LOBLAW FINANCIAL HOLDINGS INC., Appellant, v. HER MAJESTY THE QUEEN,, 2018 TCC 182

Docket: 2015-2998(IT)G BETWEEN: LOBLAW FINANCIAL HOLDINGS INC., Appellant, and HER MAJESTY THE QUEEN, Respondent . Appeals heard on April 23 to May 15, 2018, and July 17 and 18, 2018 at Toronto, Ontario By: The Honourable Justice Campbell J.

Miller Appearances : Counsel for the Appellant: Mary Paterson, Mark Sheeley, Pooja Mihailovich, Al Meghji, Lipi Mishra Counsel for the Respondent: Elizabeth Chasson, Isida Ranxi, Aleksandrs Zemdegs, Gary Edwards, Laurent Bartleman, Cherylyn Dickson JUDGMENT WHEREAS I have decided the following: 1. the large corporation rules in subsections 165(1.11) and 169(2.1) of the Income Tax Act of Canada (the " “ Act ” " ) are not applicable to preclude the Appellant from making certain arguments. 2.

Glenhuron Bank Limited ( " “GBL” " ) was a regulated foreign bank with the equivalent of greater than five full time employees in 2001 to 2005, 2008 and 2010 but was principally conducting business with non-arm’s length persons and consequently its income was from an investment business and is to be included in the Appellant’s income as foreign accrual property income ( " “FAPI” " ). 3. Pursuant to paragraph 95(2) (

b) of the Act , GBL’s fees from managing assets for non-arm’s length persons is deemed to be income from a separate business other than an active business. The fees from Weston Acquisitions Inc., Weston Foods, Inc., Weston Foods US, Inc. and JFS Inc. are also FAPI as if not caught by paragraph 95(2)(

b) of the Act they would otherwise be caught as part of GBL’s investment business. 4. The calculation of the foreign exchange gains/losses in respect of GBL’s investment in short term securities was on income account. 5. Although it is unnecessary to address the application of the general anti-avoidance rules ( " “GAAR” " ) given the above decisions, I do so for completeness’ sake: i . The waivers for 2001 – 2005 taxation years preclude the Respondent from relying on GAAR in those years. ii .

For the 2008 and 2010 taxation years, GAAR is not applicable because, while there was a tax benefit (the avoidance of FAPI) and transactions that could reasonably be considered to result in a misuse of the FAPI provisions, the transactions were not avoidance transactions as they could reasonably be considered to be undertaken primarily for bona fide purposes other than to obtain the tax benefit. NOW THEREFORE it is ordered and adjudged:

1. The Respondent’s Motion pursuant to subsections 165(1.11) and 169(2.1) of the Act (the large corporation rules) is dismissed. 2. The Appeals for 2001 – 2005, 2008 and 2010 taxation years, are allowed and referred back to the Minister of National Revenue for reconsideration and reassessment on the limited basis that foreign exchange gains or losses arising on GBL’s investment in short term securities shall be on income account. 3.

The Parties shall advise within one week of receipt of this Judgment whether or not they wish to make written representations on costs, and if so, they shall do so within 60 days of the date of this decision, limiting their written representations to a maximum of 15 pages. If they do not wish to make written representations, I make no award of costs. Signed at Ottawa, Canada, this 7th day of September 2018. " “Campbell J. Miller” " C. Miller J. Citation: 2018 TCC 182 Date: 20180907 Docket: 2015-2998(IT)G BETWEEN: LOBLAW FINANCIAL HOLDINGS INC., Appellant, and HER MAJESTY THE QUEEN, Respondent.

REASONS FOR JUDGMENT C. Miller J. [ 1 ] It was suggested at the outset of this case by the Appellant’s counsel, reaffirmed in closing argument, that, at its core, this was a general anti-avoidance rule ( " “GAAR” " ) case. The Respondent appeared to take this opening salvo to heart as she proceeded to paint a picture of an organization intent on avoiding the foreign accrual property income ( " “FAPI” " ) rules found in subsection 95(1) of the Income Tax Act of Canada (the " “ Act ” " ).

After a lengthy trial, with lengthy expert evidence on foreign banks, followed by lengthy written argument and two days of oral argument, I have concluded this case is not, at its core, a GAAR case. It is a FAPI case. [ 2 ] The primary issue in this dispute is whether, during the 2001 to 2005 and 2008 and 2010 taxation years, the income of Glenhuron Bank Limited ( " “GBL” " ) was " FAPI and, " therefore, taxable in its parent Loblaw Financial Holdings Inc.’s ( " “Loblaw Financial” " ) hands. FAPI includes income from an investment business.

The definition of " “investment business” " in 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 or the equivalent thereof. [ 3 ] In a nutshell, on the FAPI issue, Loblaw Financial’s position is that the Government of Canada made a policy decision to exempt income from a regulated foreign bank (as that term had already been defined under the Bank Act of Canada) from being FAPI, and that GBL was a regulated foreign bank that met the added conditions.

The Respondent’s position, put concisely, is that GBL was not a foreign bank and, even if it was, it did not meet the added requirements of greater than five full time employees and not conducting business principally with non-arm’s length persons, as it was simply not in competition with anyone. [ 4 ] If I find that GBL meets the requirements of a qualified regulated foreign bank, and consequently does not carry on an investment business, only then does the case morph into a GAAR case – from my reading of the evidence this is very much a secondary issue.

The Respondent argues that Loblaw Financial is caught by the " GAAR ( "

section 245 of the Act ), as it received a tax benefit (not having to pay tax on FAPI) arising from an avoidance transaction, (the incorporation of GBL, its name change, licensing etc.) constituting an abuse of the FAPI provisions in the Act .

The Appellant counters there was no tax benefit (as no diversion of capital), no avoidance transaction (as how do you intend to avoid a law that is unknown at the time) and no misuse (as Government policy was to relieve these banks from FAPI). [ 5 ] It may be disconcerting to readers of this decision, other than the Parties themselves, who presumably will understand, that a great deal will be written on the issues raised by them that ultimately has had little or no impact on my decision, given the narrow basis upon which I am hanging my hat. I do not apologize.

The Parties deserve a comprehensive review of all the matters they deemed important.

Who knows how it might assist down the road. There are many twists and turns in this case so I felt it useful to provide a roadmap outlining how I intend to render this decision. I. FACTS A. List of persons involved B. Corporate structure and background prior to the years in issue (1992 – 2000) C. What was the nature of GBL’s activities in 2001 to 2010

(1) Receipt of funds

(2) Short-term debt securities and asset management

(3) Distributor or independent operator loans ( " “I/O Loans” " )

(4) Intercompany loans

(5) Equity forwards

(6) Cross-currency and interest swaps

(7) Reporting income from activities D. How did GBL operate in 2001 to 2010

(1) Introduction/Office Structure

(2) Employees and responsibilities

(3) Board meetings E. Central Bank of Barbados involvement F. Waivers G. Assessments and objection H. Expert evidence II. ISSUES A. Is Loblaw Financial precluded from relying on certain arguments due to the application of the large corporation rule ( subsections 165(1.11) and 169 (2.1) of the Act ) B. Was income earned by GBL in 2001-2005, 2008 and 2010 FAPI pursuant to subsection 95(1) of the Act

(1) Was GBL carrying on an investment business as defined in the

preamble to the definition in subsection 95(1) of the Act ?

(2) Was GBL exempted out of the definition? (

a) Was it a foreign bank? (

i) Pursuant to the definition in subsection 2 (

a) of the Bank Act of Canada? (ii) Pursuant to the definition in subsection 2 (

c) of the Bank Act of Canada? (

b) Was it conducting business principally with persons with whom it did not deal at arm’s length? (

c) Was it regulated under the laws of Barbados? (

d) Did it employ more than five full time employees or the equivalent thereof full time in the active conduct of the business? C. If Loblaw Financial received FAPI from GBL has it been correctly calculated?

(1) Were the foreign exchange gains/losses arising on GBL’s investments in short term securities on income or capital account?

(2) Does the inclusion in FAPI arising from the deemed separate business provision in paragraph 95(2) (

b) of the Act include the fees received from Weston Acquisitions Inc., Weston Funds, Inc., Weston Foods US, Inc. and JFS Inc. (the " “Disputed Entities” " )? D. If GBL was not carrying on an investment business is Loblaw Financial caught by the application of the GAAR?

(1) Do the waivers for the taxation years 2001 to 2005 preclude the Respondent from relying on the GAAR for those years?

(2) Was there a tax benefit?

(3) Were there avoidance transactions?

