Enmax 2018abca147 PDF

In the Court of Appeal of Alberta
Citation: Alberta v ENMAX Energy Corporation, 2018 ABCA 147
2018 ABCA 147 (CanLII)

Date: 20180426
Docket: 1601-0176-AC
Registry: Calgary
Between:
Her Majesty the Queen in Right of Alberta

QB 1101-05515
1301-08510
Appellant
(Defendant)
- and -
ENMAX Energy Corporation
Respondent
(Plaintiff)
- and -
Her Majesty the Queen in Right of Alberta

QB 1001-17672
1301-08511
Appellant
(Defendant)
- and -
ENMAX PSA Corporation
Respondent
(Plaintiff)
_______________________________________________________
The Court:
The Honourable Chief Justice Catherine Fraser
The Honourable Mr. Justice Frans Slatter
The Honourable Madam Justice Frederica Schutz
_______________________________________________________
Memorandum of Judgment
Appeal from the Order by

The Honourable Mr. Justice G.H. Poelman

Dated the 17th day of June, 2016
Filed on the 27th day of October, 2016
(2016 ABQB 334, Dockets: 1101-05515, 1301-08510, 1001-17672, 1301-08511)
_______________________________________________________
Memorandum of Judgment
_______________________________________________________

I. Introduction
[1] At first blush, this case may appear to be about income tax. It is not. Nor is it about the
interpretive principles that apply to the Income Tax Act, RSC 1985, c 1 (5th Supp) [ITA]. Instead,
this case is about a legislative scheme specific to the province of Alberta that relates only to
non-taxable municipalities and their subsidiaries that compete in Alberta=s electrical power
industry.
[2] More than twenty years ago, the Alberta government implemented a legislative scheme
designed to deregulate B or, more precisely, restructure B the electrical power industry in this
province. In doing so, the government hoped to promote increased competition in the marketplace,
one of the intended objectives of deregulation. It determined that this called for a Alevel playing
field@ between municipalities which do not pay income tax and their competitors in the private
sector which do pay income tax.
[3] To achieve this goal, when a municipal entity exempt from income tax competes in certain
aspects of the electrical power industry, it must make an annual payment in lieu of tax (Balancing
Pool Payment) into the Balancing Pool, a statutory corporation that the Legislature created for the
benefit of Alberta electricity consumers.1 In this way, the Legislature intended that municipal
entities such as ENMAX Energy Corporation (Energy) and ENMAX PSA Corporation (PSA),
which are subsidiaries of ENMAX Corporation (ENMAX), 100% owned by the City of Calgary
(Calgary), would compete on the same footing as tax-paying competitors.2
[4] This legislative scheme (sometimes called the Balancing Pool Payments regime) includes
two key pieces of legislation, the Electric Utilities Act, SA 2003, c E-5.1 [Utilities Act] and the
Payment in Lieu of Tax Regulation, Alta Reg 112/2003 [PILOT Regulation].3 This case involves a
dispute between Her Majesty the Queen in Right of Alberta (the Crown) and two ENMAX
subsidiaries, Energy and PSA, regarding the amount of the Balancing Pool Payments that each
owes under the Utilities Act and PILOT Regulation. For both Energy and PSA, the disputed
amounts relate to the 2006 and 2007 tax years.
1
The Balancing Pool was established as a statutory corporation under s 75(1) of the Utilities Act for the benefit of
Alberta electricity consumers.
2
Agreed Statement of Partial Facts [ASPF], paras 3.5 to 3.9.
3
These are the current iterations of the relevant legislation. The Utilities Act is the successor legislation to the Electric
Utilities Act, SA 1995, c E-5.5, as amended [1995 EUA], and the PILOT Regulation is the successor legislation to the
Payment in Lieu of Tax Regulation, Alta Reg 236/2001, first passed in 2001.
[5] ENMAX made inter-company loans, first to Energy in 2004 and later to PSA in both 2006
and 2007. Energy and PSA claimed the interest on their respective loans as a deduction. These
deductions reduced the amount of the Balancing Pool Payment that each of Energy and PSA would
otherwise have been required to pay into the Balancing Pool under the PILOT Regulation for the

relevant tax year. Alberta=s Minister of Finance (Minister) reassessed the amount of their
Balancing Pool Payments on the basis that a reasonable interest rate was roughly half that claimed
by the companies.4 Energy and PSA appealed the reassessments to the trial judge who set them
aside and held that the interest on each loan was fully deductible. The Crown appealed that
decision to this Court.
[6] This case raises several interpretive issues specific to the Balancing Pool Payments regime.
Are the purposes and objects of the Utilities Act and PILOT Regulation relevant in interpreting the
reasonableness requirement for deductibility of interest under s 20(1)(c)(i) of the ITA which is
incorporated by reference into the legislative scheme? Does reasonableness in this context apply
only to the interest rate prescribed under the applicable loan transaction or also to the structure of
the loan transaction itself? What is the relevance of implicit parental support and under what
circumstances should implicit parental support be taken into account? Was the interest payable on
the three inter-company loans made between ENMAX, as lender, and two of its subsidiaries, as
borrower, reasonable under s 20(1)(c)(i) of the ITA and therefore fully deductible?
[7] For the reasons explained below, we have concluded that this appeal must be allowed. The
trial judge erred in concluding that the interest payable to ENMAX on the three inter-company
loans was reasonable and thus fully deductible. Determining whether the interest paid on each loan
was reasonable requires proper consideration of the legislative scheme under the Utilities Act and
the PILOT Regulation, including its key purpose, namely to level the playing field. Not only must
the interest rate itself be objectively reasonable, but the structure of each loan must also be
objectively reasonable to the extent it affects the amount of the interest paid.
[8] In other words, artificial stratagems B which themselves depend on the fact that Calgary
and ENMAX are not subject to payment of Balancing Pool Payments or income tax B are not
reasonable. Otherwise, corporate parents like ENMAX, which are not subject to income tax or
Balancing Pool Payments, could lend funds to their municipal entity subsidiaries at
disproportionately high interest rates. This would in turn allow the municipal entities to enjoy
corresponding disproportionately high deductions against their Balancing Pool Payments while
the corporate parent collects these interest payments free of both income tax and Balancing Pool
Payments. Without an objective limit on the amount of interest deductions, the municipal entity
would enjoy a competitive advantage over their private sector competitors. This would render the
Balancing Pool Payments regime toothless.
4
Section 12(1) of the PILOT Regulation allows the Minister to take any action with respect to a Balancing Pool
Payment that the Canada Revenue Agency could take under the ITA including a reassessment: ITA s 152(4).
Page: 3
[9] Accordingly, the trial judge erred in law when he concluded that the reasonableness
standard set out in s 20(1)(c)(i) of the ITA cannot generally be based on an arm=s length standard.
Even if this were correct in the ordinary income tax context B and we do not agree it is B it is

incorrect in law under the Balancing Pool Payments regime. The trial judge also erred in
determining that ENMAX was unlikely to provide implicit parental support for loans secured by
Energy and PSA. Thus, the trial judge=s conclusion that the interest payable on each loan was
reasonable cannot stand. Therefore, we set aside the trial judge=s decision, affirm the Minister=s
reassessments, and dismiss the appeals of those reassessments by Energy and PSA.
[10] To explain our reasons, we begin with an outline of key aspects of the legislative scheme
and background facts (Part II). We next review the proceedings below and relevant fact findings
the trial judge made (Part III). That takes us to the issues on appeal (Part IV). We then address the
standard of review (Part V). That is followed by a detailed analysis of why the trial judge erred in
reaching the conclusions he did (Part VI). The conclusion follows (Part VII).
II. Legislative Scheme and Background Facts
[11] The legislative scheme and background facts are set out at length in the trial judge=s written
reasons: ENMAX Energy Corporation v Alberta, 2016 ABQB 334, 40 Alta LR (6th) 105 [QB
Reasons]. For purposes of this appeal, it is sufficient to highlight the following.
A. Alberta=s Legislative Scheme
1. Overview
[12] The main components of the electrical power industry are generation, transmission,
distribution and retailing. Historically, the generation, transmission and distribution of electricity
in Alberta were all carried out by vertically integrated and regulated utilities. Beginning January 1,
1996, the Alberta Legislature took significant steps under the Electric Utilities Act, SA 1995,
c E-5.5, as amended [1995 EUA] towards deregulating the electrical power industry in Alberta.
The goal was to move from a power industry dominated by vertically integrated, regulated utilities
to one where market forces would determine the price of electric energy, create incentives for new
generation capacity, and allow for greater consumer choice.5 The theory was that deregulation
would benefit Alberta consumers by increasing competition.
[13] Deregulation separated electricity generation from transmission, distribution and retailing.
Distribution and transmission remained regulated, but generation and (eventually) retailing were
opened up to competition: ATCO Electric Limited v Alberta (Energy and Utilities Board), 2004
5
ASPF, para 3.4.
Page: 4
ABCA 215 at para 1, 361 AR 1 [ATCO]; FortisAlberta Inc v Alberta (Utilities Commission),
2015 ABCA 295 at para 79, 28 Alta LR (6th) 252 [Fortis].6

[14] Key players in the legislative scheme are the Balancing Pool, the Alberta Electric System
Operator, an independent, government-appointed transmission administrator which maintains
system reliability, 7 the Alberta Utilities Commission which regulates certain aspects of the
utilities sector and electricity markets, 8 and the Market Surveillance Administrator which
provides surveillance, investigation and enforcement functions over the industry.9
[15] The restructuring of the electrical power industry led to the government=s creating power
purchase arrangements, sometimes referred to as PPAs. These power purchase arrangements are
contracts that were auctioned off by the Crown. They granted purchasers the right to electricity
generated by power plants built and funded by ratepayers before deregulation.10 The owner of a
power purchase arrangement is entitled to sell the electricity generated by the plant directly to
consumers or through the power pool (Power Pool) set up under the Utilities Act and to determine
the price at which to offer that electricity. The owner of a power purchase arrangement must make
payments to the owner of the generating unit based on formulas intended to compensate the owner
for variable and fixed costs. Proceeds from the auction of power purchase arrangements went into
the Balancing Pool for the benefit of Alberta=s electricity consumers: ATCO, supra at para 19;
Balancing Pool v TransAlta Corporation, 2013 ABCA 409 at para 4, 566 AR 116 [Balancing
Pool].
[16] The Utilities Act prescribes the duties and responsibilities of the Balancing Pool: s 85(1).
They include (1) managing on behalf of Alberta=s electricity consumers the financial accounts
which together are known as the balancing pool accounts arising from the transition to a
competitive generation market; (2) managing Ageneration assets@ in a commercial manner during
the period the Balancing Pool holds generation assets; and (3) meeting obligations and
6
Full retail power deregulation came into effect on January 1, 2001.
7
The Alberta Electric System Operator, operating under the trade name AIndependent System Operator@, was
established under s 7 of the Utilities Act and its authority set out in s 17.
8
The Alberta Utilities Commission is governed by the Alberta Utilities Commission Act, SA 2007, c A-37.2. For
general background information on its operation, see ATCO Gas and Pipelines Ltd v Alberta (Utilities Commission),
2014 ABCA 397 at paras 9-17, 588 AR 134.
9
The Market Surveillance Administrator was first established under s 9.1 of the 1995 EUA and its authority set out in
s 9.3.
10
These legislative instruments are defined in Utilities Act, s 1(1)(nn). The term of a power purchase arrangement
ranges from three to twenty years, with the period set to the lesser of the deemed remaining useful life of the
generating unit or twenty years.
Page: 5
responsibilities relating to Ageneration assets@ which, in turn, include power purchase

arrangements. On this last point, in summary, the Balancing Pool underwrites certain risks and
obligations inherent in power purchase arrangements. That means that the Balancing Pool is not a

one-way street where monies only flow into the Balancing Pool.
[17] Under this legislative scheme, all persons eligible to trade power through the Power Pool
were given open access to the transmission grid. The grid remains a natural monopoly and
continues to be regulated by the Alberta Utilities Commission. The Power Pool is run by the
Alberta Electric System Operator. It offers access to the grid by allowing utilities to buy and sell
electricity: Fortis, supra at paras 81-83; Balancing Pool, supra at para 4.11
2. Purpose and Structure of Payment in Lieu of Tax Provisions
[18] Immediately before deregulation, there were some significant municipally-owned and
controlled electric generation and distribution systems in operation in Alberta. Calgary was
involved in the electrical power system as an electricity distributor.
[19] When Alberta moved to deregulate the electric energy industry, one consequence of taking
steps towards greater consumer choice was that municipalities and municipally-owned entities
would begin competing against privately-owned companies. This had the potential for unfairness B
and reducing, if not stifling, competition B since municipally-owned entities generally do not pay
income taxes and would therefore enjoy a considerable competitive advantage. Consequently, the
government decided that it was necessary to Alevel the playing field@ between municipal entities
and private sector competitors.12
[20] In pursuit of this objective, the government included a Apayment in lieu of tax@ obligation
in Bill 27. This Bill, which amended the 1995 EUA, became the Electric Utilities Amendment Act,
SA 1998, c 13 [Amendment Act]. The payment in lieu issue appears to have first been raised in the
Legislature on March 26, 1998 by MLA Gene Zwozdesky (Edmonton-Mill Creek). He asked the
11
Power has been traded through the Power Pool since 1996. The Alberta Electric System Operator directs which
plants are to produce electricity in order to perfectly match supply with demand. Power is dispatched based on offers
by power suppliers and bids from power purchasers. Lower offers are accepted first, until sufficient offers to meet
demand have been accepted. All energy traded through the Power Pool is financially settled each hour at the single
spot market price.
12
The phrase Alevel playing field@ was used in a number of different ways during debates on Bill 27. During second
reading, Minister West confirmed that under the new legislation, Asafeguards will be put in place to ensure a level
playing field in generation and retail markets@: Alberta, Legislative Assembly, Hansard, 24th Leg, 2nd Sess (16 March
1998) at 920 (Dr. West). At that time, it appears that the safeguards he was speaking of referred to bodies like the
Market Surveillance Administrator being given authority to monitor and investigate the behaviour of market
participants. Later debate addressed leveling the playing field in terms of market access, and ensuring a level playing
field as between municipal entities and private sector competitors.
Page: 6
Minister of Energy, the Honourable Steve West, about publicly-owned firms that may be
advantaged because they do not pay income taxes: A[I]s it the province=s intention to level that
playing field to the extent that publicly owned firms will also be required to pay taxes?@13

[21] A few days later, on March 31, 1998, the Minister explained why the government had
decided to include a payment in lieu of tax provision in Bill 27:14
... [I]f a municipality decides to compete in [the electricity] sector, it

must play by the same rules as everybody else…. It should not have
any unfair advantages when competing with the private companies.
This ensures a level playing field, and it=s in the best interest of the
consumers....
Now, private-sector companies pay taxes, but municipalities do not.

