 33 , [2002] 2 S.C.R. 235 . Questions of law are to be reviewed on a standard of correctness. Questions of fact and questions of mixed fact and law (other than extricable questions of law) are to be reviewed on a standard of palpable and overriding error. What is the proper

interpretation of the legislation? [ 41 ] The well-established approach to interpreting statutes in Canada, including the ITA , is to consider the text, context and purpose of the legislation in a manner that is harmonious with the statute as a whole ( Canada Trustco Mortgage Co. v. Canada , 2005 SCC 54 , [2005] 2 S.C.R. 601 , at paragraph 11 ). [ 42 ] The term “investment business” requires that, to be eligible for the exclusions described in paragraphs (a), (

b) and (c), the business must be “other than any business conducted principally with persons with whom the affiliate does not deal at arm’s length.” [ 43 ] The particular question to be determined in the appeal is: Who did Glenhuron principally conduct business with? The key phrase here is “business conducted … with” . [ 44 ] The plain meaning of the phrase “business conducted … with” suggests that it applies to every person with whom Glenhuron has a business relationship. It is not limited to persons with whom Glenhuron had entered into income-earning transactions.

On the other hand, the plain meaning does not extend to persons with whom Glenhuron interacted if the interaction was not in the nature of

“Glenhuron doing business”. This is implied by the word “with”. [45] After determining with whom Glenhuron conducted business, the business relationships must be weighed to determine withwhom the corporation principally conducted business. The use of the general term “principally” suggests that the weighting will be afact-based determination that is appropriate in the particular circumstances. [46] As for context, at a high level the FAPI scheme differentiates between passive income and active business income.

As describedin detail by the Tax Court, legislative changes were made to the scheme in 1995 in response to concerns that the existing legislation didnot have sufficient teeth to properly capture passive income. One way in which this objective was addressed was to add a definition of“investment business”. [47] The definition of “investment business” differentiates between active business income and passive income in a very rough way.

Itdoes this by encompassing a wide range of businesses and providing for a limited number of specific exclusions. [48] Turning to the purpose of the provision at issue, the arm’s length test is one of several requirements to qualify for one of theexclusions. The exclusions generally further the fundamental purpose of the FAPI scheme, which is to apply only to passive income.

Therequirements for the exclusion for foreign banks address this objective in several ways, including the arm’s length requirement: the business has to be subject to foreign banking laws and be regulated;the corporation has to operate the business;the business must have the equivalent of more than five full-time employees; andthe business must not be conducted principally with non-arm’s length persons. [49] It is convenient to mention here that the above conditions demonstrate that the foreign bank exclusion generally depends onwhether the corporation is licensed and regulated, and not directly on whether it carries on particular types of activities.

Did the Tax Court err? [50] The Tax Court was faced with a daunting task of having to grapple with a myriad of issues in a lengthy trial. Only one of theseissues has been appealed to this Court. [51] In my respectful view, the Tax Court’s conclusion on the arm’s length issue is built on an

interpretation of the applicablelegislation which significantly overreaches and contains errors of law. Such legal errors are to be reviewed on the non-deferentialstandard of correctness. As will be evident below, in large measure I agree with the submissions of Loblaw Financial on this issue, butmy analysis differs somewhat. [52] One error concerns how the arm’s length test is to be interpreted in the specific context of foreign banks. [53] The Tax Court determined that a proper

interpretation of the arm’s length test in a banking context requires one to examine thebank’s activities from the perspective of both the receipt and use of funds (paragraph 209). This was based on the Court’s view that abank’s business necessarily involves two sides—receipts and uses. The Court appeared to rely entirely for this conclusion on thedefinition of an “international banking business” in the Barbados legislation. [54] This conclusion was a legal error.

Simply because Barbados legislation defines international banking in a particular manner doesnot mean that receipts and uses are always a necessary requirement to carry on a banking business—in Barbados or elsewhere. [55] Canadian courts find it difficult to define the term “banking”. The Supreme Court discussed this difficulty in the context of aconstitutional matter in Canadian Pioneer Management Ltd. et al. v. Labour Relations Board of Saskatchewan et al., (SCC), [1980] 1 S.C.R. 433, (1980), 107 D.L.R. (3d) 1.

In that case, the decision of the majority concluded that “banking” is an elusiveconcept, difficult to define, and its meaning should be based on a formal, institutional approach rather than a substantive approach, in thesense of the functions of banking. It follows that the use of the term “bank” in the name of the entity, and whether it is regulated, arefactors to be considered, rather than the actual activities that are conducted. [56] The Tax Court’s approach is at odds with Canadian Pioneer, which details that a formal, institutional approach should be takento define a banking business.