(4) Was there an abuse of the FAPI provisions, specifically subsection 95(1) of the Act ? E. If the GAAR applies how is Loblaw Financial to be taxed? III. REASONS (following order of issues as set out in

Section II) IV. CONCLUSION I. FACTS A. List of persons involved [ 6 ] It is helpful to set out at the outset the cast of players, and there are many, both individual and corporate. Reference should be made to this list for noting the abbreviated names I have attached to many of the entities, as well as a brief description of their role. I therefore attach Appendix A breaking down the entities into the following categories:

a) Corporate entities

b) Corporation’s with assets under management by GBL Later in these Reasons, I will review investment management agreements that GBL had with several related parties. Suffice it to say at this introductory stage, that each of these related parties whose assets were managed by GBL, was: i . Both a foreign affiliate and non-resident, directly or indirectly wholly-owned subsidiary of Weston Foods Inc., Weston Foods (Canada) Inc., George Weston Limited ( " “GWL” " ), Provigo Distribution Inc., Loblaw Inc. ( " “LINC” " ), and/or Loblaw Companies Limited ( " “LCL” " ); and ii . A controlled foreign affiliate of the above companies other than Provigo Distribution Inc.

c) GBL directors and employees

d) Loblaw officers

e) Experts

f) Others B. Corporate structure and background prior to years in issue (1992 – 2000) [ 7 ] By way of brief overview, GBL was incorporated in Barbados on September 28, 1992, as Loblaw Inc., a wholly-owned subsidiary of Loblaw Financial. During the years assessed, Loblaw Financial was a direct wholly-owned subsidiary of LINC, a Canadian company (unfortunately with the same name as the Barbadian company), which in turn was a wholly-owned subsidiary of LCL, a public company traded on the Toronto Stock Exchange, the controlling shareholder of whom was GWL. GWL’s shares also traded on the Toronto Stock Exchange.

It owned the majority (60%) of shares of LCL. LCL concentrated on the grocery business. [ 8 ] Loblaw Financial held several Canadian and foreign subsidiaries including GBL. [ 9 ] Mr. Zoetmulder, a former director of GBL, provided evidence surrounding the incorporation of GBL. In 1992 he was also a director of GOBV, a Dutch subsidiary of Loblaw Financial.

He described the business of GOBV as a passive business used to finance Loblaw’s (when I use that term, I refer generally to the overall Loblaw Group: where it is critical to identify a specific entity within the group, I will do so) US operations by borrowing interest free from Canada and lending at interest in the United States. For example, in 1992 GOBV had interest free loans from Loblaw Financial (then called Loblaw International Holdings Inc. ( " “LIHI” " )) of approximately $133 million and lent the same amount to NHI at 9% or 10%.

It held all of the preferred shares in NHI while Loblaw Financial held all the common shares. NHI owned National TEA Company which operated supermarkets in the United States. According to Mr. Zoetmulder, Loblaw was not the only major Canadian company to have a Dutch company serve as a holding company. He explained this was primarily due to the attractive withholding rates and treaty treatment. [ 10 ] Mr. Mavrinac, as Vice-president of tax at Loblaw (which title applied to all the subsidiaries as well) attended GOBV’s board meetings in late 1980s and early 1990s.

He also described GOBV as the vehicle for financing Loblaw’s US operations, acknowledging that the structure provided a tax advantage, one that was never questioned by Revenue Canada. He further indicated that the US operation was not a strong business in the early 1990s and it had been Loblaw’s intention to sell since the late 1980’s, not an easy task given the business was not doing well. [ 11 ] In the early 1990s, the favourable regime for Canadian companies to establish Dutch holding companies was put in peril due to negotiation of the Dutch-US Treaty and, to a lesser extent, the Canada-Dutch Treaty.

Loblaw explored the possibility of establishing a Barbados corporation which, unlike the passive nature of GOBV, was intended to be an active operation. Mr. Mavrinac’s memory of the organizational meeting of GBL was that the focus was on establishing a captive reinsurance company that would benefit the US operations by relieving the cost of workers’ compensation issues then insured by third parties. According to Mr. Mavrinac, the financial vehicle (GBL) was not a well-developed idea, a twinkle in the eye, as he put it. He explained that GOBV simply lent money to the US

operations, all done in accordance with the foreign affiliate rules at the time. He believed that the Barbados company could replace GOBV in that regard, but that the foreign affiliate rules required that the Barbados financial vehicle would have to be an active business, unlike GOBV. Mr. Mavrinac described the active business contemplated as that of a treasury centre involved in a finance type business.

Though GBL was seen as a replacement to GOBV in a low tax jurisdiction, he believed that Barbados had people with the right skill set, was in the right time zone and that the Barbados tax regime was simpler than some of the alternatives.

He put it this way: … what we were doing is we were positioning ourselves that, in the event that the rules changed and we no longer had the benefit of a reduced tax rate in our offshore structure, that we would be able to either replicate that structure or come up with a new structure that fit within the foreign affiliate regime at the time, that's what we were trying to do…. … Because the FAPI rules were quite, I won't say they were simple, in their application, they were complex, but the principles were pretty simple.

If you had an active business in the treaty country, right, you had the benefit of exempt surplus…. [ 12 ] Mr. Zoetmulder confirmed that Loblaw was considering establishing a Barbadian subsidiary in the insurance business which it in fact did under the name Glenmaple Reinsurance Company Limited ( " “GRCL” " ), as a subsidiary of GBL. The Director of Insurance for LCL, Glen Leroux, had suggested Barbados for the re-insurance business.

GRCL was incorporated in January 1993 pursuant to the Exempt Insurance Act of Barbados licensed to conduct business as an exempt insurance company, not required to pay Barbadian tax on insurance income or capital gains. [ 13 ] Mr. Zoetmulder confirmed that Loblaw was indeed turning to Barbados as it had a reliable legal system, proper tax system and appropriate infrastructure. Advice was sought from local legal counsel, Mr. David King. At the November 12, 1992 Directors’ Operational meeting of GBL (then still Loblaw Inc.) Mr.

King reported: … that the Company had been incorporated as an International Business Company on the 28 th day of September, 1992 and was in the process of applying for a licence under the International Business Companies Act No. 24 of 1991. Such a licence would empower the Company to hold foreign currency accounts, transact international business and would also exempt it from the provisions of the Exchange Control Act. [ 14 ] It was determined that the Barbadian companies would be capitalized to the extent of $20 million U.S., $15 million of which was intended for the GRCL’s reinsurance business.

The Appellant subscribed for 1000 common shares for $100,000. In February 1993, GOBV subscribed for non-voting preferred shares for $20 million U.S., for another $12 million U.S. worth in June and another $35 million U.S. worth in August. (unless otherwise noted dollars are U.S. dollars) [ 15 ] Mr. Zoetmulder testified that Canadian tax played no role in these subscriptions. Mr. Mavrinac confirmed the initial $20 million was invested primarily for the insurance business and was not an avoidance of Canadian tax.

In the organizational meeting of November 12, 1992, it was discussed in general terms that the new company would carry on the business of entering into financial transactions, including interest rate and foreign exchange swap transactions. Initially, GBL hired PricewaterhouseCoopers to manage these affairs until it hired its own staff. [ 16 ] Mr. Welch, who was hired in 1993, and Mr.

DiFilippo, later the president of GBL, both claimed that to the best of their knowledge there were no Canadian tax considerations during the incorporation of GBL or the subsequent obtaining of the licence under the Offshore Banking Act ( " “ OSBA ” " ). Mr. Mavrinac acknowledged that he was certainly aware at the time of the 2.5% Barbados tax rate, though he looked to Barbados counsel, Mr. King, for advice generally with respect to Barbados law. [ 17 ] On October 15, 1993, Mr.

King wrote to the Central Bank of Barbados ( " “CBB” " ) seeking a meeting to discuss setting up an offshore bank, describing his client as a major Canadian food retailer that has in place an international business company and an exempt insurance company. On November 12, 1993, Mr. King again wrote to the CBB as follows: My client is now of the view that the financial activities which they propose to engage in ought properly to be conducted through the vehicle of a Barbados off-shore bank, rather than through the International Business Company (IBC) as was originally contemplated.

Accordingly I submit to you on behalf of my client a proposal herein contained for the abovenamed Company Glenhuron Bank Limited to become licensed as a Barbados off-shore bank. [ 18 ] At the GOBV board meeting on November 18, 1993, it was reported that " “as yet, there is no follow-up on the Auditor General’s report concerning the loopholes in Canadian tax law with respect to the international activities of Canadian multinationals.” " Mr.