You can=t achieve a level playing field if you have tax-free
municipal affiliates competing with taxpaying private-sector
companies. Bill 27 addresses this discrepancy by requiring that
municipalities make payments in lieu of taxes if they set up an
affiliate competing with the private sector in the retail electric
market....
[22] The Minister went on to explain that the payment in lieu of tax provision would Arequire
the municipality or their affiliate, if they=re in the retail business, to pay a grant in lieu of taxes@.
The Minister then addressed the concern of some municipalities that this was a Atax grab by the
province, since the payments would have gone into the government=s general revenue fund@. He
pointed out that the government had responded to this concern by providing that the Balancing
Pool Payments would be directed not to the government but to the Balancing Pool whose net
revenue, the Minister noted, Ais returned to the consumers@.15
[23] Section 5(c) of the Utilities Act expressly confirms the government=s intention to level the
playing field. It provides that one of the purposes of the Utilities Act is Ato provide for rules so that
an efficient market for electricity based on fair and open competition can develop in which neither
the market nor the structure of the Alberta electric industry is distorted by unfair advantages of
government-owned participants ....@ Another relevant statutory purpose is Ato continue the sharing,
13
Alberta, Legislative Assembly, Hansard, 24th Leg, 2nd Sess (26 March 1998) at 1186 (Mr. Zwozdesky).
14
Alberta, Legislative Assembly, Hansard, 24th Leg, 2nd Sess (31 March 1998) at 1265 (Dr. West).
15
In the original version of Bill 27, payments were to be made to the Provincial Treasurer.
Page: 7
among all customers of electricity in Alberta, of the benefits and costs associated with the
Balancing Pool.@16

[24] Balancing Pool Payments apply only to those participants in the electrical power industry
that are not subject to income tax under the ITA or the Alberta Corporate Tax Act, RSA 2000,
c A-15 [ACTA]. 17 The Balancing Pool Payments regime requires participants that meet the
definition of a Amunicipal entity@ to make a Balancing Pool Payment equivalent to the amount of
tax they would otherwise pay under the ITA and ACTA were they not exempt from those Acts:
Utilities Act, s 147; PILOT Regulation, s 2. 18 For this purpose, therefore, the Utilities Act
incorporates the ITA by reference into the provincial legislative scheme. But despite the reference
to the ITA, Balancing Pool Payments are not an income tax B they are a payment in lieu of tax.
3. Relevant Legislative Provisions
a. Section 147 of the Utilities Act
[25] Section 147(3) of the Utilities Act provides:
If a municipal entity is exempt as a result of subsection 149(1) of the

Income Tax Act (Canada) from the payment of tax under that Act or
the Alberta Corporate Tax Act, it must, in accordance with the
regulations, pay to the Balancing Pool in respect of each taxation
year an amount equal to the amount of tax that it would be liable to
pay under
(a) the Income Tax Act (Canada), and
(b) the Alberta Corporate Tax Act,
if it were not exempt.
[26] A Amunicipal entity@ is defined in s 147(1) of the Utilities Act as:
16
Utilities Act, s 5(f). The 1995 EUA had included these two statutory purposes in substantially the same form.
17
This payment in lieu provision was originally included in the Amendment Act, which received royal assent April 30,
1998. The provision was initially s 31.994 in the Amendment Act, and stayed that way when the legislation was revised
into RSA 2000, c E-5. It then became s 147 of the Utilities Act as part of the 2003 revision: SA 2003, c E-5.1.
18
For purpose of interest on loans, payments under the ITA and ACTA are identical: see Husky Energy Inc v Alberta,
2012 ABCA 231 at para 6, 533 AR 385 [Husky].
Page: 8
(a) each municipality that
(i) owns a retailer,

(ii) holds a power purchase arrangement, or
(iii) holds an agreement or arrangement derived from

a power purchase arrangement that includes the right
to exchange electric energy and ancillary services;
(b) each retailer that is a subsidiary of a municipality;
(c) each holder of a power purchase arrangement that is a

subsidiary of a municipality;
(d) each holder of an agreement or arrangement derived

from a power purchase arrangement that includes the right to
exchange electric energy and ancillary services that is a
subsidiary of a municipality.
[27] Section 147(8) of the Utilities Act authorizes the making of regulations:
The Lieutenant Governor in Council may make regulations for the

purposes of this section, including regulations
(a) respecting the calculation of the amount to be paid to the

Balancing Pool under subsection (3);
...
(e) making any provisions of the Income Tax Act (Canada)

and the Alberta Corporate Tax Act and regulations under
either or both enactments, with or without modifications,
applicable to the person named in the regulations.
b. PILOT Regulation
[28] The original payment in lieu of tax regulation was first implemented in 2001.19 The PILOT
Regulation which is the subject of this appeal was passed in 2003 under the Utilities Act.20
19
Alta Reg 236/2001, passed pursuant to the Electric Utilities Act, RSA 2000, c E-5.
Page: 9
[29] The PILOT Regulation duplicates the substantive provisions in s 147 of the Utilities Act
and also incorporates the ITA by reference. In particular, s 2(2)(a) provides:

The balancing pool payment is equal to
(a) the amount the municipal entity would be required to

pay as tax for that year pursuant to
(i) Parts I and I.3 of the Income Tax Act (Canada),

and
(ii) the Alberta Corporate Tax Act
...
20
Alta Reg 112/2003.
Page: 10
if the municipal entity were not exempt from taxation under section
149 of the Income Tax Act (Canada) and section 35 of the Alberta
Corporate Tax Act.

[30] The PILOT Regulation further provides in s 12(2):
Except as modified by this Regulation, a municipal entity
(a) is entitled to the benefits of the rights, processes,

procedures and remedies available to taxpayers under the tax
Acts, and
(b) is subject to the obligations of taxpayers under the tax

Acts.
[31] Section 1(1)(f) of the PILOT Regulation extends the definition of Amunicipal entity@ to
include Aeach municipality or subsidiary of a municipality@ that Aprovides a regulated rate tariff@,
Aowns or operates an electric distribution system@, or Aowns or operates a transmission facility@.
c. Section 20(1)(c)(i) of the ITA
[32] The relevant portion of s 20(1)(c)(i) of the ITA provides as follows:
Notwithstanding paragraphs 18(1)(a), 18(1)(b) ..., in computing a

taxpayer=s income for a taxation year from a business or property,
there may be deducted ...
(c) an amount paid in the year ... pursuant to a legal

obligation to pay interest on
(i) borrowed money used for the

purpose of earning income from a
business or property ....
or a reasonable amount in respect thereof, whichever is the lesser.
B. Background Facts
1. Setting the Scene

Page: 11
[33] In 1997, Calgary incorporated ENMAX to facilitate Calgary=s participation in the

restructured competitive electricity market. ENMAX took over distribution of electricity from
Calgary. Calgary remains ENMAX=s sole shareholder.

[34] ENMAX provides electrical services through two wholly-owned subsidiaries: (1)
ENMAX Power Corporation (ENMAX Power) which operates electricity transmission and
distribution systems; and (2) Energy which carries out electricity supply and retailing. Energy, in
essence, arranges for the supply of electricity into the Power Pool and for the sale of electricity
from the Power Pool to customers. Energy acquired the power purchase arrangement for the Battle
River Generating Station through its subsidiary, PSA, which was incorporated in 2006 for this
express purpose. The Battle River power purchase arrangement is PSA=s only asset.
[35] ENMAX is responsible for corporate governance, policies and strategic direction not only
for ENMAX but also its subsidiaries, including Energy and ENMAX Power.21 ENMAX also
consolidates its financial reporting to reflect the financial results of its overall enterprise. Under
ENMAX=s policy, all borrowing at the relevant time from sources external to ENMAX had to be
arranged through the corporate parent, ENMAX.22
[36] Since Energy is an electricity retailer and PSA holds a power purchase arrangement, both
fall within the definition of Amunicipal entity@ under the Utilities Act and the PILOT Regulation.
As a result, both must make Balancing Pool Payments. The parties have agreed that ENMAX,
which is wholly owned by Calgary, but which is not itself an electricity retailer or the owner of a
power purchase arrangement, is not a municipal entity. Accordingly, it is not required to make
Balancing Pool Payments.
2. Making the Loans to Energy and PSA
[37] After ENMAX decided that all funding of its subsidiaries should be done internally, this
led to a series of inter-company loans. The three loans at issue here were made between 2004 and
2007 (collectively the AParental Loans@). At the time of the Parental Loans, no subsidiary of
ENMAX had issued debt in the open market. The Parental Loans can be summarized as follows:
21
As explained in the 2004 ENMAX Annual Report (Trial Exhibit 1, Vol. 2, Tab 30) [2004 Annual Report] at 19,
ENMAX=s corporate leadership team is Aaccountable for the day-to-day management of the company and its
subsidiaries@ (emphasis added).
22
ASPF, para 7.11. This is understandable since ENMAX could borrow at rates very close to what Calgary could
secure with its triple AAA credit rating.
Page: 12
i) On December 1, 2004, ENMAX loaned Energy $497

million at an interest rate of 11.5% per annum for 10 years
(Energy Loan);

ii) On June 5, 2006, ENMAX loaned PSA $309 million at an
interest rate of 10.3% per annum for 10 years (2006 PSA
Loan);
iii) On January 15, 2007, ENMAX loaned PSA $58.8 million at
an interest rate of 9.9% per annum for 10 years (2007 PSA
Loan).
[38] The Energy Loan was part of ENMAX=s general strategy of restructuring its finances.
While ENMAX=s Treasury Group had recommended that Energy have a structure of 45% debt and
55% equity, the Energy Loan resulted in Energy=s taking on a 91% debt to equity ratio B in other
words, 91% debt and 9% equity.23 The trial judge expressly found that tax, that is Balancing Pool
Payments, considerations were the driving force behind ENMAX=s adoption of this debt-heavy
financing strategy.24
[39] The 2006 PSA Loan and 2007 PSA Loan were prompted by ENMAX=s decision to acquire
the Battle River power purchase arrangement through Energy=s subsidiary, PSA. Initially, PSA
acquired a 55% participant power interest in the Battle River power purchase arrangement which it
purchased using the 2006 PSA Loan. PSA also agreed to acquire the remaining 45% participant
power interest over four years, beginning in 2007. PSA used the 2007 PSA Loan to purchase the
remainder of the Battle River power purchase arrangement.
[40] None of ENMAX=s subsidiaries had any debt issued in the open market at the time of the
Parental Loans.
23
In late 2004, ENMAX paid $412 million to Energy to repay an earlier loan from Energy to ENMAX. ENMAX also
made the Energy Loan to Energy. Energy used this resulting $909 million cash infusion to declare a special dividend
of $670 million and to return an additional $239 million in share capital, both of which flowed back to Energy=s only
shareholder, ENMAX.
24
QB Reasons, para 90.
Page: 13
3. Reassessment of Balancing Pool Payments and Resulting Appeal
[41] Energy and PSA filed annual returns with the Minister under s 8 of the PILOT Regulation

