Loblaw Cos. Ltd. will take a $368-million charge this quarter after the Tax Court of Canada ruled against the company in a long-running case over investment income booked in an offshore subsidiary.
The company has been battling with Canada Revenue Agency since 2015 over taxes on the earnings of a Barbadian subsidiary, first set up in the 1990s using money generated outside of Canada, such as from U.S. supermarkets. Last year, The Globe and Mail reported that the Tax Court case involving the company, named Glenhuron Bank Ltd. and licensed as an offshore bank before being dissolved in 2013, could cost Loblaw as much as $350-million.
In his 121-page ruling, Tax Court Justice Campbell Miller said that the case had "many twists and turns," but that a crucial taxation exemption in the Income Tax Act for "foreign banks" did not apply to Glenhuron, dashing Loblaw's hopes. The ruling was made last Friday but has not yet been made available to the public online.
The company's writedown as a result of the decision will amount to a charge of $0.98 per share this quarter, Loblaw said. In a news release on Monday responding to the decision, Loblaw president Sarah Davis said the company was “pleased with the court's finding that Loblaw did not take any steps to avoid Canadian tax," and that the total amount owed had been reduced. "This confirms what we have said all along: Glenhuron was established for legitimate business purposes. … We are, however, disappointed with the court's interpretation of a technical provision in the legislation."
Loblaw said it would launch an appeal based on that interpretation, which spokesman Kevin Groh said was related to the definition of the investment-business exemption upon which Justice Miller based his decision. Mr. Groh declined further comment because of the company's plans to appeal. If the appeal were unsuccessful, Loblaw would owe $242-million after deducting payments it has already made. The company said it would make the payments from cash on hand and that it would not affect capital investments, dividend growth or share buybacks.
Glenhuron managed assets for others in exchange for fees, invested in U.S.-dollar debt and derivatives, and for several years managed a portfolio of loans provided to independent distributors of products sold by indirect units of Loblaw parent George Weston Ltd., according to filings. Loblaw transferred nearly half a billion U.S. dollars to Glenhuron, a Crown court filing said, largely from other international affiliate companies.
In its most recent quarterly financial report, Loblaw said the total amount in dispute had reached $441-million in taxes, interest and penalties, relating to CRA reassessments for the 2000-to-2013 taxation years that the company said were without merit.
Glenhuron was dissolved to help fund Loblaw’s $12.4-billion takeover of Shoppers Drug Mart Corp., which was completed in 2014. By that point, the CRA had been looking into the taxes Loblaw was paying on Glenhuron’s earnings.
At the core of the case is a conflict over whether certain investment income from Glenhuron Bank was eligible for an Income Tax Act exemption afforded to "foreign banks" that would except it from being taxed as income in Canada.
Loblaw claimed that Glenhuron fulfilled all qualifications of a foreign bank, including that it had more than five full-time active employees and primarily did business with arm's-length persons. The Crown, however, said that the company should not qualify.
In his ruling, Justice Miller said that once he determined how to interpret the Act's exemption, "the case could be readily resolved on the simple basis that Loblaw Financial’s foreign affiliate, a regulated foreign bank with more than the equivalent of five full time employees was conducting business principally with Loblaw and therefore could not avail itself of the financial institution exemption from investment business."