Mavrinac testified he was likely aware of the Auditor General’s report (about which I will have more to say later in these Reasons) but claimed neither it nor the Standing Committee on Public Accounts report published in April 1993 impacted on the interaction with the Barbados subsidiary.

He also testified that neither report played into the decision to obtain a licence under OBSA. [ 19 ] On the same day, November 18, 1993, the directors of GBL (at that point still called Loblaw Inc.) also met and discussed GBL’s status as an international business company, agreeing that " “the nature of the company’s actual business was more in keeping with that of a bank.” " Mr. Zoetmulder suggested this related to the financial swapping business and dealing with other multinational banks on the counterparty side.

The directors also agreed the company’s name would be changed " “as required under Barbados banking legislation.” " Again, Mr. Zoetmulder testified that Canadian tax was not a factor in this decision. [ 20 ] The shareholders of GBL also held a three minute meeting on November 18, 1993, in the presence of Mr. Thompson (a GOBV director and executive vice-president of Loblaw), Mr. Reid (CFO Loblaw), Mr. Mavrinac (VP tax Loblaw, representing LIHI), and Jurriaan Zoetmulder, Mr. Durtsche and Mr. Mann, representing GOBV, with Neil Walker and David King, who initiated the request for a license, according to Mr.

Mavrinac, also present. It was resolved that the company obtain an OSBA licence and amend its articles to change its name to Glenhuron Bank. [ 21 ] Mr. Walker reported to the GBL board in May 1994 that the company had changed it status from that of an international business company to that of an offshore bank and added the company obtained its licence from the Central Bank of Barbados on December 22,

1993, under OSBA . [ 22 ] In applying for that OSBA licence in late 1993, GBL described its business as follows: The bank will focus primarily on investment banking together with selected commercial banking activities involving third party financial institutions of superior credit rating. No retail or deposit taking banking activities are currently planned. Investment banking activities will initially be in the area of secondary investments where the bank, as principal, will concentrate on holding or trading derivative products such as interest rate swaps, cross currency swaps and options.

The bank will undertake all derivative transactions as a stand alone credit based on the strength of its own capitalization, all of which will be in-house. Other investment banking transactions such as equity and debt instrument trading and investment, merger and acquisitions activity and advisory services may be considered in future. Commercial banking activities will be initially limited to secured mortgage lending, initially in North America. Expanded commercial activities such as leasing and commercial leans may be considered in the future. " [ " " 23 " " ] " On December 20, 1993, Mr.

King again writes to the CBB indicating " “we require the licence dated prior to December 31, 1993”. " " " [ 24 ] On May 5, 1994, Mr. King wrote to the CBB as follows: You will be aware that proposed changes to Canada’s Income Tax Act will require subsidiaries of Canadian companies doing investment business in Barbados to increase employment to more than five (5) persons in order to retain certain tax exemptions under the Canadian Income Tax Act.

Partly to justify this increase in staff, the Bank intends to expand its present business to include processing such items as payroll, credit card applications and investment data for companies with which the Bank is related through its Canadian parent company. [ 25 ] With the introduction of the International Financial Services Act in 2002 ( " “ IFSA ” " ) the licence under the OSBA simply transferred from one Act to the other. According to Mr.

Berry, President of GBL at the time, it remained business as usual. [ 26 ] In February 1994, the Canadian government released its 1994 budget which introduced the " “investment business” " definition and included an exception to the FAPI inclusion for regulated financial institutions.

In a GOBV board meeting of May 26, 1994, it was reported: This budget introduced major amendments to the foreign affiliate provisions of the Canadian Income Tax Act , in response to the report of the Auditor General to the House of Commons in 1992 and the report of the House of Commons Standing Committee on Public Accounts delivered in June 1993.

Based on the budget proposals as they stand today, it would appear that the proposed Loblaw’s franchisees interest swap program would have to be cancelled as being no longer feasible. ...it would appear that budget proposals, as they stand today, would not affect the finance operations of GBL or the claim handling of GRCL. [ 27 ] The Auditor General Report referred to was released in November 1992 and it examined interest deductibility, taxable dividends from foreign affiliates and other related problems including FAPI.

The report of the Standing Committee on Public Accounts released in April 1993, recommended that the Department of Finance immediately clarify what constitutes active business income in the context of the rules on FAPI. [ 28 ] In February 1994, revisions to the FAPI were proposed by the Department of Finance: such revisions included the financial institution exemption.

Draft legislation with such proposals was introduced in June 1994, followed by some amendments in January 1995 and the final enactment in June 1995. [ 29 ] The February revisions also included a minimum employee requirement for the regulated financial institution exemption. Mr. Zoetmulder testified he was not aware this had been proposed and stated that employee requirements were dictated by what the business needed, not any legal provision. Three employees were hired in April and May, 1994: Wendel Mason, Donna Rogers and Antoinette Patel. [ 30 ] Mr.

Berry joined GBL on January 1, 1997, as Vice-President and Chief Investment Officer ( " “CIO” " ), bringing with him considerable financial experience primarily in the fixed income markets. His mandate was to create an investment department, bringing in-house the portfolio then being managed by Wilmington Trust Company. He became President of GBL in February 2002 and remained with GBL until its liquidation in 2013.

His view on joining GBL was that it wanted to secure funds and grow them within the parameters of reasonable return and low risk. [ 31 ] While I will go into greater detail later as to GBL’s activities during the years in issue, Mr. Berry provided a good

summary of those activities by referring me to the chart attached as Appendix B. The top level (Intercompany Loans, USD Short–Term Debt Securities and Distributor (I/O) Loans) represents a deployment from a treasury perspective of GBL’s assets, investing in the USD Short- Term Debt Securities, the US loans to several thousand independent driver operators distributing Weston Baked Goods in the US and intercorporate loans. This all produced US dollar revenue. Mr.

Berry indicated that better returns could be had by using swaps to change the nature of the floating rate US dollar income into fixed rate Canadian dollar income. This involved using the money from the investments to enter cross-currency swaps which would yield Canadian income, and then use interest rate swaps to exchange Canadian floating rate payments for Canadian fixed rate payments. It was the swap activity that yielded greater income. The profits from the activities at the top level were intended to cover the swap activity at the bottom level. Mr.

Berry also described two other pieces of GBL’s business being managing other entities’ assets for a fee and equity forwards. [ 32 ] With respect to the short-term US deposits, some were held as security for counterparties in the swaps and some were unencumbered. This overall strategy was guided by statements of investment policy and guidelines ( " “SIPG” " ) which limited

investments to US treasury bills, issues from supranational agencies (for example, World Bank), US government guarantees or implied guarantees with government sponsored entities (for example, Federal Home Loan Bank) and A1 Corporate Securities, limited to under 183 days, or, with US treasury bonds, under two years. It appears the average term was not greater than 120 days.

This would keep the portfolio fairly liquid in the event projects came along in which GBL would want to invest, for example, the " I/O Loans " . [ 33 ] Briefly, a cross-currency swap is an agreement between two counterparties (GBL and a global bank with whom GBL had an international swap and derivatives association ( " “ISDA”) " agreement), in which GBL agreed to pay three month US Dollar LIBOR (London interbank offered rate) and the counterparty paid GBL a three month Canadian dollar B.A. (Banker’s Acceptance) rate.

These rates were calculated quarterly and paid semi-annually. [ 34 ] Under the ISDA agreements, GBL was required to post security (initially cash deposits, later using securities as collateral), though the counter-parties were not required to do the same. [ 35 ] Mr. Berry described the interest rate swaps as swapping the Canadian B.A. income for a fixed rate of return akin to investing in a long-term loan. In effect, the income from the short-term securities was used by GBL as much as possible to fund the cross-currency swaps. Mr.

Berry testified that no one from Loblaw head office was involved in authorizing or approving the swaps though he did acknowledge that GBL was subject to certain provisions of the Loblaw companies’ derivative policy. [ 36 ] Mr. Berry drafted the SIPGs, being operating manuals for the investment managers, initially being just himself, to lay out boundaries as to how the money could be invested, including the kind of securities, the minimum credit ratings and the maximum maturity length. One element of the policy was to minimize or eliminate payment of withholding tax.

There was also a constraint in some of the SIPGs entered prior to 2000, that read: Constraints implicit in the FAPI rules pertaining to the Income Tax Act of Canada which may prescribe investments and obligations, direct or otherwise, of Canadian persons. [ 37 ] Mr. Berry attempted to explain this constraint as follows: Well, to be honest with you, I didn’t actually know really what FAPI was back in those days, and I certainly wouldn’t count myself as an expert today. And I am not sure what I was trying to do here in terms of FAPI, because FAPI didn’t have any direct bearing on the bank.