Using this approach, there is no reasonable basis to conclude that the arm’s length test requires bothbusiness receipts and uses. [57] The Tax Court’s error that business receipts and uses are necessary to comply with the arm’s length test spawned two incorrectconclusions: (1) that the receipt side of the business implies an element of competition (paragraph 210), and (2) that the necessity forbusiness receipts means that the exclusion does not apply if a business simply manages its own funds (paragraph 325).

Since the term“banking” depends on formal factors rather than functions, it is a legal error for the Tax Court to make these inferences. [58] In addition, the Tax Court’s focus on competition, which was dealt with at length in the Court’s reasons, is an example of a courtinferring a purposive

interpretation from unexpressed legislative intent. This is also a legal error. As stated by the Supreme Court ofCanada: “This Court has consistently held that courts must therefore be cautious before finding within the clear provisions of the [ITA]an unexpressed legislative intention … Finding unexpressed legislative intentions under the guise of purposive

interpretation runs therisk of upsetting the balance Parliament has attempted to strike in the [ITA]” (Shell Canada Ltd. v. Canada, (SCC),[1999] 3 S.C.R. 622, (1999), 178 D.L.R. (4th) 26, at paragraph 43). The emphasis in the Tax Court’s reasons on an unexpressedintention of competition is not appropriate in this case which involves a FAPI scheme that is drafted with mind-numbing detail. [59] The Tax Court also erred by conflating the rationale of the legislation for purposes of a GAAR [general anti-avoidance rule]analysis with the purpose of the legislation in a statutory

interpretation analysis. These are distinctly different exercises (Canada v.Oxford Properties Group Inc., 2018 FCA 30, [2018] 4 F.C.R. 3, [2018] 6 C.T.C. 1, at paragraphs 40–42, citing Copthorne Holdings Ltd.

v. Canada , 2011 SCC 63 , [2011] 3 S.C.R. 721 , at paragraphs 66 , 70). It appears that the Tax Court brushed over this distinction, referring to it as “something of a fine, legalistic point” (paragraph 218). [ 60 ] As discussed in the Tax Court reasons, competition is recognized as a policy rationale for limiting FAPI to passive income and as such it would be relevant in a GAAR analysis. However, Parliament has not explicitly required competition as an element of the foreign bank exclusion at issue.

This may be contrasted with other FAPI provisions where a competition requirement is explicit (see, for example, subsection 95(2.4) of the ITA ). [ 61 ] The [Tax] Court also erred in not respecting the fundamental principle that a corporation and its shareholders are separate and distinct entities ( see Chevron Corp. v. Yaiguaje , 2015 SCC 42 , [2015] 3 S.C.R. 69 , at paragraph 95 ). [ 62 ] This error is manifested in the Court’s determination that Glenhuron’s activities involving the purchase of short-term debt securities and its swap transactions were conducted with Loblaw.

In each case, the Court stated that Glenhuron was acting on behalf of Loblaw whose money it was investing (paragraphs 242, 247). Except with respect to investment management services which are not relevant in this part of the analysis, Glenhuron was not managing Loblaw’s money but its own. It was an error of law for the Court to consider that Glenhuron’s money belonged to Loblaw. What is the appropriate remedy? [ 63 ] The errors made in the Court below were the foundation for its conclusion that Glenhuron’s income was FAPI.

Accordingly, the Tax Court’s decision should be set aside, except for its finding with respect to investment management services which was not appealed. [ 64 ] In light of these errors, this Court may either refer the matter back to the Tax Court for redetermination, or it may make the decision that the Tax Court should have given. [ 65 ] In this particular case, the record was extensive, and included a 36-volume appeal book.

I was initially doubtful that it would be feasible to make the necessary findings of fact in this appeal to give the judgment that the Tax Court should have given. [ 66 ] Ultimately, I have concluded that it is possible to make the necessary findings of fact. This conclusion is assisted by three factors: (1) the reasons of the Tax Court are very detailed,

(2) Loblaw Financial provided summaries of information from financial statements that could be verified from the record, and (3) the Crown does not take issue with the Tax Court’s factual findings as to the activities conducted by Glenhuron. [ 67 ] I turn now to consider what decision the Tax Court should have given. Did Glenhuron conduct business principally with arm’s length persons? [ 68 ] In this section, I consider who Glenhuron conducted business with. For the reasons that follow, I conclude that Glenhuron principally conducted business with arm’s length persons.