claiming as deductions the full amount of interest paid on each of the Parental Loans. They relied
on s 20(1)(c)(i) of the ITA to justify these deductions. It allows a taxpayer to deduct interest paid on
Aborrowed money used for the purpose of earning income from a business or property@ or a
Areasonable amount@ in respect thereof, whichever is the lesser.
[42] In 2010, the Minister reassessed Energy=s and PSA=s calculation of the Balancing Pool
Payments. The Minister concluded that the interest payable under each of the Parental Loans was
unreasonable and thus was not fully deductible as claimed. The reassessment determined that
reasonable rates of interest would have been 5.42% (rather than 11.5%) for the Energy Loan,
5.26% (rather than 10.3%) for the 2006 PSA Loan, and 5.24% (rather than 9.9%) for the 2007 PSA
Loan.
[43] Energy and PSA objected to these reassessments under s 48 of the ACTA which allows for
an appeal of the issue to the Queen=s Bench: see ACTA, s 50; PILOT Regulation, s 12(3). In
accordance with s 52(1) of ACTA, determining whether the interest on the Parental Loans was
reasonable proceeded as a normal civil trial in the Queen=s Bench.
III. Proceedings Below
[44] Energy and PSA prevailed at trial. The trial judge concluded that the interest rate on each of
the Parental Loans was reasonable and thus the interest payments were fully deductible. He
allowed the appeals by Energy and PSA and set aside the Minister=s reassessments.
A. Expert Evidence B Credit Ratings of the Market Loans
[45] Both sides called experts to give opinion evidence about the interest rates that Energy and
PSA would have obtained had they engaged in arm=s length transactions by issuing bonds in the
market rather than turning to ENMAX for the Parental Loans.
[46] Broadly speaking, this exercise involved (1) determining a likely credit rating for loans
made to Energy and PSA by an arm=s length lender at the same time and on the same terms as their
respective Parental Loans (these hypothetical arm=s length loans being collectively called the
AMarket Loans@, and individually the loan to Energy sometimes being called the AEnergy Market
Loan@, the $309 million loan to PSA being called the A2006 PSA Market Loan@, and the $58.8
million loan to PSA being called the A2007 PSA Market Loan@);25 and then (2) Apricing@ each of
25
This exercise included attributing a credit rating for each subsidiary since subsidiaries like Energy and PSA, unlike
ENMAX, are not given actual credit ratings as a matter of course (nor is inter-company debt rated).
Page: 14
the Market Loans, that is, determining the likely interest rate that an arm=s length lender would
have demanded for loans with these credit ratings. AReal world@ bonds issued in the public bond
market around the same time as the Parental Loans were used to calculate a range of likely market

interest rates.
[47] The first part of the analysis B calculating a hypothetical credit rating for each Market Loan
B involved: (1) a Astandalone analysis@ which included assessing the financial and business risks
facing Energy or PSA when the relevant Parental Loan was made; and (2) an assessment of the
willingness and ability of ENMAX to support each company in times of financial trouble, what is
commonly called, in the absence of an express loan guarantee, implicit parental support. The issue
of implicit parental support, to which we return later in these Reasons, and which figured
prominently in the trial judge=s conclusions, is a critical issue in this appeal. To put the expert
evidence in context, at the relevant time, ENMAX=s credit rating was A- and Calgary enjoyed an
AAA (triple A) credit rating.26
B. Crown=s Expert Evidence
[48] In support of its view that a reasonable interest rate on each of the Parental Loans was
roughly 5%, the Crown called two experts: David Levey, a credit rating consultant with significant
experience rating debt, and Dr. David Goldreich, an Associate Professor of Finance at the Rotman
School of Management.
[49] Levey gave each Market Loan an overall rating of BBB. 27 He first assigned a standalone
rating of BB to both the Energy Market Loan and the 2006 PSA Market Loan, and a standalone
rating of BBB to the 2007 PSA Market Loan. The 2007 PSA Market Loan was rated higher largely
because of PSA=s more optimistic financial forecast in 2007. Levey concluded that the likelihood
of implicit parental support was high for all Market Loans and that an arm=s length lender would
26
All ratings in these Reasons use the Standard & Poor=s scale. Bonds rated BBB- and above (up to the highest rating
AAA) are considered investment grade. Bonds rated BB+ and below (down to the lowest rating of D) are considered
non-investment grade. At trial, some experts used the alternative Moody=s bond rating nomenclature, but there is no
practical difference between the two. We use the Standards & Poor=s scale for consistency. In February, 2004,
Standard & Poor=s had rated ENMAX as A-, and this A- rating was maintained through May, 2006: ASPF, paras 8.1 to
8.4. Dominion Bond Rating Service, now called DBRS, rated ENMAX even higher, giving ENMAX an A rating from
November 2003 through to 2007.
27
Extracts of Key Evidence [EKE], A086. It must be stressed that, at times, experts for both the Crown and ENMAX=s
subsidiaries drifted back and forth with the terminology they used when assessing the likely market rates that would
attach to hypothetical arm=s length loans to Energy and PSA on the same terms as the Parental Loans. Despite the
references that the experts sometimes made to the actual loans that ENMAX made to each of its subsidiaries, it is
apparent that, despite this loose language, the exercise in which all of the experts was engaged was in allocating credit
ratings to hypothetical arm=s length loans, what we have referred to collectively as the Market Loans, and individually
as the Energy Market Loan, the 2006 PSA Market Loan and the 2007 PSA Market Loan.
Page: 15
take this into account. He provided extensive reasons why ENMAX would have been both willing
and able to provide financial support to its subsidiaries should either subsidiary have been unable
to repay the Market Loans. On the basis of this implicit parental support, Levey increased the

credit rating four Anotches@ from BB to BBB+ for both the Energy Market Loan and the 2006 PSA
Market Loan, and one notch from BBB to BBB+ for the 2007 PSA Market Loan. Finally, he
reduced the credit rating on each of the Market Loans one notch to BBB to account for the Market
Loans being subordinated to other obligations, a reduction he described as normal rating agency
practice.
[50] Goldreich used Levey=s BBB ratings to determine the prevailing market interest rates for
comparably rated bonds issued around the time ENMAX made each of the Parental Loans. In
Goldreich=s opinion, a market interest rate on the Market Loans would have been as follows:
5.19% to 5.65% for the Energy Market Loan; 5% to 5.61% for the 2006 PSA Market Loan; and
4.99% to 5.47% for the 2007 PSA Market Loan.28
C. Energy=s and PSA=s Expert Evidence
[51] The two experts for Energy and PSA took a very different view of the credit ratings and the
likely market interest rates. Robert Weiss and Mark Nichols, employees of a consulting firm with
experience rating and pricing debt, prepared a report. Weiss determined credit ratings for the
Market Loans while Nichols priced the debt. Nichols was ill and unable to attend the trial. Hence,
a colleague, Gregory Johnson, who had been involved in preparing the report, stepped in to give
evidence.
[52] Weiss assigned the Energy Market Loan an overall credit rating of CCC+.29 He rated both
the 2006 PSA Market Loan and 2007 PSA Market Loan one notch lower, CCC.30 On the basis of
these ratings, Nichols (and Johnson) then priced the debt as follows: 11.25% to 12.25% for the
Energy Market Loan; 11% to 12% for the 2006 PSA Market Loan; and 10% to 11% for the 2007
PSA Market Loan.31 In deciding on these figures, both Weiss and Nichols relied at times on
internal pricing memoranda prepared by ENMAX around the time of the Parental Loans.
[53] Weiss=s far lower credit ratings than Levey=s for the Market Loans were largely attributable
to three factors. First, when assessing Energy and PSA=s financial risk, Weiss used the actual
interest rates on the Parental Loans even though the reasonableness of these interest rates was the
28
EKE, A4.
29
EKE, A235.
30
EKE, A345 (2006 PSA Market Loan), A425 (2007 PSA Market Loan).
31
EKE, A271 (Energy Market Loan), A376 (2006 PSA Market Loan), A463 (2007 PSA Market Loan).
Page: 16
key issue in dispute at trial. For example, in calculating Energy=s financial risk, Weiss considered
the fact that Energy had taken on hundreds of millions of dollars in debt at an interest rate of 11.5%
per annum. Since this resulted in large debt servicing costs and reduced Energy=s projected cash

flow and profits, this led in turn to Weiss=s assigning the Energy Market Loan a standalone credit
rating of B only with a standalone credit rating of B- for the 2006 PSA Market Loan and 2007 PSA
Market Loan. Second, in the absence of an express parental guarantee, Weiss considered the
prospect of ENMAX=s assisting its subsidiaries unlikely. Accordingly, he did not adjust his credit
rating for any of the Market Loans based on implicit parental support. Finally, Weiss reduced his
selected credit ratings by two notches (rather than the one-notch reduction made by Levey)
because he believed the Market Loans would be Adeeply@ subordinated to other obligations.
[54] Nichols considered a number of factors when Apricing@ the Market Loans. Notably, he
sought to justify higher interest rates because of what he described as (1) Afundamental factors@;
and (2) Atransaction costs@. In cross-examination, Johnson agreed that Weiss had already
considered these fundamental factors B which include risk factors such as industry risk and
management changes B when he determined a credit rating for the Market Loans. However,
Johnson insisted that a lender would consider these fundamental factors again in pricing the
Market Loans. On this basis alone, Nichols added another 75 to 150 basis points to the market
interest rate. In other words, both Nichols and Johnson believed that fundamental factors would
translate to an increase of 0.75% to 1.50% in the market interest rate on each of the Market Loans.
[55] Nichols and Johnson also advocated adding another 44 basis points (0.44%) to the interest
rate for the Energy Market Loan and 40 basis points (0.40%) to the interest rate for both the 2006
PSA Market Loan and 2007 PSA Market Loan to account for transaction costs. Transaction costs
were described as the expenses associated with issuing a bond in the market.32 Neither Nichols nor
Johnson independently calculated the likely transaction costs had Energy and PSA gone into the
market for their respective loans. Instead, they relied on ENMAX=s own estimate of the transaction
costs found in the internal pricing memoranda that ENMAX had prepared to justify the interest
rates chosen for the Parental Loans.
[56] In a rebuttal report, Goldreich disputed the relevance of transaction costs to the pricing of
the Market Loans on the basis that these costs are not a lender=s responsibility. In other words, in
Goldreich=s view, a lender would not seek a higher interest rate on a loan to cover costs for which
it would not be responsible in any event. Goldreich also challenged the claim that fundamental
factors should be considered again in pricing of the Market Loans.
[57] In summary, the dramatically different conclusions of the experts about credit ratings for
the Market Loans and corresponding market interest rates were as follows:
32
Transaction costs include Aroad show@ expenses to educate potential lenders about the company and nature of the
debt offering, legal fees, auditing costs, issuance expenses, underwriters= fees, and the like.
Page: 17

Page: 18
Market Loans Energy/PSA Energy/PSA Market Crown Crown Market

Market Loan Loan Interest Rates Market Loan Loan Interest

Ratings (Nichols / Johnson) Ratings Rates
(Weiss) (Levey) (Goldreich)
Energy Market CCC+ 11.25% to 12.25% BBB 5.19% to 5.65%
Loan
2006 PSA CCC 11.00% to 12.00% BBB 5.00% to 5.61%
Market Loan
2007 PSA CCC 10.00% to 11.00% BBB 4.99% to 5.47%
Market Loan
D. Trial Judge=s Findings and Conclusions
[58] The trial judge relied on aspects of this expert evidence to calculate his own range of
market interest rates that Energy and PSA could have obtained for each of the Parental Loans. He
described this process as an Aarm=s length check on reasonableness@. In doing so, the trial judge
found fault with both Weiss=s and Levey=s evidence. He found it Aindefensible@ for Weiss to have
used the actual inter-company interest rates to determine a company=s financial status, it being Atoo
circular@ to use in a credit rating analysis the very interest rate at issue.33 He also found that
Weiss=s conclusions about the business risks facing Energy and PSA were too pessimistic.
[59] The trial judge concluded that Levey, for his part, had erred in factoring implicit parental
support into his ratings. To remove any reliance on parental support, the trial judge decreased
Levey=s credit rating by four notches for both the Energy Market Loan and 2006 PSA Market
Loan, and by one notch for the 2007 PSA Market Loan. This took those ratings back to where they
stood before Levey adjusted for implicit parental support. The trial judge also found that Levey
had unreasonably relied on what he found to be PSA=s own overly optimistic 2007 financial
forecast. To remove any reliance on this forecast, the trial judge used the same credit rating for the
2007 PSA Market Loan as he used for the 2006 PSA Market Loan. In the end, the Aadjusted@ credit
rating for all Market Loans was BB-.
[60] However, rather than accepting this adjusted BB- rating, the trial judge decided to calculate
a Amidpoint@ between this adjusted rating (as calculated by the trial judge) and Weiss=s unadjusted
credit ratings of CCC+ (for the Energy Market Loan) and CCC (for the 2006 PSA Market Loan
and 2007 PSA Market Loan). Crucially, while the trial judge reduced Levey=s credit ratings to
33
Page: 19
account for their supposed deficiencies, he did not do the same to Weiss=s figures notwithstanding
the frailties he identified in Weiss=s analysis. We return to this point later in these Reasons.