We weren’t investing in Canadian securities anyway. We weren’t permitted to. …I am not sure where this came from or why it was stuck in. But, in any event, I submit humbly, Your Honour, that was probably put there to sound good or to try and sound intelligent and impress people. [ 38 ] As will be seen when discussing the business activity during the years in question in more detail, GBL managed its own money in a very similar manner to how GBL managed others’ assets in accordance with the SIPGs. [ 39 ] Where did GBL get its funds in the early years?

There were subscriptions from GOBV for preferred shares in 1993 totalling $67 million. In 1994, GOBV subscribed for additional preferred shares throughout the year totalling close to $48 million. In 1995, GOBV subscribed for another $10 million worth of preferred shares. In 1997, GBL redeemed $94 million worth of the preferred shares, while in the same year a further $111 million worth of preferred shares were issued. Also, in 1997, GBL received $133 million in cash for an assignment of promissory notes from GOBV, representing interest-free loans from Canada. Mr.

Holland explained this was to take the cash that was in GOBV and contribute it to GBL. He also explained it was unlikely the funds would have been repaid to Canada as it would have triggered a foreign exchange gain and that money was simply not needed in Canada. [ 40 ] In 1998, GBL realized over $8 million of gain on its disposition of GRCL.

Loblaw Financial subscribed for 420,000 common shares in 1998 for $42 million, in answer to a concern from the Central Bank of Barbados regarding GBL’s capital adequacy issue. [ 41 ] In 2000 there was a significant injection (approximately $292 million) of capital from Loblaw Financial as part of the wrapping-up of the US operations run through National TEA, which requires further explanation. [ 42 ] Loblaw Financial held all the common shares of NHI, while GOBV held the preferred shares.

NHI was the parent of National TEA which operated the grocery business in the US, the business which was struggling in the late 1980’s and early 1990’s, as indicated earlier. Indeed, a purchaser was ultimately found and an agreement to sell substantially all of the assets of National TEA was finalized in 1995, resulting in a cash receipt by National TEA of approximately $440 million.

It was determined at a GOBV board meeting in late 1994 that rather than invest the money in GBL preferred shares or repay the funds by way of repayment of capital to Loblaw Financial (at that point still LIHI), the funds would be held in NHI " “in anticipation of alternative US investment opportunities.” " In January 1995, NHI repaid $111 million that it owed to GOBV. Wilmington was hired to manage the proceeds to invest on a short-term basis. The resulting income was FAPI.

Also in 1995, NHI contributed $207 million to Glendel, its wholly-owned subsidiary, which invested on a short-term basis, also triggering FAPI. Glendel was also subject to US tax. Mr. Holland indicated Glendel’s Canadian tax was only 10% of the US tax. [ 43 ] In June 2000, Glendel was dissolved into NHI and a few days later, GBL issued 291,786 common shares to Loblaw Financial in exchange for all the issued and outstanding shares of NHI, which was subsequently dissolved, resulting in GBL receiving approximately $291 million cash. Mr.

Holland, who structured the transaction, admitted Canadian tax was a factor in undertaking the transaction but denied that FAPI was the primary driver, rather " “the primary driver was … to put cash that was in the US into GBL for use in its business.” " He also indicated that structuring in this manner avoided US withholding tax on liquidating into GBL.

Loblaw had sought an advance ruling regarding these transactions, receiving a letter dated December 31, 1999 from the Canada Revenue Agency (the " “CRA” " ) permitting the rollover treatment sought and confirming that GAAR was not applicable, though also stipulating that nothing in the letter " “should be construed as implying Revenue Canada has reviewed, accepted or otherwise agreed to the nature of any business.” " [ 44 ] Also in 2000, Loblaw Financial converted its 142,099 preferred shares in GBL, which previously it acquired on the wind up of GOBV in early 1999, into common shares.

In effect, the preferred shares were paid off by GBL and GBL received $142 million worth of

NHI’s assets. Together these amounts ($291 million and $142 million) equate closely to the $440 million sale proceeds of the National TEA sale. [ 45 ] To round out the picture of revenues received in the years prior to the years in issue, GBL was making money through its short-term investments and through its swap program. In 1993, just before being licensed under OSBA , GBL was investing in short term debt securities and entering both the cross currency swaps and interest rate swaps.

In 1994, for example, revenues from interest swaps was $18 million compared to $1.5 million in 1993 and revenues from cross-currency swaps went from a few hundred thousand dollars in 1993 to over $13 million in 1994, with corresponding increases in associated expenses. Mr. Welch described this increase in the early years as requiring much more work. [ 46 ] By 2001, GBL was earning about $49 million on interest swaps, $24 million on cross-currency swaps and $31 million on short-term investments and security deposits. C. What was the nature of GBL’s activities in 2001 to 2010

(1) Receipt of funds [ 47 ] For the years in issue, GBL grew its asset base primarily through an increase in its retained earnings which went from approximately $100 million at the end of the 2000 taxation to approximately $700 million at the end of the 2010 taxation year.

The share capital at the end of 2000 was $476 million and at the end of 2010 was $443 million, though there had been some capital distributions as well as injections to capital over that time period. [ 48 ] As indicated on the chart on Appendix B, the business of GBL can be broken into a few components: short term debt securities, assets under management, intercorporate loans, I/O Loans, swaps and equity forwards.

While there was considerable evidence in relation to each of these business activities, some of which I have already described for the 1992-2000 period, I intend to condense it to the essential elements for the years in issue.

(2) Short term debt securities and asset management [ 49 ] The policy of obtaining US short term debt securities with short maturity dates continued from the 1990s into the years in issue. Only US securities were acquired, as Mr. Berry described the US market as the deepest, most liquid and most efficient. Also, GBL identified five types of debt securities in which it remained invested (see paragraph 32). [ 50 ] GBL invested in short term debt securities on its own account and also had investment management agreements with companies whose assets it managed.

The agreements stipulated how the investment manager may effect transactions, the standard of care imposed on the investment manager, when the agreement will commence and when it will terminate. The agreement contained three schedules: the SIPG, the fee

schedule and the custodial option. [ 51 ] As indicated earlier, Mr. Berry developed the SIPGs that specified the kind of securities that could be held, the minimum credit ratings, maximum maturity lengths and constraints. Every party with assets under management was related to GBL, except Waterman Insurance (see Appendix A for a list of these related companies). Mr. Holland testified that five of these companies, Weston Acquisitions Inc., Weston Foods Inc., Weston Foods US, Inc., JFS Inc. and GRCL, carried on active businesses and did not earn FAPI on assets managed by GBL. [ 52 ] The fee

schedule set out the fees. Waterman Insurance paid a fee of 30 to 36 basis points, while the related companies paid 17 basis points. Some related companies had their fee paid by another related company. The fees earned by GBL would be a few hundred thousand dollars a year in the early 2000s, peaking at approximately $1.7 million in 2009. Assets under management ranged from approximately $175 million in 2001 to $1.2 billion in 2008.

This compares to GBL’s portfolio growth of $708 million in 2000 to $977 million in 2010. [ 53 ] The custodial option indicated the account’s assets would be held at CitiBank unless another custodian was specified. [ 54 ] There was a detailed process for the purchasing and settling of new short term debt securities, regardless of whether the securities were for GBL’s own account or for the companies with assets under management.

Sometimes GBL bought a security and split it amongst different entities’ portfolios. [ 55 ] With respect to the short term debt securities, the investment team would discuss their research and decide what to buy, ensuring it would comply with the SIPG. The investment analyst or manager would then contact brokers to determine availability: normally there would be no negotiation as a broker (for example, Solomon or Merryl Lynch) would make it a take it or leave it offer. If the product sought was not available at the price sought, Mr. Berry indicated they might have to modify the plan.

Once the security was bought, the broker would send a confirmation which would trigger GBL’s investment team to write a " “triplicate ticket.” " What followed was a three part settlement process before GBL paid for the security. This became the back office’s responsibility. One employee input the transaction into GBL’s CitiBank settlement platform, a second employee verified such input against the ticket and a third employee authorized the trade. Once GBL released the funds, the broker delivered the security to GBL’s CitiBank custody account.

The back office also then entered the purchase into GBL’s accounting ledger and swap investment management system ( " “SIMS” " ). SIMS displayed each SIPG ensuring that only authorized short term debt securities were actually purchased.