This conclusion does not depend on whether or not the investment management business is considered a separate business. [ 69 ] The term “investment business” explicitly requires that either Loblaw Financial or Glenhuron establish that the arm’s length requirement has been satisfied. In my view Loblaw Financial has done so. For the reasons below, I conclude that Glenhuron principally conducted business with persons with whom it entered into contracts with respect to short-term debt securities and swap transactions.

Glenhuron dealt with all such persons on an arm’s length basis. [ 70 ] The essence of Glenhuron’s business activity was to decide what areas of business to pursue and what specific income-earning contracts to enter into, and then to implement those transactions. These activities generally involved interactions between Glenhuron and the persons with whom Glenhuron entered into income-earning transactions.

They also involved interactions between Glenhuron and Loblaw Financial in which the parent corporation provided direction, support and oversight. [ 71 ] In applying the arm’s length test to these interactions, one must consider how the interaction with Loblaw Financial affects the analysis, determine the predominant income-earning transactions, and determine whether those transactions were conducted with persons with whom Glenhuron dealt at arm’s length. [ 72 ] With respect to the interaction between Glenhuron and Loblaw Financial, the extent and nature of this interaction was not as clearly set out in the evidence as it could have been.

Loblaw Financial submits that these interactions were “commercially normal and legally required” . This suggests a mere oversight role which would not amount to conducting business with Glenhuron. In my view, the evidence was not sufficiently detailed to establish that the role was limited in this way.

The role may well have involved Loblaw Financial providing support services to Glenhuron which resulted in Glenhuron conducting business with its parent corporation. [ 73 ] However, in my view this does not affect the ultimate issue which is whether Glenhuron principally conducted business with arm’s length persons. The FAPI regime as a whole, and the foreign bank exclusion in particular, is intended to encourage Canadians to carry on active businesses outside Canada.

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 legislative intent would be frustrated if these interactions with Loblaw Financial were to be given significant weight. [ 74 ] As for weighing Glenhuron’s interactions in its income-earning transactions, a predominate weighting should be given to persons with whom Glenhuron dealt in the context of acquiring short-term debt securities and swaps.

As clearly set out in the appended charts, the vast majority of Glenhuron’s assets were invested in U.S. denominated short-term debt securities, cross-currency swaps, and interest rate swaps. These activities also generated by far the most income. Except for Loblaw’s supporting role discussed above, this business activity was conducted entirely with arm’s length persons.

[75] Loblaw Financial submitted that there was another aspect of Glenhuron’s core business, loans to drivers of Weston bakeryproducts. Although the loans were held by arm’s length drivers, the arrangement had the significant involvement of the Weston bakerygroup and was subject to a formal agreement with that group. I conclude that this part of the business was substantially conducted withWeston as well as with the arm’s length drivers. [76] However, it is not necessary to take the drivers’ loans into account to satisfy the arm’s length test.

As described in the charts, thedrivers’ loans employed a relatively small amount of Glenhuron’s funds and they earned a relatively small amount of income.

Mygeneral impression is that this activity involved more employee time than other businesses, relative to its returns, but that the number ofemployees engaged in this activity was still small compared to the main business activity which involved the active participation of aninvestment team to purchase short-term debt securities and enter into swap transactions. [77] I would mention that the charts provided by Loblaw Financial do not contain financial information about the equity forwards.Loblaw Financial justified the exclusion on the basis that the Minister’s reassessments did not include the unrealized gains or losses fromthis activity which were reported in the financial statements.

I am not satisfied that this is a sufficient reason to exclude information aboutthe equity forwards from the charts. However, these contracts lost money on a cumulative basis and the Crown did not submit that it wasa significant business activity. On balance, I have concluded that this activity was not significant compared to Glenhuron’s mainactivities. [78] I turn now to consider some of the Crown’s submissions. [79] First, the Crown submits that the arm’s length test requires the court to consider both Glenhuron’s use of funds and receipt offunds.

The Crown says that Loblaw Financial itself admitted throughout that both receipts and uses were elements of Glenhuron’sbusiness by acknowledging that Glenhuron carried on an “international banking business”. [80] This Court was not provided with Loblaw Financial’s submissions in the Tax Court. However, based on the information beforethis Court the Crown’s submission misrepresents Loblaw Financial’s position. Loblaw Financial did not represent that receipts were partof Glenhuron’s business as the term “business” is understood for purposes of the definition of “investment business” in the ITA.

