Loblaw and its real estate arm snapped up a $1.3 billion personal property business in Barbados with the proceeds from sale of Sobeys.
The business consisted of a supermarket chain in the Caribbean nation, distribution centers, a mortgage broker and the Rosemont resort.
To capture the proceeds, Sobeys Corp. formed Loblaw Partnership Fund Limited (PPFL) and transferred its 84% interest in PPFL to Sobeys Inc.
Sobeys Inc. paid the proceeds to Loblaw Financial Inc.
In 2011, PPFL financed the purchase of the supermarket chain with inter-company debt of $1.4 billion. Sobeys Inc. financed the use of those funds with inter-company debentures that were sold to Loblaw Financial Inc. As such, Loblaw Financial Inc. and Sobeys Inc. are not liable for interest payments on these notes.
However, at least 75% of the debentures are used to buy real estate from PPFL. Through which Loblaw Financial Inc. moves money to Barbados to help finance the purchase of the Caribbean chain.
PPFL sales are recorded on its balance sheet as “capital lease income” and “asset/liability investment income.”
The problem was, the tax treaties signed with Barbados and the Republic of Barbados include a tax treatment that favors any entity that does business in Barbados over a company that does business in Canada.
Thus, it is in Barbados’ best interest to see PPFL be acquired by Loblaw Financial Inc.
So why did the tax treaty provide a tax break?
The 1987 agreement between Barbados and Canada does not mention inter-company financing.
Instead, it specifies that all other transfers between a land-based business group (the Barbados business group) and a real property group (Loblaw Financial Inc.) be treated in the same way.
It is unclear if the lawyers of the Canadian government relied on this clause when designing the treaty.
The 1982 Barbados-Canadian Tax Treaty (BCDT) additionally did not mention any tax advantages associated with inter-company financing.
Loblaw Financial Inc. argued that inter-company debt is not treated as “convertible instruments” because there is no right to convert it back to cash.
However, because the transaction is simply a transfer of ownership in PPFL by Sobeys Inc. to Loblaw Financial Inc., it was construed as such.
Loblaw Financial Inc. argued the tax benefit will not be realized for up to five years. But the Court disagreed.
Based on the available facts, the court found that Loblaw Financial Inc. engaged in real transactions in support of the purchase of PPFL, not just paper transactions, and therefore it will benefit from the tax treatment.
Loblaw Financial Inc. was a sound entity and this decision will provide it with more benefit from its Barbados acquisitions than previously.
It will also allow the company to continue to grow in Barbados.