(Adds details of case, quote, background)
OTTAWA, Dec 3 (Reuters) - Canadian grocery retailer Loblaw Companies Ltd does not have to pay tax on income earned by an offshore subsidiary, the country's Supreme Court said on Friday, a decision that could have implications for other companies.
The case revolved around a Barbados-based bank linked to the company. Loblaw successfully argued the bank was foreign-regulated and largely doing business with other entities, and its income should therefore not be taxed in Canada.
Government lawyers said if they lost the case, it could endanger the collection of more than C$1 billion ($782 million) in taxes a year, given that other companies were eyeing similar arrangements. Ottawa argued the bank was a controlled foreign affiliate of Loblaw which should pay tax on its income.
But Canadian tax law allows an exception for offshore subsidiaries which are foreign banks, are regulated by foreign law, employ more than five people and have an arm's length relationship with the parent company.
Loblaw "was entitled to rely on the financial institution exception," the court ruled.
Loblaw wound down the bank in 2013 and had already recorded a C$367 million charge to cover costs had it lost the ruling. ($1 = 1.2794 Canadian dollars) (Reporting by David Ljunggren Editing by Paul Simao)