Instead,Loblaw Financial represented that receipts were part of its international banking business for purposes of Barbados banking legislation.The two concepts are very different. [81] The question presented by the Crown’s submission is whether funds received by Glenhuron for use in its business were part ofthe conduct of Glenhuron’s business for purposes of the definition of “investment business” in the ITA.

For this purpose, the term“business” should be determined in accordance with Canadian law—not the law of Barbados. [82] For purposes of the ITA, the term “business” generally means “anything which occupies the time and attention and labour of aman for the purpose of profit” (see Smith v. Anderson (1880), 15 Ch. D. 247 (C.A.), at page 258 and the definition of “business” insubsection 248(1) of the ITA). [83] The relevance of this issue is whether capital invested by the Loblaw group was part of the conduct of Glenhuron’s business. Inlight of the general meaning of “business”, this is a factual determination.

In my view, the capital investments by the Loblaw group werenot part of Glenhuron’s conduct of business. [84] Applying the meaning of “business”, there is no reason to conclude that the capital invested by the Loblaw group would haveoccupied the time and attention of Glenhuron in any meaningful way. Instead, the investments were part of Loblaw’s global strategy totransfer funds from other affiliates to Glenhuron to the extent that the funds were surplus to Loblaw’s business needs.

It was ashareholder decision—and there is no reason to conclude that it involved business conducted by Glenhuron. [85] I would also add that this approach is consistent with long-standing jurisprudence which draws a distinction between “capital toenable [people] to conduct their enterprises” and “the activities by which they earn their income” (Bennett & White Construction Co. v.Minister of National Revenue, (SCC), [1949] S.C.R. 287 [at page 298], [1948] 4 D.L.R. 817, at page 823, citingMontreal Coke and Mfg. Co. Ltd. v.

Minister of National Revenue, (UK JCPC), [1944] 3 D.L.R. 545, [1944] A.C. 126(P.C.)). [86] Finally, the Crown submits that if Loblaw Financial’s position is accepted, the very target of the FAPI legislation, which is aninvestment portfolio held offshore, would be exempt. The concern is a valid one, but it does not enable a court to give the legislation abroader

interpretation than it can reasonably bear. A gap in the legislation is for Parliament to address. It appears that Parliament mayhave now done so with the addition of subsection 95(2.11) of the ITA, but this is not relevant for purposes of this appeal. [87] For these reasons, I conclude that Glenhuron’s FAPI is limited to its income in relation to investment management servicesprovided to non-arm’s length persons. I would refer the reassessments back to the Minister for reassessment on this basis.

What is an appropriate award of costs? [88] It is necessary to consider costs in this Court and the Tax Court. [89] With respect to the appeal in this Court, costs will be awarded to Loblaw Financial based on the tariff. [90] With respect to the Tax Court proceeding, I would make the costs order that the Tax Court should have given. The question iswhether Loblaw Financial should be granted costs in excess of the tariff, and if so how much. [91] The trial was lengthy, complex, and raised an important issue. It is clear that costs significantly above the tariff should beawarded.

The Crown agreed in their submissions that this would be appropriate if Loblaw Financial were the successful party.

[ 92 ] The parties differ, however, as to amount that should be awarded. Loblaw Financial submits that an appropriate award for legal fees would be $3.1 million which represents 50 percent of its claimed legal fees up to the date of its first settlement offer and 80 percent thereafter, for an aggregate 60 percent of total fees. The Crown submits that the award for legal fees should not be fixed, but should be a percentage of reasonable billed and paid fees. It suggests a percentage of 35 percent. [ 93 ] The award of costs is not an exact science and in this case it is appropriate for this Court to fix the amount.

In my view, an award of $1.8 million plus reasonable disbursements is appropriate. This result is closer the Crown’s position (35 percent) than Loblaw Financial’s (60 percent). [ 94 ] In reaching this conclusion, I have rejected Loblaw Financial’s submission that the award should be significantly increased due to settlement offers it made and in light of certain conduct by the Crown. [ 95 ] There were two settlement offers. Loblaw Financial’s earlier offer was not a reasonable compromise and it does not justify an increased award.

The later offer was based on a compromise but the offer was made quite late in the process. It also would not justify a significant increase in costs. [ 96 ] With respect to the conduct of the Crown, to the extent that the Crown’s conduct resulted in a lengthier and more difficult trial, the costs award reflects this to some extent. However, I am not of the view that the award should be substantially increased. There is no reason for me to believe that the Crown took positions that were not justified in the circumstances.

