Business

Loblaws squares off with CRA in $400M tax fight

Loblaws and the Canada Revenue Agency faced off in Tax Court this morning over allegations that the grocery giant misused a Barbados-based subsidiary for tax avoidance — a long-running dispute that could lead to a tax bill of more than $400 million.

Government alleges grocery giant set up bogus offshore bank to avoid paying tax

A four-week-long Tax Court trial will weigh the government's claim that Loblaws took steps to have a Barbados-based subsidiary appear to be a foreign bank in order to avoid paying tax. (CBC)

Already taking flak over its admissions of bread price-fixing and over the theft of its customer loyalty points, Loblaws entered another battlefield Monday morning in a Toronto courtroom.

The grocery giant began a month-long trial against the federal government over the Canada Revenue Agency's claims that it set up a bogus offshore bank in the Caribbean to avoid tax on hundreds of millions of dollars in investment income over the last two decades.

At stake for Loblaws and controlling shareholder George Weston Ltd. is a potential $406-million assessment by the taxman — which the company is appealing — consisting of taxes on profits it booked in a Barbados subsidiary. The government has said the financial manoeuvre was designed to "circumvent" parts of the Income Tax Act.

"This appeal, your honour, is about two multinationals, two Canadian multinationals, who are parking their surplus cash offshore in a Loblaws-controlled foreign affiliate to avoid paying Canadian tax on investment income," government lawyer Elizabeth Chasson, arguing for the CRA, said in court Monday morning.

The government contends that the Barbados subsidiary, Glenhuron Bank, got its seed money from "the diversion" of more than $470 million US from two sources: a Loblaws unit in the Netherlands and the sale of the Loblaws-Weston grocery business in the U.S.

The Crown alleges Loblaws dressed up Glenhuron to look like an actual Barbados-based bank so it could invest those proceeds and enjoy tax exemptions on the profits under the Income Tax Act, while in reality it was just a regular offshore company.  

The name of Glenhuron Bank Ltd., the Loblaws subsidiary at the centre of the trial, is listed on the directory at the CGI Tower in Warrens, St. Michael, Barbados, as seen on 13 December 2010. (CaribDigita/Wikimedia Commons)

"If the appellant had made these investments in Canada, the profits would have been subject to Canadian tax. If the appellant had left the money in its Netherlands subsidiary, it would have been subject to Canadian tax," Chasson argued.

"If the appellant had left the money in the U.S. when it sold its grocery business, and just left that surplus cash in the U.S., to earn investment income, it would have been [taxed]. All the appellant has done is take that surplus cash to move it to" Barbados, she said.

Crown's 'epic narrative... is without foundation'

The Tax Court trial is just the latest foray into headlines in recent months for the grocery chain. It has been taking flak over its admission in December that it conspired to fix the price of bread, and more recently suffered several glitches with its loyalty program PC Optimum, including the theft of some customers' points. 

In its battle with the CRA, Loblaws maintains that its offshore subsidiary Glenhuron Bank, even though it didn't accept deposits from any customers, was a legitimate foreign financial institution. If so, it would be entitled to the Income Tax Act's exception for the investment earnings of Canadian-owned regulated foreign banks.

"The Crown's theory ... boils down to something like, 'Look, this exception is only available to "real" banks. This is for real banks. Real banks take retail deposits. Glenhuron Bank didn't take retail deposits so it's not a real bank,' " said Al Meghji from law firm Oslers, representing Loblaws.

"We of course don't for a moment accept the proposition that real banks take deposits and anybody who doesn't is not a real bank. Try and make a deposit at the Amex Bank of Canada. They don't take deposits, but nobody disputes that they are a bank." (Amex Bank of Canada used to have deposit accounts but, as of 2017, no longer does.)

The evidence will show that the minister's theory is without foundation- Al Meghji, lawyer for Loblaws 

Meghji also rejected the Crown's theory that Loblaws only set up Glenhuron Bank back in 1992, and operated it until it was liquidated in 2013, to avoid tax on investment income.

"That is the epic narrative that comes out of the Crown's materials and pleadings," he said. "Loblaws anticipates that the evidence will show that the minister's theory is without foundation."

The four-week trial will see witnesses testify to Barbados bank law, how many full-time employees Loblaws actually had at Glenhuron Bank (the Income Tax Act exemption requires the equivalent of more than five), and how much of its business came from arm's-length dealings with non-Loblaws entities. Winston Cox, former governor of the Central Bank of Barbados, is on the company's witness list.

Judge Campbell Miller indicated Monday morning he is hoping to keep the proceedings as streamlined as possible. When a government lawyer objected, before opening arguments even started, to how the Loblaws legal team had labelled some of its binders of evidence, Miller shot down the objection and warned he would not look kindly on similar future ones.

About the Author

Zach Dubinsky

Senior Writer, CBC Investigations Unit

Zach Dubinsky is an investigative journalist. His reporting on offshore tax havens (including the Paradise Papers and Panama Papers), political corruption and organized crime has won multiple national and international awards. Phone: 416-205-7553. Email zach.dubinsky@cbc.ca

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