Losing offshore tax case against Loblaw has put more than $1 billion in revenue at risk, Ottawa says

Government asks Supreme Court to weigh in on ruling it says is blow to efforts to curb offshore tax avoidance

Loblaw Cos. headquarters in Brampton, Ontario. COLE BURSTON/BLOOMBERG

The federal government wants the Supreme Court of Canada to weigh in on an appeal-court decision that it says risks more than $1 billion in revenue and that it claims would deal a blow to efforts to curb offshore tax avoidance.

Department of Justice lawyers on June 19 filed an application to appeal a tax case to the Supreme Court that involves a Barbados-based subsidiary of another subsidiary of Loblaw Companies Ltd., the grocery and pharmacy chain controlled by the billionaire Weston family.

The Supreme Court turns down most of these applications. Ottawa, though, is asking the country’s most senior judges to make an exception, arguing their input is needed to clarify rules surrounding “foreign accrual property income,” or FAPI, which can be rent, interest or other forms of passive money-making by non-Canadian companies controlled by a Canadian taxpayer.

FAPI is supposed to be lumped in with the rest of a taxpayer’s income, making the provisions an important weapon in Ottawa’s fight against tax havens. The regime “is the cornerstone of the government’s efforts to prevent the erosion of the Canadian tax base through the use of foreign affiliates in low tax jurisdictions,” the notice of the application to the Supreme Court says.

The government says a Federal Court of Appeal decision released in April, regarding a since-liquidated bank that a Loblaw subsidiary set up in the Caribbean, undermines those efforts.

Ottawa also says the decision is risking hundreds of millions of dollars in revenue at a time when Prime Minister Justin Trudeau and Finance Minister Bill Morneau are facing a budget deficit expected to balloon to around 16 per cent of economic output this year because of the COVID-19 crisis.

According to court records, the Canada Revenue Agency estimated there are tax matters involving 14 Canadian multinational corporate groups, including Loblaw, that could be affected by the appeal court’s reading of FAPI.

“The Federal Court of Appeal’s interpretation provides a roadmap for Canadian financial institutions to avoid FAPI by parking investments offshore,” the government argues in a statement of facts in its application. “Direction from this Court is needed to ensure the proper interpretation of the FAPI provisions.”

Ottawa claims the appeal-court decision on the Loblaw matter has “imperilled” the collection of approximately $1.18 billion in federal and provincial tax so far “by failing to properly articulate the anti-avoidance purpose that permeates (the FAPI) regime, by characterizing the regime as incentivizing offshore investment, and by mandating a restrictive interpretation to lower Courts tasked with considering these rules,” the court filing says.

The attempt to have the highest court in Canada hear the Loblaw case comes as the Trudeau government says it has invested more than $1 billion in the CRA to combat tax evasion, but still faces pressure to crack down on offshore tax havens.

report released Wednesday by the non-profit Canadians for Tax Fairness found domestic companies had $380.8 billion in assets in the twelve biggest tax havens last year, a record high that included $49.8 billion held in Barbados.

“The appeal court got into issues of ‘what is a bank?’ and ‘what’s the nature of an arm’s length relationship?’” said Toby Sanger, an economist and director of Canadians for Tax Fairness. “These are pretty fundamental and significant issues and so it’s important that the federal government appeal.”

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