Loblaw to ap­peal $368M tax charge over Bar­ba­dian bank

Judge re­duces amount af­ter find­ing com­pany didn’t attempt to avoid taxes

Calgary Herald - - FINANCIAL POST - ARMINA LIGAYA

TORONTO Loblaw Com­pa­nies Ltd. will record a $368-mil­lion tax charge re­lated to its former Bar­ba­dian bank­ing sub­sidiary Glen­huron Bank Ltd. af­ter a re­cent Tax Court of Canada rul­ing.

The charge of 98 cents per share will be recorded in the com­pany’s third quar­ter but the gro­cery con­glom­er­ate said Mon­day it plans to ap­peal the rul­ing that was is­sued last week.

The tax court de­ci­sion cen­tres on the Canada Rev­enue Agency ’s re­assess­ments of Glen­huron for sev­eral tax years dat­ing as far back as 2001. The fed­eral gov­ern­ment had al­leged Glen­huron did not meet the re­quire­ments to be con­sid­ered a for­eign bank un­der Cana­dian law, and there­fore ex­empt from pay­ing tax back home, and took steps to make it look like it was.

Tax Court judge Camp­bell Miller wrote in his 124-page judg­ment re­leased on Sept. 7 that, on bal­ance, the trans­ac­tions en­tered into by Loblaw re­gard­ing Glen­huron did re­sult in a tax ben­e­fit but “were en­tered pri­mar­ily for pur­poses other than to ob­tain the tax ben­e­fit and con­se­quently were not avoid­ance trans­ac­tions.”

Loblaw said it is “pleased” with the court’s find­ing that it did not take steps to avoid Cana­dian tax. “This con­firms what we have said all along: Glen­huron was es­tab­lished for le­git­i­mate busi­ness pur­poses. We are also pleased that the court’s de­ci­sion will re­sult in a re­duc­tion of the amount of taxes as­sessed,” said Loblaw pres­i­dent Sarah Davis in a state­ment Mon­day.

Depart­ment of Jus­tice lawyers had ar­gued dur­ing the trial, which be­gan in April, that Loblaw took steps to make Glen­huron look like a bank in or­der to avoid pay­ing tax. Gov­ern­ment lawyers said Glen­huron did not qual­ify be­cause, among other things, it largely in­vested the gro­cery gi­ant’s own funds and was “play­ing with its own money.”

How­ever, Miller said in his de­ci­sion that although Glen­huron was a reg­u­lated for­eign bank, it was prin­ci­pally con­duct­ing busi­ness with non-arm’s length per­sons. In turn, Miller wrote, the Bar­ba­dian sub­sidiary’s in­come was from an in­vest­ment busi­ness and should be in­cluded in Loblaw’s in­come as “for­eign ac­crual property in­come.”

Loblaw said Mon­day it was dis­ap­pointed with the court’s in­ter­pre­ta­tion of a tech­ni­cal pro­vi­sion in the leg­is­la­tion and will ap­peal.

“Though the judge was sup­port­ive of Loblaw’s po­si­tion on most points, his de­ci­sion on a tech­ni­cal tax-law in­ter­pre­ta­tion means that Loblaw’s tax obli­ga­tion for Glen­huron has been re­duced but not elim­i­nated,” Loblaw spokesman Kevin Groh wrote in an email. “We dis­agree with this as­pect of the de­ci­sion and will ap­peal.”

Af­ter de­duct­ing amounts al­ready paid, Loblaw ex­pects to make a cash pay­ment of ap­prox­i­mately $242 mil­lion from cash on hand, with­out any im­pact on its capital in­vest­ment plans, div­i­dend growth or its share buy­back pro­gram.

The Canada Rev­enue Agency would not com­ment on the de­tails of the case, cit­ing the con­fi­den­tial­ity pro­vi­sions of the In­come Tax Act. A CRA spokes­woman said the tax­payer in this case has un­til Oct. 9 to ap­peal the de­ci­sion.

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