[61] The trial judge used the Amidpoint@ credit ratings to calculate a preliminary range of market
interest rates.34 He then increased the rate ranges he selected to account for some of Nichols=
pricing considerations. Specifically, the trial judge added 44 basis points to account for the Asaved
costs of bond issuance@ and 50 basis points to account for Afundamental factors@. In the result, the
trial judge found the final market ranges for the Market Loans to be as follows: 7.97% to 8.77% for
the Energy Market Loan; 7.79% to 9.21% for the 2006 PSA Market Loan; and 7.85% to 9.08% for
the 2007 PSA Market Loan.35
[62] In deciding whether the interest deductions were reasonable, the trial judge then compared
the highest end of each range of interest rates for the Market Loans to the actual interest rates on
the Parental Loans. He concluded that the interest rates paid Aexceed what the evidence shows
would probably have been paid under a similar arm=s length transaction@. Nevertheless, the trial
judge concluded that the interest deductions were reasonable because the interest payments were
made under an Aidiosyncratic arrangement specially constructed to meet the business policy
objectives of the ENMAX Corporate group@.36 In doing so, the trial judge essentially abandoned
the arm=s length check, another point to which we return later in these Reasons.
[63] Ultimately, the trial judge concluded that the differences paid when compared to the
highest end of each range of market interest rates as found by him (2.73% per annum higher for the
Energy Loan, 1.09% per annum higher for the 2006 PSA Loan and 0.82% per annum higher for the
2007 PSA Loan) were Anot so great as to bring the rates outside what any business would have
contracted to pay@.37
IV. Issues on Appeal
[64] The formal notice of appeal succinctly alleges that the trial judge erred in his analysis of
whether a reasonable amount of interest was deducted and his use of the expert evidence. The
Crown specifically takes issue with a number of aspects of the QB Reasons. Essentially, it argues
that the trial judge erred in applying the test for reasonableness set out in Gabco Ltd. v Minister of
National Revenue, [1968] 2 Ex CR 511 [Gabco] by (1) using a subjective standard rather than an
34
The trial judge relied on historical interest rate data that Goldreich had provided in his rebuttal report in relation to
bonds that were rated B and B- around the relevant times: QB Reasons, paras 256-257.
35
36
37
Page: 20
objective one; (2) considering the views of the lender rather than the borrower in assessing the
reasonableness of the interest paid; and (3) failing to conduct a proper arm=s length test by
including non-arm=s length components. In particular, the Crown contends that had a true arm=s

length test been applied, implicit parental support would have B and should have B been taken into
account, thereby increasing the credit ratings. Finally, the Crown also contends that the trial judge
erred in his use of expert evidence by improperly averaging the competing expert ratings, adding
transaction costs, and double counting the fundamental factors.
V. Standard of Review
[65] Questions of law, including those involving issues of statutory interpretation, are reviewed
for correctness: Canadian National Railway Co. v Canada (Attorney General), 2014 SCC 40 at
para 33, [2014] 2 SCR 135; Geophysical Service Incorporated v EnCana Corporation, 2017
ABCA 125 at para 75, 51 Alta LR (6th) 259. Determining and applying the proper test in assessing
the reasonableness of interest claimed under s 20(1)(c)(i) of the ITA is a question of law: Singleton
v Canada, 2001 SCC 61 at para 22, [2001] 2 SCR 1046; Ludco Enterprises Ltd. v Canada, 2001
SCC 62 at para 34, [2001] 2 SCR 1082 [Ludco].
[66] In general, a trial judge=s factual findings and factual inferences are reviewed for palpable
and overriding error: Housen v Nikolaisen, 2002 SCC 33, [2002] 2 SCR 235. If such errors are
disclosed on the record, an appellate court must intervene to correct them: HL v Canada (Attorney
General), 2005 SCC 25 at para 75, [2005] 1 SCR 401 [HL]. Functionally, a finding of palpable
and overriding error is the same as concluding that the trial judge=s factual finding or factual
inference was unreasonable, unsupported by the evidence, or clearly wrong: HL, supra at paras
55-56.
[67] The same deferential standard of review applies to a trial judge=s decision to accept or
reject expert evidence: Toneguzzo-Norvell (Guardian ad litem of) v Burnaby Hospital, [1994] 1
SCR 114 at 121 [Toneguzzo-Norvell]; Baker Estate v Poucette, 2017 ABCA 344 at para 12, 60
Alta LR (6th) 39. Accordingly, where the evidence of one expert is preferred to that of another, an
appellate court will only intervene where that decision is unreasonable: Stewart Estate v TAQA
North Ltd, 2015 ABCA 357 at para 112, 607 AR 201; Thoreson v Alberta (Minister of
Infrastructure), 2012 ABCA 170 at para 15, 524 AR 390. Nor is it for appellate courts to
second-guess the weight to be assigned to the evidence: Nelson (City) v Mowatt, 2017 SCC 8 at
para 38, [2017] 1 SCR 138. That assessment being the province of the trial judge, an appellate
court is not to interfere simply because it takes a different view of the evidence:
Toneguzzo-Norvell, supra at 121-123.
Page: 21
VI. Analysis
A. Reviewable Errors in Assessing Reasonableness of Claimed Interest Expenses

[68] The QB Reasons reveal a number of critical errors in assessing the reasonableness of the
claimed interest expenses that warrant appellate intervention.
1. Disregarding the Legislative Scheme
[69] Unfortunately, the starting point of the analysis was flawed. The trial judge began by
acknowledging the fundamental principle of statutory interpretation: the Act in question must be
read in its entire context, in its grammatical and ordinary sense and in harmony with the legislative
scheme, its object and the intention of the legislature: Rizzo & Rizzo Shoes Ltd (Re), [1998] 1 SCR
27 at para 21. However, the trial judge rejected the Crown=s submission that, in these
circumstances, the interpretation of s 20(1)(c)(i) of the ITA should be informed by Alberta=s
legislative scheme. Declining to take into account what he termed Agovernment policy in
deregulating the electrical power market@ in interpreting s 20(1)(c)(i) of the ITA, the trial judge
stated the following at QB Reasons, para 88:
There is no basis for the Crown or the court to impose further

obligations motivated by a desire to level the playing field. Doing so
would undermine the interpretive principles governing taxing
statutes.... Those principles, in my view, apply to the PILOT Reg. as
well.... Further, it would be anomalous to find that Alberta=s
legislature intended to incorporate the words of the Income Tax Act,
but not the jurisprudence considering it.
Consequently, the trial judge effectively determined that anything outside the ITA was irrelevant in
determining whether the claimed interest was Areasonable@ under s 20(1)(c)(i) of the ITA. In so
concluding, the trial judge erred in law.
[70] The modern rule of statutory interpretation requires courts to take a unified textual,
contextual and purposive approach to this task: Ruth Sullivan, Sullivan on the Construction of
Statutes, 6th ed (Markham: LexisNexis Canada, 2014) [Sullivan] at 7-8. A court must consider not
only the textual wording of the statutory provision in dispute but also the purpose of that provision
and all relevant context. That includes the legislative scheme of which the provision forms a part.
The key point here is that while the trial judge thought he was interpreting a Ataxing statute@, in
fact, he was not. In this case, the sections of the PILOT Regulation and Utilities Act that
incorporate the ITA by reference are part of a larger legislative scheme. That larger scheme is
directly related to the issue at the heart of the interpretive exercise here B whether the amount of
interest deducted was Areasonable@. That invites the obvious question: reasonable in what context?
Page: 22
Here, that context necessarily includes the statutory regime under which Energy and PSA are
required to make Balancing Pool Payments to the Balancing Pool.

[71] At its core, the legislative intention underlying the requirement for municipal entities to
make Balancing Pool Payments is clear. The Legislature=s intent is reflected in the text of the
Utilities Act and the PILOT Regulation and in the legislative debates. It is to ensure a level playing
field between non-tax paying municipalities (and their subsidiaries) and their tax-paying
competitors in the private sector. The object in doing so is to promote competition for the benefit
and protection of Alberta electricity consumers. Hence the statutory requirement that municipal
entities which choose to compete in the electric power industry make Balancing Pool Payments in
an amount equal to what they would otherwise be required to pay were they subject to tax. To
repeat, these Balancing Pool Payments are not payable to the Crown but to the Balancing Pool for
the benefit of Alberta electricity consumers.
[72] The trial judge viewed Aleveling the playing field@ as an unexpressed goal of the
Legislature. Courts are understandably reluctant to rely on unexpressed legislative goals when
interpreting the ITA. The ITA is a complex piece of legislation that balances a number of
sometimes conflicting principles. Relying on unstated purposes risks upsetting the delicate
balance Parliament has struck: Shell Canada Ltd v Canada, [1999] 3 SCR 622 at para 43 [Shell];
Canada Trustco Mortgage Co v Canada, 2005 SCC 54 at para 42, [2005] 2 SCR 601 [Canada
Trustco]. But in the context of the Balancing Pool Payments regime, the Legislature=s intention is
clearly identifiable and compelling B to level the playing field in aid of fostering competition so
that other entities can enter the electrical power industry in Alberta. The intended beneficiaries of
deregulation were, and are, Alberta electricity consumers, not municipalities or monopolistic
entities involved in the electrical power industry. As a result, under the Balancing Pool Payments
regime, the Legislature=s intention is neither unexpressed nor irrelevant to the reasonableness
assessment of the claimed interest deduction.
[73] Moreover, one must remember the rationale for the Duke of Westminster principle and its
emphasis on textual interpretation of taxing statutes. As stated by Lord Tomlin in Commissioners
of Inland Revenue v Duke of Westminister, [1936] AC 1 (HL) at pp 19-20:
Every man is entitled if he can to order his affairs so as that the tax
attaching under the appropriate Acts is less than it otherwise would
be. If he succeeds in ordering them so as to secure this result, then,
however unappreciative the Commissioners of Inland Revenue or
his fellow taxpayers may be of his ingenuity, he cannot be
compelled to pay an increased tax.
This rationale does not apply to the Balancing Pool Payments regime. As stressed, this is not an
income tax case. The entire point of the Balancing Pool Payments regime is that other electrical
utilities do not have to abide the Aingenuity@ of one municipal entity using techniques to reduce its
Page: 23
Balancing Pool Payment in a manner which leads to an unlevel playing field. The objective of the
Balancing Pool Payments regime is not to raise money for the Crown but to level the playing field
and thereby balance the contributions all utilities make to the Balancing Pool for the benefit of

electrical consumers.
[74] It is true that under s 12(2) of the PILOT Regulation, a municipal entity is entitled to the
benefit of the rights, processes, procedures and remedies available to taxpayers under the specified
tax acts in addition to being subject to the obligations of taxpayers under those acts. But the
provisions in the ITA that affect the calculation of the Balancing Pool Payments cannot be stripped
out of the larger legislative context. While the Legislature has incorporated the ITA by reference as
part of the Balancing Pool Payments regime, it has done so in pursuit of a specific goal:
competitive equivalency between municipally-owned and non-municipally-owned companies.
[75] Courts should avoid interpretations that defeat or undermine legislative purpose: Sullivan
at 259. As a result, assessing whether the interest that Energy and PSA deducted was Areasonable@
under s 20(1)(c) of the ITA requires consideration of the purpose of the legislative scheme in order
to ensure harmony, coherence and consistency among s 20(1)(c) of the ITA, the Utilities Act and
the PILOT Regulation.38 In any case, the modern rule also applies to interpretation of the ITA:
Stubart Investments Ltd v Canada [1984] 1 SCR 536; Canada Trustco, supra at para 47; Lipson
v Canada, 2009 SCC 1 at para 26, [2009] 1 SCR 3 [Lipson].
[76] What does all this mean? Just this. Given the legislative scheme here, in assessing whether
an interest deduction by a municipal entity was reasonable, a court must determine whether the
interest rate charged on the loan and the structure of the loan transaction, to the extent that structure
affects the interest rate, are objectively reasonable. Were there no limits on how much interest
could be deducted, municipalities could readily defeat the Balancing Pool Payments regime. The
reason why is simple. Any interest payments deductible by Energy and PSA are not taxable
income in ENMAX=s hands. In general, municipalities and subsidiaries of municipalities do not
pay income tax: see ITA ss 149(1)(c), 149(1)(d.6) and 149(1.2)(b); ACTA s 5(1)(a).39 And under
38
As to legislative Apurpose@, Sullivan notes (at 268): AA range of expressions is used in referring to purpose,
including >aim=, >object=, >objective=, >intention=, >underlying philosophy=, >policy=, >principle=, >reason=, and >rationale=.
Although these terms are not used with any great precision, their diversity reflects the fact that there are many different
aspects of purpose.@
39
Municipalities themselves are exempt from federal income tax: ITA, s 149(1)(c). Municipally-owned corporations,
such as ENMAX, are exempt from federal income tax if no more than 10% of their income is earned from activities
carried on outside of the municipality=s geographic boundaries: ITA, s 149(1)(d.5). Subsidiaries of municipally-owned
corporations, such as Energy and PSA, are subject to a similar exemption: ITA, s 149(1)(d.6). Corporate income
earned from the production or distribution of electrical energy is excluded in calculating how much of a company=s
income was earned outside the municipality where these activities are regulated under provincial law: ITA,
s 149(1.2)(b). Identical exemptions also apply to municipally-owned companies (and their subsidiaries) under
provincial tax law: ACTA, s 5(1)(a). Since Energy and PSA were required to make Balancing Pool Payments under the
PILOT Regulation, they were exempt from federal and provincial income tax at all relevant times.
Page: 24
the Balancing Pool Payments regime, it is only Amunicipal entities@ within the meaning of s 147(1)
of the Utilities Act and s 1(1)(f) of the PILOT Regulation that must make Balancing Pool
Payments. That includes Energy and PSA, but not ENMAX. ENMAX is not required to pay