(3) Distributor or independent operator loans – I/O Loans [ 56 ] In 2001, GWL purchased Best Foods Baking Co. ( " “Best Foods” " ) from Unilever, who, along with Bank of America and SunTrust held and financed the " I/O L " oans, being loans to distributors. The distributors were individual drivers who had purchased the rights to distribute Best Foods baked products along specified routes in the United States. GWL only wanted some of the I/O loans, allowing GBL

to acquire approximately 1,875 I/O loans in 2001 for approximately $86 million. GBL expected a return of 8.5%, a greater return than it was making on its other assets. [ 57 ] GBL acquired software which amortized the loans and calculated expected payments and also set up a 1-800 number so the distributors could get in touch. [ 58 ] GBL hired two people, Francine Taylor and Michelle Medford to manage the loans, which required collecting payments, paying expenses, reviewing documents and treasury rates (as the loans were pegged to treasury rates) and completing the documents and invoices.

The I/O loan portfolio was valued every 28 days for reporting to LCL. [ 59 ] GBL also provided new financing, approximately 700 to 800 new loans a year, the average loan being about $40,000 to $50,000. GBL would not finance distributors with poor credit rating, as checked through Equifax. [ 60 ] GBL received payments on the loans via George Weston Bakeries Inc., who deducted the amount owed to GBL from the distributors’ paycheques and then made a monthly wire transfer to GBL. George Weston Bakeries Inc. also guaranteed the loan portfolio for a total value equal to 35% of the loans.

GBL earned approximately $7 million to $8 million a year from the I/O loans. [ 61 ] On March 31, 2005, GBL sold the I/O loan portfolio to Glendock Finance Company, a related Irish company for $106 million, as the US-Barbados tax withholding regime had changed, which made owning the loans less profitable. GBL returned $100 million to Loblaw Financial that year. [ 62 ] GBL continued to manage the I/O loan portfolio as Glendock was not set up to do so. [ 63 ] In 2009, Grupo Bimbo purchased the US bakery operations and the I/O loans from George Weston Bakeries Inc. and took over administering the portfolio.

Shortly afterwards, Ms. Taylor and Ms. Medford were laid off.

(4) Intercompany loans [ 64 ] GBL made two substantial short term intercompany loans in the relevant years. In 2002, it loaned $325 million to Weston Acquisition and was repaid 38 days later, earning $3 million in interest income. Over several days in February 2008, GBL loaned an aggregate of $300 million to LCL: $200 million was pursuant to its committed credit agreement and $100 million was pursuant to its uncommitted credit agreement. These agreements had been entered into in October 2007. Again, GBL was repaid in short order in March 2008 and earned $1.2 million in interest income.

(5) Equity forwards [ 65 ] Equity forward contracts were a series of contracts that GBL entered with CitiBank where GBL paid CitiBank a three month B.A. rate plus a credit spread, and in return GBL received the rate of return on an underlying stock. That rate equaled the difference between stock market price on the day of entering the contract and terminating the contract, plus any dividends. The difference in market price was paid to GBL when the contract was terminated.

The dividends were credited every three months against GBL’s payment to CitiBank. [ 66 ] GBL entered six equity forward contracts with LCL’s shares constituting the underlying stock. The contracts were for 10 years. From March 2003 until March 2009, GBL’s equity forward possession represented a notional amount of 4,793,600 shares of LCL. [ 67 ] Manny DiFilippo was GBL’s President when it entered into the first couple of equity forward contracts involving LCL shares. Previously, Mr. DiFilippo had worked for LCL and had helped implement its stock option program.

He testified that it was his idea for GBL to enter into the LCL equity forward contracts and that GBL was not instructed to do so. He further testified that the LCL employee stock options may have been a consideration in entering these contracts, but that the equity forwards were not a hedge against LCL’s employee stock options. Mr. Berry, however, testified that Mr. DiFilippo presented the equity forwards to GBL’s board as a way to offset the cost of the LCL stock option program. [ 68 ] Mr.

Galen Weston testified that though he was Executive Chairman of LCL in 2006, he did not have first-hand knowledge of the GBL derivative policy nor GBL’s equity forwards, as they were implemented before he began this role. He did confirm that LCL’s annual report indicated that GBL’s equity forwards " “are used to manage exposure to fluctuations in the company’s stock based compensation costs.” " He further clarified that he believed LCL’s derivative policy applied to its operating business but not to GBL. [ 69 ] Mr.

Weston was also questioned about statements he made in May 2011 regarding GBL’s equity forwards being implemented " “as a way of managing the cost of LCL’s stock options.” " He confirmed that this reflected his understanding at that time but reiterated that he had no first-hand knowledge of why the equity forwards were put in place. He also indicated that GBL’s equity forwards were an ineffective way of managing the cost of the LCL stock option program. [ 70 ] GBL calculated the accumulated dividends and stock price return every 28 days on the equity forward contracts and reported that to LCL.

The share price of LCL’s shares peaked in 2005 before declining. This was discussed at several of the GBL board meetings but it was not until March 2009 that GBL began to terminate the equity forward contracts. Some were terminated and others sold to Wittington Investments Limited, leading to a loss of some $30 million. Indeed, Mr. Welch reported to a board meeting of GBL on November 11, 2009, that on a cumulative basis the bank has recorded a $71 million Canadian unrealized loss and a $37 million Canadian realized loss on the equity forward position.

(6) Cross-currency and interest swaps [ 71 ] I have already briefly described GBL’s modus operandi with respect to swaps (see paragraphs 33-35), which continued throughout the years in issue. Interest rate swaps in particular were profitable in the 2000s as GBL received a much higher fixed rate than the

floating rate. Also, the appreciation of the Canadian dollar in 2000s increased the profitability of the cross-currency swaps. [ 72 ] Mr. Berry testified that although no one from LCL’s head office was involved or had to authorize GBL’s swaps, GBL was subject to certain provisions of the LCL’s derivative policy. [ 73 ] Once the investment team decided on a swap, they would contact two or three counterparties to determine a price. Then, after an agreement was reached, the accounting team would enter it into SIMS. Mr.

Berry reviewed the outstanding swaps weekly, reviewing mark to market price as well as the credit rating for the counterparty. Every 28 days, the accounting team recorded and reported to LCL the accrued interest and cash received. Every three months, they also calculated for each swap the applicable US LIBOR and Canadian B.A. They reported annually on all outstanding swaps. [ 74 ] An ISDA agreement and accompanying credit annex were mandatory before GBL entered a swap with a counterparty. The credit annex set out the deal between the parties, including the collateral security held by each party.

GBL would provide some of its short term debt securities as collateral. Many of the GBL ISDA agreements would terminate if GBL was no longer directly or indirectly owned or affiliated with LCL. [ 75 ] GBL netted approximately $125 million to $130 million over the years in issue from the cross-currency swaps and a similar amount from the interest rate swaps.

(7) Reporting of income from activities [ 76 ] Mr. Holland went through several T1134 Controlled Foreign Affiliate Information Returns filed by Loblaw Financial for both GBL and GOBV. He confirmed the returns in connection with GBL reported its accounting net income before tax and that such income was not FAPI. The reasons checked for income not being FAPI was due to the regulated financial institutions exemption (95(1) of the Act ) and also due to the application of paragraph 95(2) (

l) of the Act . The T1134s income reported is tracked to GBL’s statements of earnings in the relevant tax years. [ 77 ] Mr. Holland also confirmed that the T1134s filed by Loblaw Financial in connection with GOBV reported the interest and dividend income as FAPI. [ 78 ] With respect to the lack of reporting of any FAPI arising from the fees from managing other entities’ investments pursuant to paragraph 95(2) (

b) of the Act , Mr. Holland testified that was an oversight. He indicated, however, that only applied to affiliates that did not carry on active business, which would not include GRCL, JFS Inc., Weston Foods, Inc., Weston Foods US Inc. and Weston Acquisition Inc. He indicated that other than Canadian-sourced income, GRCL’s income was never assessed as FAPI. With respect to JFS Inc., he stated it was established in 2010 as the US retailer of Joe Fresh apparel. With respect to Weston Acquisition Inc. and its subsidiaries, he confirmed it carried on a baking business.

With respect to Weston Foods, Inc., he indicated it and its subsidiaries carried on a fresh and frozen baked goods business. Finally, with respect to Weston Foods US Inc. and its subsidiaries, he testified they carried on a food processing businesses. D. How Did GBL Operate – 2001 – 2010

(1) Introduction/Office structure [ 79 ] An element of this case is the determination of the number of full-time employees of GBL during the years in question. I have attached as Appendix C copies of organization charts for some of the years in issue setting out the employees and their titles to give a flavour of the organization. [ 80 ] These charts make clear there are basically two arms or departments: front office or investment department and back office or accounting department. Mr.

