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The Supreme Court’s decision (which, as is standard practice, did not come with an explanation) arrives as Prime Minister Justin Trudeau has faced pressure to crack down on offshore tax havens.
It also comes as the federal government is on pace to post the largest budget deficit since the Second World War, as a result of massive spending on support programs for people and businesses during the coronavirus pandemic.
“The leave application was made in the context of the government’s ongoing efforts to protect Canada’s tax base and uphold its commitments to address international profit shifting,” a CRA spokesperson said in an email. “We are pleased with this decision and will now take steps to file the appeal documents.”
Ottawa’s tax issue with Loblaw boils down to FAPI, which is supposed to be included in a taxpayer’s income. The rules for that income also form “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 government’s notice of the application to the Supreme Court said.
The Canada Revenue Agency had reassessed a Loblaw subsidiary for tax years between 2001 to 2010 that required it to pay tax on income earned by another subsidiary, Glenhuron Bank Ltd. Glenhuron was licensed as a bank in Barbados in 1993, before it was wound up in 2013 to help fund Loblaw’s purchase of Shoppers Drug Mart.
However, Loblaw had pushed back against the reassessments, saying Glenhuron was a regulated foreign bank mostly doing business at arm’s length with others, which would exempt its investment activities from FAPI. The government disagreed.