income tax or Balancing Pool Payments.40
[77] This stands in marked contrast to the ordinary situation under the ITA where a parent has
loaned money to a subsidiary. The interest deductible by the subsidiary is brought into income by
the parent. In that case, the government taxes both ends of the loan transaction.41 However, in this
case, one half of the transaction, that is the interest payments to ENMAX, are not subject either to
income tax or payments in lieu of tax. Therefore, it would be easy for a municipality to defeat the
purpose of the Balancing Pool Payments regime if courts assessed the Areasonableness@ of an
interest deduction without any regard to this reality.
[78] Unless there is some objective limit to the amount of interest a municipal parent that pays
neither tax nor Balancing Pool Payments could charge on loans to its municipal entity subsidiaries,
the parent could simply load up its subsidiaries with significant debt. Or lard up the lending terms
of a loan with parent-friendly terms that make the loan unattractive to an arm=s length lender. Or
use these factors as Ajustification@ for charging disproportionately high interest rates on loans.
Permitting municipalities or their subsidiaries to artificially create Ajunk bonds@ would allow them
to gain an unfair competitive advantage over their private sector competitors. This would reduce
competition and defeat the purpose of the Balancing Pool Payments regime. On a proper
interpretation of the Balancing Pool Payments regime, this is not permitted.
[79] It is not this Court=s role to act as protector of public revenue: Rezek v Canada, 2005 FCA
227 at para 39, 336 NR 141. However, it is this Court=s role to give effect to the clear legislative
purpose underlying the Balancing Pool Payments regime. Thus, the Areasonableness@ of a
deduction for payment of interest under s 20(1)(c)(i) must be measured in a way that is consistent
with the Legislature=s goal of leveling the playing field in the electrical industry. What is
reasonable for purposes of calculating taxable income is not necessarily reasonable for purposes of
calculating a required Balancing Pool Payment. Artificial devices that undermine or defeat the
legislative scheme for the payment of Balancing Pool Payments cannot satisfy the
Areasonableness@ test under s 20(1)(c)(i).
40
A municipally-owned subsidiary, which includes Energy and PSA, that engages in one of the businesses covered by
the Balancing Pool Payments regime falls within the definition. However, the Crown and ENMAX agree that a
company wholly owned by a municipality is not a Amunicipal entity@ if it does not directly engage in any of the
businesses or undertakings listed in the Utilities Act and the PILOT Regulation even if it owns subsidiaries that do
engage in those businesses. This issue is not before this Court.
41
For income tax purposes, where the parent company does not pay Canadian income tax (for example, where the
parent is a non-resident for tax purposes), these concerns are addressed by s 18(4) of the ITA which limits the amount
of interest deductible by thinly-capitalized companies.
Page: 25
[80] For these reasons, the trial judge erred in law in failing to take the legislative scheme into
account in assessing the reasonableness of the claimed interest expenses. This led, in turn, to other

reviewable errors.
2. Failure to Conduct a Proper Arm=s Length Assessment of Reasonableness
[81] The QB Reasons reveal a failure to conduct a proper arm=s length assessment of the
reasonableness of the claimed interest expense. That is wrapped up not only in the erroneous
starting point to this interpretive exercise but also in the misinterpretation and misapplication of
the arm=s length test itself.
a. Section 20(1)(c)(i) of the ITA and Reasonableness
[82] Section 20(1)(c)(i) of the ITA Apermits a deduction against income of interest paid on
borrowed money used for the purpose of earning income@: Husky, supra at para 12. The purpose
of allowing such a deduction is to encourage the accumulation of capital to earn income:
Bronfman Trust v The Queen, [1987] 1 SCR 32 at para 23; Lipson, supra at para 29; Ludco,
supra at para 63; Shell, supra at para 57.42
[83] In Shell, supra at para 28, the Supreme Court extracted from the wording of s 20(1)(c)(i)
a four-part test for interest deductibility under s 20(1)(c)(i) of the ITA: (1) the amount must be paid
in the year or be payable in the year in which it is sought to be deducted; (2) the amount must be
paid pursuant to a legal obligation to pay interest on borrowed money; (3) the borrowed money
must be used for the purpose of earning non-exempt income from a business or property; and (4)
the amount must be reasonable, as assessed by reference to the first three requirements: Shell,
supra at para 28. Of course, the Shell test is not wholly applicable to the Balancing Pool Payments
regime. It is applied to the calculation of Balancing Pool Payments on the artificial assumption that
Energy and PSA are engaged in borrowing money to earn Ataxable income@. This legal fiction is
required because the Balancing Pool Payments are calculated as if both Energy and PSA did pay
income tax. When constructing the legal fiction around the Shell test, one must therefore assume
that Energy and PSA are taxable since that is the premise of the Shell test.
42
Section 20(1)(c)(i) is an exception to s 18(1) which prohibits capital deductions. Section 20(1)(c)(i) essentially
deems interest expenses on money used to produce income from a business or property to be current expenses:
Canada Safeway Ltd v Canada (Minister of National Revenue) [1957] SCR 717 at 727; Shell, supra at para 74.
Page: 26
[84] On this appeal, the only disputed part of the Shell test is whether the amount of interest
claimed is Areasonable@ in the context of the Balancing Pool Payments regime. The third part of the
test (sometimes referred to as the Adeductibility@ requirement) has attracted the bulk of judicial

consideration under the ITA. Even under tax law, little attention has been paid to the
reasonableness requirement. This is not surprising because, as noted, both sides of the transaction
involving interest deductions typically pay income tax. But here, ENMAX, as recipient of the
claimed interest deductions, does not pay income tax or make Balancing Pool Payments. Thus, for
purposes of the Balancing Pool Payments regime, when assessing whether the interest paid by
Energy and PSA satisfies the reasonableness requirement under s 20(1)(c)(i), this consideration
forms part of the evaluative context.
[85] AReasonableness@ implies an objective test. For purposes of s 20(1)(c)(i) of the ITA, the
Areasonableness@ of an interest deduction is assessed by applying the test in Gabco, supra at 522:43
It is not a question of the Minister or this Court substituting its

judgment for what is a reasonable amount to pay, but rather a case of
the Minister or the Court coming to the conclusion that no
reasonable business man would have contracted to pay such an
amount having only the business consideration of the appellant in
mind. [Emphasis added.]
[86] Gabco frames the inquiry in terms of whether no reasonable business person would have
contracted to pay the disputed interest. However, the question is not whether there is some
imaginable business person who might have agreed to do so even if 99% of reasonable business
persons would not have done so. Therefore, we would refine the test this way: would a reasonable
business person have contracted to pay the disputed amount of interest taking into account only the
business interests of the borrower? This accords with the requirement in Gabco that the test must
be objective and with how that test has been applied in later cases: see e.g. Safety Boss Ltd v
Canada, [2000] 3 CTC 2497 at para 27 (FC); TransAlta Corp v Canada, 2012 FCA 20 at paras
74-78, 426 NR 27. In other words, was the interest paid objectively reasonable? Under the
Balancing Pool Payments regime, the answer to this question may also require a court to consider
whether the terms of the loan were objectively reasonable to the extent those terms affected the
interest rate.
b. Errors in Applying s 20(1)(c)(i) Under Balancing Pool Payments Regime
(i) Failure to Properly Apply an Arm=s Length Check
43
The parties agreed that this test applied even though derived from a general provision in the ITA dealing with
deductions for reasonable expenses rather than interest deductions: Petro-Canada v Canada, infra at paras 61-62.
Page: 27
[87] At trial, the Crown contended that the best way to determine whether the interest deduction
was reasonable was to ask how much interest Energy and PSA would have paid had they borrowed
from an arm=s length lender rather than their corporate parent ENMAX. On the Crown=s theory,

this required the trial judge to consider the interest rates that Energy and PSA would have paid to
third party lenders had they gone into the bond market for the Parental Loans. Energy and PSA
disagreed. They took the position that interest deductions may be reasonable even if the interest
rate is above market rates. They also pointed out that, unlike other provisions of the ITA,
s 20(1)(c)(i) does not expressly mandate a comparison against an arm=s length transaction.
[88] The trial judge rejected the Crown=s argument that the test for whether an interest rate is
Areasonable@ under s 20(1)(c)(i) of the ITA is synonymous with what a borrower would pay in an
arm=s length transaction. In his view, Athe interest that would have been paid in a similar
transaction at arm=s length may inform the analysis but cannot determine the result@.44 But the trial
judge did not stop there. In agreeing with Energy and PSA, he stated at QB Reasons, para 112:
For the reasons already given, I conclude the reasonableness

standard set out in section 20(1)(c) cannot generally be based on an
arm=s length standard. Doing so would go against the entire tenor of
the Supreme Court of Canada jurisprudence.
In approaching this issue the way he did, the trial judge erred in law. Even under income tax law,
the conclusion that reasonableness cannot generally be based on an arm=s length analysis is a
misstatement of the law.
[89] We accept that, in some cases, business considerations may motivate a reasonable
borrower to pay a higher than market interest rate: Petro-Canada v Canada, 2004 FCA 158 at
paras 61-62, [2004] 3 CTC 156 [Petro-Canada]. For example, a borrower may be willing to agree
to this to preserve the relationship with its primary lending institution. But the mere fact that some
deviation from a market rate may be considered reasonable even where parties are not dealing at
arm=s length does not mean that any interest rate agreed to between non-arm=s length parties is
generally reasonable. No such generalization may be drawn.
[90] Where parties are not dealing at arm=s length, the reality is that transactions between them
are often not subject to ordinary market forces: GlaxoSmith Kline Inc v R, 2012 SCC 52 at para 1,
[2012] 3 SCR 3 [Glaxo]. Consequently, it would be illogical to conclude that the interest that a
non-arm=s length borrower agrees to pay is usually objectively reasonable. Indeed, it is the reverse
that is usually true: the interest that an arm=s length borrower has agreed to pay in the market
defines what is reasonable. In other words, where an interest rate for a loan has been established in
a market of lenders and borrowers acting at arm=s length, that market interest rate is the one
44
Page: 28
usually considered reasonable: Shell, supra at para 34; Mohammad v R [1998] 1 FC 165 at para
28, [1997] 3 CTC 321 (Fed CA) [Mohammad]; Ludco, supra at para 70. Thus, even under income
tax law, courts have recognized that the reasonableness of an interest rate can be measured

objectively by reference to market rates, a place where parties deal at arm=s length: Mohammad,
supra at para 28.45
[91] Commercially, this makes sense. Transactions between parents and subsidiaries often
involve business considerations idiosyncratic to the corporate family. Subsidiaries do not act with
only their best interests in mind. A reasonable business person might take steps to maximize
profits for the corporate parent even if this means earning a smaller net profit for the subsidiaries
themselves. After all, the overall aim of a corporate group is to maximize shareholder value. In
pursuit of this goal, it is of little practical consequence to shareholders which entity in the
corporate group earns the profits and how it does so, whether by dividends or interest payments,
provided that, in the end, the shareholders benefit.
[92] As a result, even under income tax law, the market interest rate that an arm=s length lender
would have charged for an equivalent loan remains a useful tool against which to gauge whether a
particular non-arm=s length interest deduction is reasonable. This is so even though s 20(1)(c)(i) of
the ITA does not explicitly require a comparison to an arm=s length transaction: Glaxo, supra at
para 35. As noted, under income tax law, the perceived need for a provision to this effect is lacking
since both sides of the interest transaction are typically taxable. Hence, an interest deduction for
one constitutes income in the hands of the recipient. But not so under the Balancing Pool Payments
regime.
[93] Here, despite the trial judge=s reluctance to accept the validity of an arm=s length check on
reasonableness, he undertook what he described as an arm=s length check on the interest rates
payable by Energy and PSA under the Parental Loans. In the section of the QB Reasons titled
AArm=s Length Check of Reasonableness@, he calculated a range of possible interest rates that an
arm=s length lender would have charged Energy and PSA. Unfortunately, the trial judge erred in
applying the arm=s length check. Why? He failed to construct a truly arm=s length comparison and
instead infused his hypothetical with non-arm=s length components. His analysis was premised on
a misunderstanding of what an arm=s length transaction involves and how it relates to the four-part
test from Shell. As a consequence of this approach, the trial judge ultimately abandoned the arm=s
length check. This was a fatal error.
[94] The trial judge concluded that decisions such as Shell prohibited an Aarm=s length check@
from looking behind the terms of the actual parent-subsidiary loan. In the trial judge=s view,
45
See also Canada Revenue Agency Income Tax Folio, S3-F6-C1, at 1.20: ATo determine whether an interest rate is
reasonable [under s 20(1)(c)], the prevailing market rates for debts with similar terms and credit risks should be
considered@.
Page: 29
reasonableness should Abe measured with reference to the legal transaction to which the borrower
was a party, not other contracts it might have made@: QB Reasons, para 99. Thus, on this
reasoning, when conducting an arm=s length check, A[t]o select a meaningful comparator, the main