The Tax Court did come to a different view on this, but the judge had the benefit of observing the trial as it unfolded and the Court’s comments were in the context of the Crown being the successful party. Conclusion [ 97 ] I would allow the appeal, and set aside the decision of the Tax Court.

In giving the decision that the Tax Court should have given, I would allow the appeal in the Tax Court, and refer the reassessments back to the Minister for reconsideration and reassessment on the basis that Glenhuron’s FAPI consists only of income from investment management services provided to non-arm’s length parties. [ 98 ] I would order costs to Loblaw Financial with respect to this appeal. With respect to costs in the Tax Court, I would set aside the award of costs by the Tax Court.

In making the decision that the Tax Court should have given, I would award costs to Loblaw Financial in a fixed amount of $1.8 million, plus reasonable disbursements. “ Laskin J.A. : I agree. Mactavish J.A. : I agree. APPENDIX A

APPENDIX B Definition for this Subdivision 95

(1) In this subdivision,

… investment business of a foreign affiliate of a taxpayer means a business carried on by the foreign affiliate in a taxation year (other than a business deemed by subsection (2) to be a business other than an active business carried on by the foreign affiliate and other than a non-qualifying business of the foreign affiliate) the principal purpose of which is to derive income from property (including interest, dividends, rents, royalties or any similar returns or substitutes for such interest, dividends, rents, royalties or returns), income from the insurance or reinsurance of risks, income from the factoring of trade accounts receivable, or profits from the disposition of investment property, unless it is established by the taxpayer or the foreign affiliate that, throughout the period in the taxation year during which the business was carried on by the foreign affiliate, (

a) the business (other than any business conducted principally with persons with whom the affiliate does not deal at arm’s length) is (

i) a business carried on by it as a foreign bank, a trust company, a credit union, an insurance corporation or a trader or dealer in securities or commodities, the activities of which are regulated under the laws (

A) of each country in which the business is carried on through a permanent establishment in that country and of the country under whose laws the affiliate is governed and any of exists, was (unless the affiliate was continued in any jurisdiction) formed or organized, or was last continued, (

B) of the country in which the business is principally carried on, or (

C) if the affiliate is related to a non-resident corporation, of the country under whose laws that non-resident corporation is governed and any of exists, was (unless that non-resident corporation was continued in any jurisdiction) formed or organized, or was last continued, if those regulating laws are recognized under the laws of the country in which the business is principally carried on and all of those countries are members of the European Union, or (ii) the development of real property or immovables for sale, the lending of money, the leasing or licensing of property or the insurance or reinsurance of risks, (

b) either (

i) the affiliate (otherwise than as a member of a partnership) carries on the business (the affiliate being, in respect of those times, in that period of the year, that it so carries on the business, referred to in paragraph (

c) as the “operator”), or (ii) the affiliate carries on the business as a qualifying member of a partnership (the partnership being, in respect of those times, in that period of the year, that the affiliate so carries on the business, referred to in paragraph (

c) as the “operator”), and (

c) the operator employs (

i) more than five employees full time in the active conduct of the business, or (ii) the equivalent of more than five employees full time in the active conduct of the business taking into consideration only (

A) the services provided by employees of the operator, and (

B) the services provided outside Canada to the operator by any one or more persons each of whom is, during the time at which the services were performed by the person, an employee of (

I) a corporation related to the affiliate (otherwise than because of a right referred to in paragraph 251(5)(b)), (II) in the case where the operator is the affiliate, 1 a corporation (referred to in this subparagraph as a “providing shareholder”) that is a qualifying shareholder of the affiliate, 2 a designated corporation in respect of the affiliate, or 3 a designated partnership in respect of the affiliate, and (III) in the case where the operator is the partnership described in subparagraph (b)(ii), 1 any person (referred to in this subparagraph as a “providing member”) who is a qualifying member of that partnership, 2 a designated corporation in respect of the affiliate, or 3 a designated partnership in respect of the affiliate, if the corporations referred to in subclause (B)(

I) and the designated corporations, designated partnerships, providing shareholders or providing members referred to in subclauses (B)(II) and (III) receive compensation from the operator for the services provided to the operator by those employees the value of which is not less than the cost to those corporations, partnerships, shareholders or members of the compensation paid or accruing to the benefit of those employees that performed the services during the time at which the services were performed by those employees; ( entreprise de placement )