Berry described a very clear separation between the two departments. [ 81 ] GBL’s physical premises in Barbados were shared with GRCL for most of the period in issue. Barbara Cummins was hired by GRCL when its operations were brought in-house in or around 2003. Ms. Cummins did the day to day work for GRCL, as well as for PVO Assurance, WFRG and Glenhuron Holdings (the latter two, starting in 2008), including preparing financial statements, which were reviewed by Mr. Welch. Ms.

Cummins occasionally assisted GBL as one of the individuals responsible to verify trades, though she was never paid by GBL nor listed as an employee of GBL.

(2) Employees and responsibilities [ 82 ] The following summarizes the employees’ titles and terms of employment with GBL during the years in issue: Name Position Term Manny DiFilippo Vice President/President 1998 – February/2002 Donna Rogers Executive Assistant/Treasury Assistant 1994 – 2013 Wendel Mason Investment Manager/Controller 1994 – 2013 Michael Berry CIO/President 1997 – 2013 Carl Drayton Accounting Officer/IO Loan Manager 1997- May 2005 Brenda Blackman Accounting Treasury Clerk/Office Manager 1996 – after 2010

Julia Robinson Accounting Manager 1999 – June 2005 Antoinette Patel Treasury Manager 1994 – after 2010 Kirk Odle Assistant Portfolio Manager 1999 – February 28, 2001 Trevor Welch Vice President Finance and Administration August 1, 2001 – after 2010 Francine Taylor Loans Administration February 1, 2002 – October 2009 Michelle Medford Loans Accountant/IT Supervisor January 1, 2002 – March 2010 Beverly Holder Reception/General Administration Temporary – November 27, 2001; permanent February 1, 2002 – 2013 Amanda McKenzie Investment Manager March 1, 2003 – 2007 Shane Whittaker Financial Analyst/IT September 1, 2005 – 2013 Jason Bayley Investment Analyst 2007 – 2012 I will address each employee in greater detail.

Manny DiFilippo [ 83 ] Mr. DiFilippo, a chartered accountant, joined LCL in 1992 in internal audit and in 1995 became the Vice President, Corporate Development for LCL and GWL. He was asked by Don Reid to join GBL in mid-1998 due to concerns with respect to timeliness, completeness and accuracy of GBL’s financial information. Before the end of the year, Mr. DiFilippo replaced Mr. Walker as President of GBL, where he remained until December 31, 2001. [ 84 ] Mr. DiFilippo described his job as full-time (eight to nine hours per day, 5 days a week throughout the year).

He described three responsibilities: 1) Running the office, ensuring policies and procedures were followed. 2) Operations; contact with the CBB and overseeing the investment desk including entering the forward equity contracts. 3) Financial reporting and communicating with LCL on an as needed basis. [ 85 ] Mr. DiFilippo, as President, reported to GBL’s board. He was President when GBL acquired NHI and also when GBL acquired the I/O loan portfolio. [ 86 ] Although Mr.

DiFilippo testified that he had not worked for any other related entity, he did acknowledge that he was President and a director of GRCL while in Barbados. He testified his responsibility was limited to preparing for the quarterly board meetings. He was not paid by GRCL. He was also an officer and director of PVO Assurance. Michael Berry [ 87 ] Mr. Berry succeeded Mr. DiFilippo as President of GBL in early 2002, having acted as Chief Investment Officer to that point since joining GBL in 1997. As President, Mr. Berry reported to the GBL board, but also reported to an LCL " “line officer,” " initially Mr.

Mavrinac, then Ms. Lacchin and finally Mr. Holland. He testified it was only with Mr. Holland that he had regular contact of two to three times a week. [ 88 ] Mr. Berry, for the years in issue, headed up the investment team (treasury manager, investment analysts and himself), with whom he met each morning to discuss securities research, what to buy and to review third party assets under management. Quarterly reports were prepared for each entity with assets under management, which Mr. Berry helped write and edit. [ 89 ] Mr. Berry worked with Ms.

Patel on the swaps, determining what to buy and what counterparties to contact. He reviewed the swaps weekly. As President, he also had the head of the back office, Mr. Welch, report to him. [ 90 ] As well as President of GBL, Mr. Berry was President of GGMI until it dissolved in 2003. GGMI was set up to attract third party clients but only obtained the one client, Waterman Insurance Inc. Mr. Berry was also President of GRCL as of January 1, 2002, spending less than a day per quarter in this supervisory role.

Later he became President of PVO Assurance, WFRG Investment and Glenhuron Holdings, claiming he spent very little time in these companies, as his only responsibility was running annual board meetings. None of these companies paid Mr. Berry any employment income, though GBL paid him a bonus of 20% of net profit from work for Waterman, as it was attracted by GGMI, which Mr. Berry described simply as a marketing tool. WFRG paid Mr. Berry a few thousand dollar director’s fee. Mr. Berry was a director of these related companies. [ 91 ] Finally, Mr.

Berry testified that he created a set of rules, " “existing customs,” " he called it, establishing standard working hours for all employees, being 8:00 a.m. to 4:00 p.m. with some flex hours allowed. Overtime was necessary, especially in the accounting department due to the mandatory reporting requirements (28 day financial cycle to report to LCL). Wendel Mason [ 92 ] Mr. Mason switched from back office (accounting department) to front office (investment department) in 2002 and then back to the back office in June 2005.

He described his work on the investment side as requiring full eight hour days, while as Controller, on the accounting side, he would put in more hours due to the requirements of monthly and quarterly reports.

[ 93 ] On the investment side, Mr. Mason would review portfolios daily, meeting with the investment team to determine what would be maturing and planning what to purchase. He suggested his objective with respect to the short term debt securities was " “to make as much money as possible for Mr. Weston.” " He would check with Ms. Patel to see if more securities were needed in the collateral accounts. He reported to Mr. Berry. [ 94 ] As Controller, Mr. Mason was the person primarily responsible for financial statements, consequently having to ensure the accurate recording in GBL’s ledgers.

He was also responsible for settling swaps and verifying trade tickets. In addition, he prepared the CCB quarterly reports. He reported to Trevor Welch. Trevor Welch [ 95 ] Mr. Welch, a CGA, worked for GBL in the 1990s but left for a brief period of time, returning in August 2001 to serve as Vice President Finance and Administration. He served as a director of GGMI in 2003. He was also a commissioner of the Barbados Fair Trading Commission from 2005 to 2012 and a Director of Glenhuron Holdings beginning in 2008. He helped prepare the latter’s financial statements as well as for GRCL and PVO. [ 96 ] When Mr.

Welch rejoined GBL in 2001, there were " “lots of things going on” " as he put it. The I/O loan portfolio had just been acquired. The swaps were taking off and short term securities were maturing. [ 97 ] Mr. Welch had overall responsibility for compliance, including overseeing internal controls, internal and external audits, statutory reporting, anti-laundering aspects of GBL, as well as having responsibility for human resources.

He handled the reporting requirements, including the cyclical 28 day reports LCL, the basic financial reports to companies with assets under management and reviewing statutory filings with the CBB. [ 98 ] Mr. Welch met quarterly by phone with the LCL finance group for 15 to 20 minutes. He acknowledged having interaction with the LCL IT group as they were on the same platform, but testified he had no interaction with the LCL International Tax Group. He would report to the board on GBL’s financial results. [ 99 ] Mr.

Welch explained that his department, the accounting department, had responsibility for updating SIMS and also ensuring that, based on SIPGs, traders could not buy anything not approved by the board. It was Mr. Welch who prepared a

schedule or roster for the three-step process for inputting information with respect to the trades, verifying them and finally authorizing them. Donna Rogers [ 100 ] Ms. Rogers was one of the early employees, acting as executive assistant to the president. She later also served as assistant to the treasury manager and back up for swap transactions, sitting in on the morning front office meetings with the investment team. Part of her duties on the investment desk would be to receive confirmations from brokers that would be attached to the trade tickets prepared by an investment manager.

She would also enter information into SIMS. She put together packages for the board meetings and annual general meetings for GBL and some related companies (eg. GRCL, PVO, WFRG) as well as maintaining their minute books. It was also her responsibility to maintain files, for any entity GBL had a relationship with, for example, those companies with assets under management. Jason Bayley [ 101 ] Mr. Bayley was hired by Mr. Berry in September 2007 as an investment analyst.