features of the actual transactions must be replicated as closely as possible@: QB Reasons, para
237. Accordingly, he determined that the transactions he needed to assess were the ones Energy
and PSA actually entered into. To put it the way the trial judge did at QB Reasons, para 234:
APerhaps the funds could have been borrowed by issuing bonds on public markets, but that is not
the transaction to be considered.@
[95] But even under income tax law, Shell does not demand this approach in evaluating the
reasonableness of the interest deduction claimed. This misunderstanding ultimately distorted the
trial judge=s Aarm=s length check@, leading him to conclude that the market interest rates were much
closer to the interest rates paid on the Parental Loans than they in fact were. The proposition that it
is the actual transaction that must be considered is correct in the narrow sense that it is indeed the
interest deducted under the non-arm=s length loans that must ultimately satisfy the statutory criteria
of Areasonableness@. Therefore, focusing on the Amain features@ of the Parental Loans makes sense
but subject to the obvious caveat that any arm=s length comparators would have to be different
from the Parental Loans in one key respect: they would have to be arm=s length. It cannot be
extrapolated from Shell that an arm=s length interest rate is irrelevant to whether the non-arm=s
length interest rate is reasonable. Quite the contrary.
[96] It must be remembered that the central issue in Shell was whether the higher interest rate
met the third element of the test, the deductibility requirement. The taxpayer borrowed in New
Zealand dollars at 15.4% interest, the prevailing market rate for similar loans priced in New
Zealand dollars. Shell immediately converted the New Zealand dollars into US dollars, and then
used the US currency for the purpose of earning business income. Shell concurrently entered into a
contract hedging against expected declines in the New Zealand dollar in a way that functionally
allowed Shell to borrow at the prevailing market interest rate for similar loans priced in US dollars,
which was 9.1%.
[97] The Minister reassessed Shell on the grounds that interest could only be deducted at this
lower rate since it was US dollars that were being used in Shell=s business. The Supreme Court
disagreed. It concluded that since there was a link between the New Zealand funds and income
earned by the business, the higher interest rate (15.4%) on the New Zealand loan met the third part
of the test (Athe borrowed money must be used for the purpose of earning non-exempt income from
a business or property@). Once the Court reached this conclusion, the issue of reasonableness
became relatively straightforward: the relevant interest rate of 15.4 % was itself a market rate and
market rates are generally reasonable. However, in this case, the Parental Loans were not arm=s
length and thus, the disputed interest rates are not presumptively reasonable.
[98] Even under income tax principles alone, the requirement that the interest deducted be
Areasonable@ invites an arm=s length check. But here, in undertaking the arm=s length check, the
Page: 30
trial judge fell back into assessing Athe legal transaction to which the borrower was a party@ rather
than considering what the funds could have been borrowed at in the market. In essence, he
concluded that an arm=s length check did not matter because, in his view, the test was ultimately

subjective and idiosyncratic. In other words, on this approach, ENMAX was entitled to do what it
wanted, making the expert evidence as to market interest rates for the Market Loans essentially
irrelevant. This conceptual error had the effect of significantly increasing the purported range of
the Aarm=s length@ interest rates. And, of course, it was these increased rates that the trial judge then
compared favourably to the interest rates actually paid under the Parental Loans.
(ii) Failure to Recognize Arm=s Length Check Is Essential Under Balancing Pool
Payments Regime
[99] This error was compounded by the failure to recognize that under the Balancing Pool
Payments regime, an arm=s length assessment is not simply a useful check, it is essential. An arm=s
length assessment constitutes a necessary proxy for the reasonableness of the interest deduction.
Again, we stress that this is not an income tax case where both lender and borrower in a loan
transaction are taxable.
[100] Therefore, under the Balancing Pool Payments regime, without considering the interest
rate an arm=s length lender would have charged the municipal entity, it would be difficult, as a
matter of principle, to find any objective criterion by which to determine whether the interest
deduction claimed was reasonable. If the only check were on what the parties did internally, then
the parties= idiosyncratic choices made B all of which are in the control of the parent that pays
neither income tax nor Balancing Pool Payments B would drive and determine the result. The
objective test would be diminished to the vanishing point. This makes no sense.
[101] Further, any Aarm=s length check@ may well be largely artificial unless the arm=s length
hypothetical addresses how a reasonable business person would have structured the transaction to
the extent that structure affects the amount of the interest paid. The reality is that subsidiaries will
often deal with their parent much differently than they would an arm=s length lender. For example,
an arm=s length lender would typically restrict the subsidiary from paying dividends to the parent
or repaying outstanding shareholder loans to the parent. But in a non-arm=s length transaction, the
terms of the loan (as with the Parental Loans) might well contain no such limitations. The critical
point is this. Given the Balancing Pool Payments regime, a court cannot be restricted to looking
only at the idiosyncratic loan terms set by a corporate parent that is not subject to either Balancing
Pool Payments or income tax. Simply, it may well be that the terms and conditions surrounding the
loan cannot be divorced from the interest claimed as deductible.
[102] In this case, as the trial judge observed, Athe intercompany notes were burdened with a
number of conditions, such as ... stripping of cash flow to the parent, which would have made them
very difficult to sell on the market@: QB Reasons, para 268. Yet these conditions were essentially a
fiction from a business perspective. It was ENMAX that decided on the terms of the Parental
Page: 31
Loans. A corporate parent might well lend money to its subsidiary without any formal covenants
restricting, for example, subsequent borrowing or repayment of shareholders loans. After all, there
is no compelling need for covenants when the parent lender itself decides how the subsidiary

manages its affairs. Similarly, here, the capital structure of Energy and PSA B including their mix
of debt and equity B was solely within ENMAX=s discretion. It was ENMAX that decided whether
to capitalize its subsidiaries through parental loans, retained earnings, or a gift of cash from the
parent. These decisions had a direct impact on key financial ratios.46 The reality is that strong
covenants of the kind an arm=s length lender would typically demand were missing only because of
the non-arm=s length nature of the Parental Loans.47
[103] That leads to the obvious question: can a parent of a municipal entity essentially create
Ajunk bonds@ for its subsidiaries by loaning money on parent-friendly terms, and then argue that
the high interest rates set are justified because of the Arisk@ inherent in these loans? In our view, the
answer to this question is no. Allowing a municipal entity to deduct interest expenses without
regard to what an arm=s length lender would have charged would give municipal entities a
competitive advantage over companies not owned by municipalities. This is directly contrary to
the object and spirit of the Balancing Pool Payments regime, not to mention the interests this
regime was designed to protect B those of Alberta electricity consumers. A parent of a municipal
entity is not entitled to gain an advantage over its private competitors by arranging its subsidiaries=
affairs in a way that causes a hypothetical arm=s length loan to appear riskier than it would have
been had any reasonable municipal entity actually gone into the market to borrow the funds. Hence
the need under the Balancing Pool Payments regime to ensure that the structure of the loan
transaction is also objectively reasonable to the extent it would affect a market interest rate.
[104] For these reasons, when determining the reasonableness of an interest deduction under the
Balancing Pool Payments regime, a court must take into account the interest rate a third party
lender would have charged the municipal entity in question. As part of that exercise, in the absence
of implicit parental support, the hypothetical arm=s length assessment should be based on what
would be commercially reasonable terms for an arm=s length loan transaction. Barring exceptional
circumstances, that market interest rate will be determinative of reasonableness.
[105] The trial judge erred in law when he failed to assess the reasonableness of the interest
deduction in accordance with these principles.
46
For instance, the debt-to-equity ratio was one factor that both Levey and Weiss considered when assigning credit
ratings to each of Energy and PSA. The experts reasonably assumed that, all else being equal, a higher debt-to-equity
ratio would reduce the subsidiaries= perceived creditworthiness and drive up arm=s length interest rates: EKE, A232-3,
A342, A400 (Weiss); EKE, A123, A131 (Levey).
47
Weiss, Nichols and Johnson all relied on the purported weakness in the loan covenants when rating and pricing the
Market Loans: EKE, A235 (Weiss); EKE, A266 (Nichols); ARD at 306/36-308/9 (Johnson).
Page: 32
[106] In addition, the Aarm=s length check@ that the trial judge did undertake was erroneous on
five other critical points: (1) implicit parental support; (2) transaction costs; (3) the use of internal
memoranda prepared by ENMAX; (4) fundamental factors; and (5) splitting the difference

between the experts’ credit ratings. We now address each in turn.
3. Failure to Take ENMAX=s Implicit Parental Support into Account
[107] The trial judge erred in failing to take Aimplicit parental support@ into account in assessing
whether the claimed interest deduction was reasonable. The issue, simply stated, is whether, in the
absence of an express parental guarantee, ENMAX would nevertheless still have provided parental
support to Energy and PSA had the Parental Loans been made by a third party lender.
[108] It is evident from this record that the trial judge preferred Levey=s evidence on this point.
He discounted Weiss=s contrary evidence as Aarbitrary@ for his Arefusal to give any degree of effect
to implicit parental support@: QB Reasons, para 127. As noted at QB Reasons, para 134:
Mr. Levey=s recognition of implicit parental support is also more

convincing than Mr. Weiss=s conclusion that the subsidiaries should
be viewed as completely separate organizations. This leaves aside,
for the moment, the question of whether it is proper to assume
implicit support when evaluating possible comparators to the
ENMAX transaction. [Emphasis added]
[109] Despite accepting Levey=s approach to implicit parental support, the trial judge excluded
implicit parental support from his calculation of the credit ratings for the Market Loans. Why? It is
clear from the following that he assumed, wrongly, that merely because the lender and parent were
the same entity, it necessarily followed that there could be no implicit parental support:48
The parties spent much time at trial discussing whether arm=s length
purchasers of ENMAX Energy and ENMAX PSA bonds would
assume implicit support from ENMAX Corp. in the event of a risk
of default (it being a given that express guarantees for the bonds
would not be given by the parent). Assumed implicit support would
materially improve the credit rating and thus lower the interest rate
purchasers would require.
It would be wrong, in my view, to allow consideration of implicit

support to influence opinions about reasonable interest rates,
regardless of whether bond purchasers might make such an
48
QB Reasons, paras 239-241.
Page: 33
assumption. The intercompany notes allow for no parental support,

because the lender and the implicit supporter are the same. If
ENMAX Energy or ENMAX PSA default, there is no other party

from whom ENMAX Corp. may hope for relief. It bears the entire
risk....
In using the Crown=s experts= opinions, I find it necessary to remove

the effect of implicit support. [Emphasis added]
[110] As these QB Reasons reveal, the trial judge=s rationale for ignoring implicit parental
support was that the lender and parent were the same entity. He appears to have reasoned that since
ENMAX bore all the risk from the loans, parental support was irrelevant.
[111] However, the issue is not whether ENMAX bore the entire risk for the Parental Loans. Of
course it did B it was the lender. But the mere fact the parent and lender were one and the same does
not answer the question whether the parent would have provided implicit parental support had an
arm=s length lender been involved. What the trial judge should have asked is whether, given the
expert evidence he did accept, it was likely that external lenders would have assumed that
ENMAX would have provided implicit parental support had Energy and PSA borrowed the
Market Loans from an arm=s length lender. In other words, for purposes of a hypothetical arm=s
length loan (in this case, the Market Loans), the relevant transaction the judge is to consider is not
the actual loan from the parent to its subsidiary but rather a hypothetical loan to the subsidiary by
an arm=s length lender. By itself, quite apart from the issue of implicit parental support, the trial
judge=s failure to undertake this analysis was a significant error in law since it erroneously negated
an arm=s length check.
[112] Moreover, had a proper analysis been undertaken, then, based on the trial judge=s own fact
findings made and this evidentiary record, it is evident that ENMAX almost certainly would have
provided parental support for the Market Loans and would have been perceived by arm=s length
lenders as doing so. There are several cogent reasons for this.
[113] First, ENMAX and its subsidiaries were involved in the electrical industry in a symbiotic
way. Energy and PSA made up large, stable, and strategically important parts of ENMAX=s overall
business. To a large extent, Energy was ENMAX. Energy owned ENMAX=s generation and
retailing assets, and in 2004, Energy made up over 70% of ENMAX=s total revenue and over 70%
of its net earnings.49 ENMAX=s own expert conceded that Energy made up Aapproximately half@
of ENMAX=s business.50 In addition, Energy and PSA were strategically crucial to ENMAX=s
49
2004 Annual Report at 14; EKE, A124.
50
ARD at 430. This was so despite some suggestion that Energy=s profits were unusually high in 2004.
Page: 34
vertically integrated business operations.51 This being so, ENMAX would likely step in to provide
parental support rather than jeopardize its corporate strategy of vertical integration by allowing
these key subsidiaries to fall into default. A default would entitle a lender to take all available legal

steps to enforce the loan agreements. ENMAX would hardly stand idly by while subsidiaries that
represented at least half of its net income were forced into insolvency or into the sale of key assets.
51
In a presentation at ENMAX=s 2004 annual general meeting, the President and CEO of ENMAX described the
importance of Avertical integration@ between ENMAX=s businesses: EKE, A104, para 51. Moreover, the operations of
ENMAX, Energy, and PSA were closely integrated. The companies shared the same management and had identical
boards of directors: EKE, A106. ENMAX provided its subsidiaries with regulatory, financial, legal, IT and human
resources services: ASPF, para 7.10.
Page: 35
[114] Second, any insolvency or other failure of Energy and PSA would have had not only
financial implications for ENMAX, but also operating implications for ENMAX=s own reputation
and financial position. One of ENMAX=s goals was to maintain an A credit rating.52 Allowing

Energy or PSA to default on any loans would jeopardize the market=s assessment of ENMAX=s
own creditworthiness. This is to say nothing of the consequences that a default by Energy or PSA
could well have on Calgary=s own credit rating. There were also direct financial risks to ENMAX
if it allowed Energy to default on any contractual obligations. ENMAX had already provided
Energy=s trading partners with over $230 million in parental guarantees.53 Even if the hypothetical
Market Loans were subordinate to these guarantees, ENMAX faced direct financial exposure
under these other contractual obligations if it permitted its subsidiaries to fall into default. Shortly
put, the entire business of ENMAX would be at risk if either one of the subsidiaries ceased to be
viable and play its part in the larger operation.
[115] Third, ENMAX was in a strong financial position that allowed it to support its subsidiaries
if they were at risk of default. Standard & Poor’s and Dominion Bond Rating Service both
described ENMAX as having relatively strong cash flow, low leverage, and moderate business
risk.54 ENMAX was also profitable. In 2003 and 2004, it paid its shareholder, Calgary, dividends
representing only 30% of its net earnings for each year B and yet these numbers totaled $168
million and $147 million respectively. 55 Moreover, if ENMAX needed access to additional
capital, it had an arrangement with Calgary that allowed it to borrow at interest rates close to the
sterling AAA- grade rates available to Calgary.56 Financially, ENMAX was well positioned to
assist its subsidiaries should the need arise, and it had good reason to do so.
[116] Finally, as for ENMAX’s argument that no one would buy the debt instruments as reflected
in the Parental Loans given their terms, the short answer is that ENMAX did. That it did so
highlights an inescapable reality. It is only because of parental support that the Parental Loans
could be structured on such parent-friendly terms. As previously noted, ENMAX did not care if the
Parental Loans contained the usual kinds of covenants that a lender would extract. That was both
because ENMAX controlled how the subsidiaries operated their businesses B and could determine
when, and under what circumstances, the Parental Loans could, and would, be repaid B but also
because in practical terms ENMAX was going to pay the price if the subsidiaries failed. Any
realistic arms-length comparison of what would be reasonable interest rates on Market Loans must
52
ASPF, para 8.5.
53
EKE, A125, para 105.
54
Reports cited in Levey Report, EKE, A128.
55
EKE, A107.
56
See regulatory filing cited in Levey: EKE, A108.
Page: 36
include similar assumptions. In other words, any third party lender would look at the entire
corporate structure and see that ENMAX=s viability could not be separated from that of its
subsidiaries. An external lender would therefore assume implicit parental support.

[117] Viewed through this lens, it is reasonable to conclude that ENMAX would likely have
provided parental support not just for any arm=s length Market Loans but also for the Parental
Loans because parental support also buttressed its own position, not just that of Energy or PSA. In
case of default, ENMAX would have two options: (a) let its subsidiaries fail and attempt to recover
as much as possible; or (b) prop them up and recover as much as possible on a going-concern basis.
It is clear on this record that, for the reasons given, ENMAX=s interests were so linked with those
of its subsidiaries that implicit parental support, as reflected in the second option, was inherent in
the contractual arrangements made for the Parental Loans. As a result, even if one ignored the
arm=s length check B which we repeat would be an error B a court must nevertheless find a
reasonable pricing for the Parental Loans as structured. Parental support was clearly implicit in
that paradigm.
[118] Ironically, the trial judge=s observation that ENMAX bore the entire risk of the Parental
Loans is tantamount to accepting that ENMAX would have backstopped Energy and PSA
financially.
[119] Thus, implicit parental support ought to have been taken into account when determining
the arm=s length credit ratings for the Market Loans. But it was not. This error had a cascading
negative impact on the trial judge=s assessment of the credit ratings for the Market Loans which, in
turn, substantially increased the market interest rate ranges that the trial judge believed an arm=s
length lender would have demanded.
4. Erroneous Treatment of Transaction Costs
[120] The trial judge also erred in his treatment of Atransaction costs@. These costs include
underwriter fees, professional fees, promotional costs, and other expenses that a borrower incurs
by having to sell a bond in the market. A borrower does not incur many of these costs when, as
here, the borrower avoids the market by securing a non-arm=s length loan. The evidence of Nichols
and Johnson was that transaction costs would increase the market interest rate by up to 44 basis
points (0.44%). In reaching this conclusion, they relied on ENMAX=s internal pricing
memorandum.57 Conversely, Goldreich=s evidence was that such costs have no effect on market
interest rates since these costs are irrelevant to lenders.58
57
EKE, A269, A781.
58
EKE, A607.
Page: 37
[121] The trial judge added 44 basis points, that is 0.44%, to the hypothetical interest rate in his
Aarm=s length check@. He did not base this conclusion on the idea that such costs affect the market
interest rate. Instead, at QB Reasons, para 252, he focused on how saved costs (that is, costs not

incurred because the loan is non-arm=s length) could result in a higher rate of interest in a
non-arm=s length loan compared to one negotiated in the market:
I am persuaded by the views expressed by Mr. Johnson that saved

transaction costs would be a factor in what a borrower is prepared
to pay, and thus could affect the interest rate. I accept the figure of
44 basis points that Mr. Nichols adopted from the figure used in the
ENMAX pricing memoranda prepared by ENMAX Corp.
[Emphasis added]
[122] There are three problems with this reasoning. First, it is premised on a reviewable error,
namely that the Market Loans would have been rated as speculative grade securities. The ENMAX
pricing memorandum for the Energy Loan noted that CIBC World Markets had provided an
estimate for transaction costs of 44 basis points. 59 The subject memoranda also assumed
transaction costs of 34 basis points for a security rated B. The memoranda for the 2006 PSA Loan
and 2007 PSA Loan assumed transaction costs of 40 basis points with no explanation.60 The trial
judge used 44 basis points for all the Market Loans. But this was based on an assumption that the
securities in question would have a rating below the BBB rating calculated by Levey for the
Parental Loans.
[123] A security=s rating affects transaction costs. While rating agencies do not categorize ratings
as either investment grade or speculative grade, marketplace norms have led to these designations.
Securities with a credit rating BBB- and above are rated investment grade. Securities rated lower
than this, that is, BB+ and below, are rated speculative grade.61 Even the lesser number used by
CIBC World Markets assumes a speculative grade security. The market for a speculative grade
security is limited in Canada. That means, according to ENMAX=s experts, that had Energy and
PSA gone to the market, they would have had to do so in the United States. This would have driven
up transaction costs, which include road show costs and marketing the securities to various
lenders. We have already explained how the trial judge erred in calculating the credit ratings for
the Market Loans, including failing to take into account implicit parental support. Even if such
transaction costs were relevant to this analysis, there is no evidence as to what these costs would be
for an investment grade security.
59
EKE, A781.
60
EKE, A810-A811, A834-A835.
61
Expert Report of David R. Levey (Levey Report), EKE, A90.
Page: 38
[124] Second, the trial judge appears to have confused transaction costs (which occur in the
market) with saved transaction costs (which are avoided because the market is not involved). Had

Energy and PSA gone to the market and borrowed money at arm=s length, they would have been
able to deduct transaction costs. But even under income tax law, a corporation cannot deduct
money it Asaves@ in calculating its tax. For example, a corporation cannot say Awe saved money by
laying off 10 employees@ and deduct that avoided expense from its taxes. Allowing the interest rate
a notional third party lender would have charged to be increased because of transaction costs saved
constitutes a back-door way of trying to deduct Asaved costs@ from the amount of the Balancing
Pool Payments owed.
[125] Third, in any event, since transaction costs of a loan are invariably payable by the
borrower, not the lender, it follows that saved transaction costs are not a reason to increase the
market rate of interest when conducting an Aarm=s length@ check. That rate is set by the inherent
risk of the loans and not costs borne by the borrower. It may be that saving these costs through a
non-arm=s length loan could justify a subsidiary=s being willing to pay a parent a somewhat higher
interest rate than that obtained in the market. But saved costs cannot, by definition, be part of an
arm=s length transaction.
[126] For these reasons, the trial judge erred in considering transaction costs as part of his arm=s
length hypothetical and using them to increase the market interest rate ranges.
5. Improper Reliance on the Inter-Company Memoranda
[127] In considering whether the actual interest rates were reasonable, the trial judge gave Asome
weight@ to the Adetailed explanations and justifications@ that ENMAX provided in its
inter-company pricing memoranda. In these memoranda, management explained how it had
selected the interest rates for the Parental Loans. The trial judge concluded that while the
taxpayer=s justifications were Anot determinative,@ they Acannot be ignored@: QB Reasons,
para 270. Certainly, as admissible records, the trial judge could not simply disregard them. But that
does not end the analysis. Stating that the memoranda Acannot be ignored@ is not correct in law.
Such internal pricing memoranda can be ignored should the trial judge decide they should be given
no weight. It is incumbent on a trial judge to carefully scrutinize these internal memoranda since
such internal documents papering up the rationale for a transaction may be self-serving.
[128] In any case, the trial judge erred by placing weight on ENMAX=s conclusions in these
memoranda about what constituted a reasonable interest rate. The inter-company memoranda
relied on assumptions that the trial judge himself expressly rejected after weighing the conflicting
expert evidence. For instance, he rejected Weiss=s risk assessment as Atoo pessimistic@ because
Energy Aappeared to be performing in an economically stable manner, had strong market positions
and the benefit of some degree of regulation that moderated risk@: QB Reasons, para 242. And yet,
the inter-company memoranda were predicated on assumptions identical to those Weiss made
Page: 39
about the subsidiaries= business risk.62 The trial judge also rejected Weiss=s Acircular@ use of the
inter-company interest rates when determining whether this interest rate was reasonable,
describing this approach as Aindefensible@: QB Reasons, para 242. It was. And yet, the memoranda

made an identical mistake, since the financial ratio analysis in each memorandum assumed the
very interest rates that it set out to justify.63
[129] The interest rates calculated in these internal memoranda were not entitled to weight or
deference simply because ENMAX had conducted a complicated or detailed analysis. The
memoranda were only as strong as the assumptions and analysis ENMAX used to calculate the
appropriate interest rate. Having rejected identical lines of reasoning when they were expressed
through Energy=s and PSA=s experts, it was palpably wrong for the trial judge to give weight to the
memoranda=s conclusions about the appropriate interest rates. Relying on memoranda based on
assumptions the trial judge himself rejected constitutes reviewable error in its own right.
6. Double Counting Fundamental Factors
[130] We have already explained why the trial judge erred in assessing the preliminary ranges of
likely market interest rates. This error was compounded when the trial judge concluded that
Afundamental factors@ should be used to increase the interest rate beyond the preliminary range of
rates he assessed. AFundamental factors@ were defined as hard-to-quantify considerations that
could influence the interest rates that lenders demanded on the Market Loans, such as the lenders=
perception of risk within the electrical power industry, concerns about potential changes to the
debtor=s management, the premium lenders sometimes charged to a first-time bond issuer,
concerns about how deeply the new debt would be subordinated to the debtor=s other obligations,
and unusual terms in a loan.
[131] The trial judge expressly accepted that ENMAX=s own expert, Weiss, had already taken
fundamental factors into account when he calculated the credit ratings for the Market Loans.
Although Nichols then used these very credit ratings in determining a likely range of interest rates
for the Market Loans, he nevertheless claimed in his report, and Johnson repeated this in his oral
evidence, that fundamental factors should be considered again as part of this pricing exercise.
While Johnson was unable to quantify how much each of these factors would influence the market
interest rate, he Aassumed that the aggregate effect would add 75 to 150 basis points to the interest
rate@: QB Reasons, para 208.
[132] However, using the same factors to select a credit rating for each of the Market Loans and
then using them again to increase the interest rate allocable to the selected credit rating would
62
EKE, A743.
63
EKE, A761-2 (Energy Market Loan), A807 (2006 PSA Market Loan).
Page: 40
result in these factors being considered twice. Although the trial judge acknowledged this flaw in
Johnson=s analysis, he still gave some effect to the Afundamental factors@ and relied on them to
increase the hypothetical interest rates for his arm=s length analysis. As he explained at QB

Reasons, paras 249-250 [Emphasis added]:
There is no dispute among the witnesses for both parties that all of
these fundamental factors were considered and used by Mr. Weiss
in deriving his credit rating for each of the notes. Mr. Nichols in his
report and Mr. Johnson in his testimony argued that the same factors
would be considered again by investors in their bond-purchasing
decisions. This approach was strongly criticized by the Crown=s
experts, who said credit ratings were the main driver in setting
interest rates and investors would not consider the same factors
again when making purchasing decisions. I am persuaded by the
Crown=s position. It would be nonsensical to double count these
factors to such a significant degree. Further, neither Mr. Nichols
nor Mr. Johnson could give a reasonable explanation for the extent
of the price impact from these factors.
Nonetheless, I cannot completely disregard the strong views of Mr.