He testified that he worked longer than standard hours, citing as an example in 2009 GBL diversified to two custodians, which created a large volume of securities to be moved over. He worked most closely with the investment team of Mr. Berry, Ms. Patel and Ms. Rogers, handling primarily the short term debt securities, including research (60% to 70% of his time) on investments and executing trades, approximately three a week. As well, he was responsible for doing the quarterly reporting for entities whose assets were managed by GBL. [ 102 ] Mr.

Bayley explained he was in constant contact with brokers to assist on deciding on the appropriate investment. He confirmed all investments had to be in compliance with the SIPGs. [ 103 ] At the daily morning meetings of the investment team, Mr. Bayley would advise what was happening in the markets and give an update of where the investments stood. With respect to trades, Mr. Bayley confirmed a number of things.

First, that there were no separate purchases for GBL’s own account and those with assets under management: there would be a block trade and then it would be split on a pro rata basis amongst those that had cash or maturities on that day. Second, there would be a trade ticket for each trade for each company. Third, once there was confirmation from the broker and trade tickets issued, the accounting department inputted the trade, followed by a different person verifying it and then an employee who finally authorized it. He testified that he also did not understand the FAPI constraint in the SIPGs. [ 104 ] Mr.

Bayley was involved in preparing the quarterly reports for GBL and others such as GRCL, comparing their performance to certain benchmarks. Carl Drayton [ 105 ] Mr. Drayton was an accounting officer and network supervisor (IT) and in 2002 became the manager of the I/O Loans Group, which entailed inputting of the loans. One of his responsibilities was to verify that what got entered into the CitiBank’s settlement system was correct against information from the broker. Mr. Drayton reported to Mr. Mason. He provided some IT support to GRCL. Brenda Blackman [ 106 ] Ms.

Blackman started in the 1990s with GBL as a receptionist, but moved into the accounting department and later served as office manager looking after the general upkeep and ordering the supplies. Mr. DiFilippo described the amount of traffic coming through the office as minimal so the receptionist duties were minor. She was also on the

schedule for the three-step process of inputting into the

CitiBank system, verification and authorization of trades. [ 107 ] Ms. Blackman also prepared financial statements for Glenhuron Holdings, which Mr. Welch described as a simple task given that it only held shares in a couple of companies. Julia Robinson [ 108 ] Ms. Robinson worked in the accounting department until June 30, 2005. One of her duties was, after a ticket was received from the investment department, to write up the voucher where cash will be debited and investments credited. She was also on the roster of the three-step settlement process, either inputting or verifying the input was correct.

She assisted in the financial statement reports to LCL and also did trial balances for affiliated companies to whom GBL provided management services, for example PVO, WFRG and GRCL. Antoinette Patel [ 109 ] Ms. Patel was one of the early employees to have joined GBL commencing in 1994 as assistant treasurer, moving to treasury manager in 1998 in the investment department. She had primary responsibility for the swaps, meeting with Mr. Berry to develop a plan, contacting counterparties and then proceeding with the deal by making the bank transfers. Indeed, it was her job to monitor balances in bank accounts.

On the banking side she assisted with wire transfers and routine banking matters for WFRG though such were limited to just four incoming and four outgoing payments in a year. [ 110 ] Ms. Patel would prepare information about the swaps for presentation at board meetings. She was also cross-trained to do purchase and sale of short term debt securities. She was a director of GGMI in 2003. Kirk Odle [ 111 ] Mr. Odle was with GBL briefly as assistant portfolio manager until February 28, 2001, mainly assisting Mr. Berry, who evidently did not find him of much assistance. Mr.

Mason was moved from accounting department to investment department to replace Mr. Odle. Francine Taylor [ 112 ] Ms. Taylor was hired as an I/O Loans Administrator on February 1, 2002, and left GBL in October of 2009 when it ceased any involvement with the I/O loan portfolio. She would review the loan documents, verifying them against a checklist, before passing them on to Ms. Medford or Mr. Drayton. She was on the

schedule for CitiDirect that was the system of settling short term debt securities into CitiBank’s settlement platform. Michelle Medford [ 113 ] Ms. Medford was hired in January 2002 as the I/O Loan Accountant, and also later assumed some IT responsibilities as backup network administrator. She too was on the roster for CitiBank (the investment settlements) set by Mr. Welch for the inputting, verifying and authorizing of trades. Beverly Holder [ 114 ] Ms. Holder started in a temporary position in November 2001, moving to full-time on February 1, 2002.

She held various positions, including reception, filing and general administrative duties. With respect to reception, the physical office for GBL was in the same office as GRCL, GGMI (until 2003), PVO Assurance and later WFRG and Glenhuron Holdings, who all rented from GBL. Anyone visiting the latter companies would pass through the GBL reception, though the other companies had their own phone lines. Amanda McKenzie [ 115 ] Ms. McKenzie worked in the investment department of GBL from March 1, 2003 to sometime in 2007. She replaced Mr. Mason when he returned to the accounting department. She backed up Ms.

Patel on the swaps when Ms. Patel was away. Shane Whittaker [ 116 ] Mr. Whittaker was employed by GBL as a financial analyst in the accounting department, starting in September 2005. He was involved in the preparation of financial statements for GBL and some of the related companies (eg. GRCL). He also handled bank reconciliations and made entries in the general ledger, for example if a security moved from non-collateral to collateral. He also assisted Mr. Drayton with respect to IT. He too was on the roster for entering and verifying trades.

(3) Board meetings [ 117 ] Officers of LCL would attend GBL board meetings mainly as observers, though if there was a specific issue such as a standby credit facility that would directly affect LCL, they would have some input. Otherwise, according to Mr. Welch, they had no impact on board decisions. As Mr. Mavrinac explained, he would attend representing the shareholder but only asked questions as appropriate. Mr.

Holland went further in identifying unrelated world events (the bankruptcy of Barings in the mid-1990s and the fraudulent assets held by Parmalat in 2003) causing LCL to have a policy to attend Board meetings of its affiliates. E. Central Bank of Barbados ( " “CBB”) " Involvement [ 118 ] Given the Respondent’s concession in argument that GBL was regulated, it is unnecessary to provide exhaustive evidentiary detail of the CBB involvement, but for completeness’ sake, I highlight the following.

[ 119 ] GBL, as a licensee under OSBA and later IFSA , was required to pay annual fees to the " CBB " . It did so for the years in issue. [ 120 ] Mr. Berry testified that by April 30 of each year, GBL was required to provide the CBB with audited and signed financial statements. Also, every quarter a report was given to the CBB to address the capital adequacy of GBL. Examples of the quarterly reports were provided (the fourth quarter for each of the years 2000 to 2010).

These reports covered areas such as large exposures, number of employees, bad debts and capital adequacy, and listed all securities held by the counterparties of GBL. [ 121 ] According to Mr. Berry, there was a CBB inspection in 2002 and periodic interviews between CBB officers and GBL officers. With respect to the inspection, the CBB wrote to GBL on November 12, 2002, as follows: We enclose eight (8) copies of the Examination Report of Glenhuron Bank Limited at June 15, 2002.

The Examination covered the period January – June15, 2002 and was performed following the enactment of the International Financial Services Act 2002 (IFSA). In accordance with Section 53(1) of IFSA, the Central Bank conducted an onsite inspection of the licensee to determine the safety and soundness of the licensee and to assess compliance with IFSA. The Central Bank had initially submitted a draft Examination Report dated October 30, 2002 for discussion purposes to the management of the licensee.

The licensee responded promptly and based on a review of the response document and discussions with management on November 7, 2002, the licensee has addressed our concerns and accepted our recommendations. The Central Bank has noted the effort taken in collecting delinquent loans. This will be verified in a future examination. [ 122 ] The CBB issued regular guidance and regulatory notices and would occasionally ask for copies of GBL policies and procedures. [ 123 ] The directors of GBL met once a year with representatives of CBB, usually in November.

A common topic was the financial health of LCL, as well as the operations of GBL, and how world events might impact on it. In 2006 or 2007, according to Mr. Mavrinac, Loblaw had had bad results and the CBB asked that a representative of GBL’s parent attend the annual meeting. Mr. Mavrinac attended. [ 124 ] As well as the annual external audit, the CBB required an internal audit, which Mr.

Berry described as " “a more detailed discovery of the proper use of the policies and the controls within the bank.” " GBL relied on an internal control group of GWL to send a team from Toronto once a year for such purpose. [ 125 ] Mr.

Berry went through several communications between GBL and CBB, some of which are as follows: 1) In October 1998, GBL advised the CBB of a capital deficiency to which the CBB required an auditor’s confirmation of receipt of funds to restore the capital base. 2) In July 2004, GBL advised the CBB of the repayment of $133 million loan to Loblaw Financial (then LIHI) and assuring the CBB the share capital was still strong. 3) In December 2004, GBL wrote to the CBB requesting that the CBB " “confirm the intention of GBL to reduce its capital by an amount of $100 million.” " The CBB granted " “approval” " by letter of February 8, 2005. 4) In October 2007, GBL wrote to the CBB advising that it had entered a US $200 million standby credit with Loblaw Companies. 5) On June 21, 2002, the CBB wrote to GBL as follows: As you are aware, the Offshore Banking Act, 1980 has been repealed and replaced by the International Services Act,

Section 53 of this Act provides for an examination to be made by the Central Bank of Barbados of the affairs of a licensee, to inter alia assess compliance with the Act and to determine whether the licensee is in sound financial condition. In this regard, a team from the International Financial Services Inspection Unit (IFSIU) will be visiting your office on June 4, 2002, to commence such an examination. During the initial meeting with you, we will communicate our information requirements. It is also our desire to meet with your External Auditors at a mutually agreeable date and time.

We look forward to meeting with you. 6) On August 3, 2007, the CBB wrote to GBL as follows: The Central Bank of Barbados (Bank) in furtherance of its responsibility for the regulation and supervision of licensees under the Financial Institutions Act 1996-16 (FIA) and the International Financial Services Act 2002-5 (IFSA), is issuing this letter to provide guidance and share with the industry the ratios used in the offsite surveillance of institutions. During the period between onsite inspections, the Bank Supervision Department conducts intensive reviews of financial and prudential data submitted by licensees.

As part of this on-going monitoring, the prudential quarterly returns and monthly schedules submitted to the department are analysed to assess the stability of licensees. The Bank calculates prudential ratios and supplemental ratios. While the prudential ratios are generally applicable to all licensees, there is likely to be significant variations in the supplemental ratios because of differences in organisational structure and business lines. However these ratios can facilitate analysis on a bank-by-bank basis against historical trends and comparisons with similar banks (peer groups). [ 126 ] According to Mr.

Welch, the CBB would also make ad hoc requests. His view was that the CBB wanted a feel for what impact offshore companies were having on the local economy.

F. Waivers [ 127 ] The Canada Revenue Agency (the " “CRA” " ) commenced the audit of Loblaw Financial’s 2001 taxation year in early 2005. Mr. Holland explained that Loblaw had a good working relationship with the CRA and that because the CRA had not completed their work before the time expired for assessing, Loblaw provided a waiver. The waiver for the 2001 year was prepared by the CRA and signed by Mr. Holland on July 14, 2006.

The waiver stated: The normal reassessment period referred to in subsection 152(4) of the Income Tax Act , within which the Minister may reassess or make additional assessments or assess tax, interest or penalties under the Act is hereby waived for the taxation year indicated above, in respect of: 1. Subsection 91(1) of the Income Tax Act – inclusion of foreign accrual property income of the controlled foreign affiliate (Glenhuron Bank Limited). 2. Subsection 91(4) of the Income Tax Act – deduction in respect of foreign taxes paid on the amounts included under subsection 91(1) of the Act . [ 128 ] Mr.

Holland’s understanding was that the audit was a technical audit concerning FAPI. He did not believe the audit or the waiver related to an application of the GAAR. [ 129 ] On August 2, 2006, the CRA wrote to Loblaw Financial, attention: Mr. Holland, outlining CRA’s preliminary conclusion that GBL carried on an investment business and requesting certain information. No reference was made to GAAR in this request. Mr. Holland was of the view that the request for information was in connection with the technical audit with respect to FAPI.

From that point on, and into 2009, there were a number of communications between Mr. Holland and the CRA regarding the collection of additional information from Loblaw. [ 130 ] On July 5, 2007, Mr. Holland signed a waiver of Loblaw Financial’s 2002 taxation year, again the waiver having been prepared by the CRA. Two items were specified in the waiver: 1. Inclusion of FAPI of Glenhuron Bank Limited under subsection 91(1) of the Income Tax Act . 2. Deduction in respect of foreign taxes paid on FAPI of Glenhuron Bank Limited under subsection 91(4) of the Income Tax Act . [ 131 ] Mr.

Holland confirmed it was his understanding that the audit and the waiver related only to FAPI, with no mention or suggestion from the CRA that GAAR was at issue. [ 132 ] On May 13, 2008, the CRA wrote to Loblaw, attention: Mr. Holland, with a comprehensive request for information from LCL, Loblaw Financial, GWL and GBL (relating to both financial derivative transactions and other activities). The years referred to in this request were 2001 to 2005. On May 15, 2008, the CRA indicated more time would be given to meet these requests if " “acceptable waivers” " were provided. The CRA again provided waivers.

On June 4, 2008, Mr. Holland signed a waiver for the 2003 taxation year that stated: 1. Inclusion of FAPI of Glenhuron Bank Limited. 2. Deduction in respect of foreign taxes paid on FAPI of Glenhuron Bank Limited. [ 133 ] A further information request was made by the CRA in June 2008 including for the minutes of GBL for the 2001 to 2005 taxation years. Likewise, into 2009, the CRA continued to follow-up on this request, including seeking information regarding the licence obtained under the IFSA . There is no reference to consideration of the application of GAAR in these correspondences.

In May 2009, the CRA sought a waiver in connection with the 2004 taxation year of Loblaw Financial. The CRA prepared a waiver which covered the same two areas as set out in the 2003 waiver. [ 134 ] On July 15, 2010, Mr. Holland signed a waiver for Loblaw Financial’s 2005 taxation year. A third item was added to this waiver: 3. Deduction taken under

section 113 in respect of dividend income received from GlenHuron Bank Limited. [ 135 ] Mr. Holland testified his understanding remained that the subject matter was FAPI, with no consideration of an assessment under GAAR. [ 136 ] On June 28, 2011, Mr. Holland received what he called a proposal letter from the CRA, the opening paragraph of which read: We have completed our review of the information you submitted in response to our letters May 13, 2008, June 19, 2008 and May 14, 2009 in respect of the activities of Glenhuron Bank Limited ( " “GBL” " ), a foreign affiliate of LFHI.

Based on our review of the information you submitted, the financial statements of GBL, the Offshore Banking Act ( " “ OSBA ” " ) and the International Financial Services Act ( " “IFSA” " ) of Barbados, it is our view that during the relevant period under review (2001 to 2006 taxation years), GBLs income is foreign accrual property income ( " “FAPI” " ). [ 137 ] Mr.

Holland expanded on his understanding of the nature of a possible assessment in that it was limited to technical issues with respect to what the term " “regulated” meant, whether " derivative transactions were adventures in the nature of trade and whether other sources of income also represent investment income. Again, no reference was made in correspondences about the application of GAAR. [ 138 ] On August 26, 2011, the CRA again requested more information from Loblaw including swap reconciliations, investment policies and information with respect to GBL employees.

On July 30, 2012, the CRA asked for GBL’s Barbados tax returns and assessments

along with any withholding tax certificates. The CRA also requested a waiver for the 2007 taxation year. [ 139 ] On August 1, 2012, the CRA wrote to Loblaw Financial, attention: Mr. Holland, as follows: The following summarizes the basis of our proposed assessment as previously outlined in our letter dated June 28, 2011: 1. GBL is not " “regulated” " within the meaning of that term in subsection 95(1) of the Income Tax Act , 2. The income from GBL’s derivative transactions is income from an adventure in the nature of trade, 3. Interest in similar returns earned by GBL is income from property, and 4.

The principal purpose of GBL’s business is to derive income from property. Based on the above, it is our view that GBL’s business does not fall under the exception to the " “investment business” " definition in subsection 95(1) of the Income Tax Act . Accordingly, GBL’s business constitutes an " “investment business” " and its income is a FAPI to LFHI. [ 140 ] The letter also advised that the case had been referred to aggressive tax planning ( " “ATP” " ). [ 141 ] Mr. Holland signed a waiver for the 2007 taxation year on August 13, 2012, which specified the three items previously mentioned.

The next day, August 14, 2012, he had a call from Ms. Lau at the CRA indicating that ATP requested an additional waiver that would include the GAAR. This is followed up with a letter the same day making the same request, attaching a waiver that specified the application of GAAR under

section 245. Mr. Holland provided the waiver, signed April 29, 2013 for the 2008 taxation year which included specific reference to GAAR. [ 142 ] The CRA conducted a site visit to Barbados in June 2013 where just Mr. Berry was provided to answer any CRA inquiries. On October 22, 2013, Loblaw counsel provided a binder t

[…]