Nichols and Mr. Johnson, both highly experienced in their areas,
that these factors would have some additional impact at the pricing
stage. In the absence of any quantification evidence, I will use 50
basis points as the impact. It is not insignificant, but lower than the
lowest point on the range suggested by Mr. Nichols B based on my
reluctance to accede to any significant double counting of these
factors.
[133] In deciding to increase the notional arm=s length interest rates to account for Afundamental
factors@, the trial judge erred. First, while he found he could not accede to any Asignificant double
counting@, there is no principled basis for double counting at all. Weiss did not calculate credit
ratings for Energy and PSA as companies. Instead, he rated the Market Loans themselves. As a
result, these ratings already took fundamental factors into account. To suggest that fundamental
factors would justify a further increase in the notional interest rates B which were themselves
calculated using the credit ratings for the Market Loans B constitutes a classic case of double
counting.
[134] Second, despite the trial judge=s suggestion to the contrary, he was under no obligation to
increase the interest rates simply because Nichols and Johnson held Astrong views@ that these
factors would have some additional impact in pricing the Market Loans. The strength of their
views was irrelevant if, as here, their underlying logic B premised as it was in part on double
counting B was faulty. Further, in any case, Johnson=s opinion was based on an incorrect
Page: 41
assumption, namely that implicit parental support would not be taken into account. We have
already explained why the trial judge erred on this key point.

7. ASplitting the Difference@ Between the Experts= Credit Ratings
[135] It was palpable and overriding error for the trial judge to Asplit the difference@ between
Levey=s and Weiss=s credit ratings for the Market Loans in the manner he did. Of course, arriving
at a midpoint figure between the positions of two experts is not itself an error. There will be cases
in which a trial judge may properly elect to Asplit the difference@ where expert evidence conflicts.
But the trial judge=s decision to do so here cannot be sustained for two reasons.
[136] First, as we have explained, the trial judge erred in failing to take ENMAX=s implicit
parental support into account and, in turn, in adjusting Levey=s credit ratings downward on the
basis that ENMAX was unlikely to provide parental support to its subsidiaries.
[137] Second, in any event, while the trial judge purported to split the difference between the
experts= ratings, in reality, he only adjusted Levey=s credit rating downward. The trial judge did so
on the basis of what he perceived as deficiencies in Levey=s analysis B most importantly, what he
believed was Levey=s unreasonable reliance on implicit parental support.64 The trial judge then
calculated the Amidpoint@ credit rating between Levey=s adjusted ratings and Weiss=s unadjusted
ratings:
Levey Original Levey Adjusted Weiss Midpoint Rating

Market
Rating Rating Unadjusted Between Levey
Loans
Rating (Adjusted) and
Weiss
(Unadjusted)
Energy BBB BB- CCC+ B
Market Loan
2006 PSA BBB BB- CCC B to B-
Market Loan
2007 PSA BBB BB- CCC B to B-
Market Loan
[138] The critical point is that the trial judge never increased Weiss=s credit ratings to account for
the serious failings the trial judge himself had already identified in Weiss=s reasoning. These
64
QB Reasons, paras 243-244.
Page: 42
included Weiss=s circular reliance on the actual interest rates of the Parental Loans when
calculating the credit ratings for the Market Loans.65

[139] Therefore, while Levey=s credit ratings for the Market Loans were adjusted downward to
account for the trial judge=s concerns about frailties in his analysis B concerns we conclude were
unfounded on the key issue of implicit parental support B Weiss=s credit ratings remained
unchanged. This being so, it constituted palpable and overriding error to take the midpoint
between the adjusted Levey ratings and the unadjusted Weiss ratings for the Market Loans. In
effect, this allowed Weiss=s inaccurate credit ratings, which the trial judge himself acknowledged
were fundamentally flawed, to make up half of the final credit rating calculation for each of the
Market Loans.
8. Concluding that Interest Rates Outside the Market Range Were Reasonable
[140] After identifying what the trial judge found to be a range of reasonable interest rates that a
hypothetical arm=s length lender would have charged the subsidiaries, the trial judge compared
these ranges to the actual interest rates that ENMAX charged its subsidiaries under the Parental
Loans. The actual interest rates were higher than even the top end of the trial judge=s ranges.
[141] We have already explained in detail why the trial judge erred in calculating the range of
market interest rates he did. Unfortunately, the trial judge compounded other errors by concluding
that the differences between the ranges of market rates he found for the Market Loans and those
under the Parental Loans were Anot so great as to bring the rates outside what any business would
have contracted to pay in the circumstances of these subsidiaries, under notes with these
conditions@: QB Reasons, para 269. His reasoning on this point also discloses reviewable error.
[142] First, by focussing wrongly on the idiosyncratic contractual arrangements between

ENMAX and its subsidiaries as reflected in the Parental Loans, the trial judge, in effect,
determined that the market interest ranges were essentially irrelevant.
[143] Second, the trial judge=s determination that the differences between the market interest
rates for the Market Loans and actual rates for the Parental Loans were not Aso great@ as to take the
loan rates for the Parental Loans outside what a business person would have contracted to pay also
constitutes palpable and overriding error. The Parental Loans involved over $860 million. Even a
very small change in the interest rates would have significant financial consequences for Energy
and PSA and, equally important, for the amount of the Balancing Pool Payments owed by each.
For example, the sensitivity analysis found in ENMAX=s own inter-company memorandum on the
65
Page: 43
Energy Loan suggested that increasing the interest rate by just half a percentage point, from 11% to
11.5%, would cost Energy an additional $8 million over the term of the Energy Loan.66

[144] Admittedly, sometimes there are sound business reasons for borrowing at above-market
rates, such as the ability to deal with a single lender rather than multiple lenders. But nothing in this
case justifies incurring millions of dollars in extra interest. AClose enough@ is not objectively
reasonable when dealing with loans involving upwards of a billion dollars. With this much money
at stake, any reasonable business person would seek out a loan at the lowest interest rate possible.
[145] Moreover, in any event, the actual interest rates were not even Aclose@ at all to the trial
judge=s hypothetical market rate ranges. The differences might appear to be Anot so great@ if
considered only in absolute terms, the difference being measured in a few percentage points. But
as the following table reveals, financially and commercially, these differences were substantial
when considered in relative terms. And they were significant in impact given the hundreds of
millions of dollars involved.
Parental Loans Trial Judge=s Actual Interest Absolute Percentage

Range for Rate for Difference Actual Interest
Market Loans Parental Loans Between Trial Rate Was
Judge=s Range Higher than
& Actual Trial Judge=s
Interest Rate Range
Energy Loan 7.97% to 8.77% 11.5% 2.73% to 3.53% 31% to 44%
2006 PSA Loan 7.79% to 9.21% 10.3% 1.09% to 2.51% 12% to 32%
2007 PSA Loan 7.85% to 9.08% 9.9% 0.82% to 2.05% 9% to 26%
[146] These numbers speak for themselves. What they demonstrate is that the actual interest rates
under the Parental Loans were from 9% to 44% higher (in relative terms) than the market interest
ranges found by the trial judge. To put this in perspective, most Canadians would be delighted to
learn their RRSP or TFSA had enjoyed returns each year 9% to 44% higher than their projected
rate of return B and ecstatic to learn that these higher returns were locked in for 10 straight years.
[147] In summary, it was palpable and overriding error for the trial judge to find that interest
rates well outside the market interest range as found by the trial judge were reasonable. This is
quite apart from the fact that, for reasons already explained, the trial judge erred in his assessment
of these market interest ranges which were disproportionately high in any case.
66
EKE, A761.
Page: 44
B. The Effect of the Trial Judge=s Errors

[148] Individually and collectively, these reviewable errors had a serious impact on the trial
judge=s assessment of whether the interest deduction was reasonable.
[149] Not only did the trial judge err in failing to conduct a hypothetical check which was truly
arm=s length, he effectively dismissed the requirement to determine an arm=s length interest rate as
irrelevant. Given the purpose and object of the Balancing Pool Payments regime, the arm=s length
market interest rate is, barring exceptional circumstances, determinative of reasonableness.
[150] By wrongly rejecting the likelihood of implicit parental support, the trial judge reduced the
credit ratings for the Market Loans by four Anotches@ (from BBB to BB-). Had he not made this
error, the credit rating for each of the Market Loans would be BBB, that is Levey=s original credit
rating for each of the Market Loans. This would qualify each of the Market Loans as investment
grade, with a corresponding interest rate of between roughly 5% and 5.5%.
[151] Further, the trial judge should not have added 44 basis points (0.44%) to account for saved
transaction fees nor double counted fundamental factors at all and added 50 basis points (0.50%)
for this.
[152] Taken together, these errors inflated the market interest rates which the trial judge
compared to the actual interest rates for purposes of determining whether the s 20(1)(c)(i) interest
deduction was reasonable.
[153] The trial judge also erred by Asplitting the difference@ between the adjusted Levey credit
ratings and the unadjusted Weiss credit ratings. He further erred by concluding that interest rates
well above the notional market rates that he found (which were themselves erroneous for reasons
discussed) were still reasonable. And he erred by placing weight on the ENMAX inter-company
memoranda that used a pricing approach he had rejected.
[154] Once these errors are accounted for and a proper arm=s length test undertaken, it follows on
the evidence the trial judge accepted that no reasonable business person would have agreed to the
interest rates in question.
[155] Even if the arm=s length market interest rates were not determinative of reasonableness, it is
difficult to imagine any reasonable business person signing off on a loan with an interest rate at
least 5.85% higher per annum for the Energy Loan,67 4.69% higher per annum for the 2006 PSA
67
The difference between the actual interest rate on the Energy Loan (11.5%) and the top end of the Crown expert=s
market range (5.65%).
Page: 45
Loan68 and 4.43% higher per annum for the 2007 PSA Loan69 than the interest rate the subsidiary
could have obtained from an arm=s length lender in the market, thereby adding millions of dollars
in additional interest payments. Whatever the additional benefits of non-arm=s length borrowing

from a parent, there was simply no evidence on this record that could justify such a large gap
between market interest rates and the actual interest rates on the Parental Loans.
[156] In the end, it comes down to this. Is it reasonable that a lender would consider a bond issued
by PSA or its parent, Energy, which supplies electrical energy to Calgarians and others throughout
Alberta and contributes the majority of ENMAX=s income, to be a speculative grade CCC bond B
essentially a junk bond B that carries with it a risk of default of 78.81%, when its parent, ENMAX,
had an A- credit rating which carries with it a risk of default of only 1.69%?70 To ask this question
is to answer it.
[157] For these reasons, we conclude that on all the evidence, including the purpose and object of
the Balancing Pool Payments regime, the interest deducted on each of the Parental Loans was
unreasonable under s 20(1)(c)(i) of the ITA.
VII. Conclusion
[158] Accordingly, the appeal is allowed and the reassessments are reinstated.
Appeal heard on October 12, 2017
Memorandum filed at Calgary, Alberta

this 26th day of April, 2018
Fraser CJA
68
The difference between the actual interest rate on the 2006 PSA Loan (10.3%) and the top end of the Crown expert=s
69
The difference between the actual interest rate for the 2007 PSA Loan (9.9%) and the top end of the Crown expert=s
70
These are historical default rates according to the Chart on 10-year Historical Default Rates and Senior Debt
Ratings found in Levey=s Report (Figure 20): EKE, A140.
Page: 46
Slatter JA

Schutz JA
Page: 47
Appearances:

M.E. Burns and S.T. Dolgoy
for the Appellants
A. Meghji, B. Harding and G.A. Grenon

for the Respondents

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In the Court of Appeal of Alberta

Citation: Alberta v ENMAX Energy Corporation, 2018 ABCA 147

2018 ABCA 147 (CanLII)

Her Majesty the Queen in Right of Alberta

ENMAX Energy Corporation

Her Majesty the Queen in Right of Alberta

ENMAX PSA Corporation

Appeal from the Order by

2018 ABCA 147 (CanLII)

2018 ABCA 147 (CanLII)

2018 ABCA 147 (CanLII)

2018 ABCA 147 (CanLII)

II. Legislative Scheme and Background Facts

A. Alberta=s Legislative Scheme

2018 ABCA 147 (CanLII)

responsibilities relating to Ageneration assets@ which, in turn, include power purchase

2018 ABCA 147 (CanLII)

2. Purpose and Structure of Payment in Lieu of Tax Provisions

2018 ABCA 147 (CanLII)

... [I]f a municipality decides to compete in [the electricity] sector, it

Now, private-sector companies pay taxes, but municipalities do not.

2018 ABCA 147 (CanLII)

3. Relevant Legislative Provisions

a. Section 147 of the Utilities Act

[25] Section 147(3) of the Utilities Act provides:

If a municipal entity is exempt as a result of subsection 149(1) of the

(a) the Income Tax Act (Canada), and

(b) the Alberta Corporate Tax Act,

if it were not exempt.

[26] A Amunicipal entity@ is defined in s 147(1) of the Utilities Act as:

(a) each municipality that

(i) owns a retailer,

2018 ABCA 147 (CanLII)

(iii) holds an agreement or arrangement derived from

(b) each retailer that is a subsidiary of a municipality;

(c) each holder of a power purchase arrangement that is a

(d) each holder of an agreement or arrangement derived

The Lieutenant Governor in Council may make regulations for the

(a) respecting the calculation of the amount to be paid to the

(e) making any provisions of the Income Tax Act (Canada)

2018 ABCA 147 (CanLII)

(a) the amount the municipal entity would be required to

(i) Parts I and I.3 of the Income Tax Act (Canada),

(ii) the Alberta Corporate Tax Act

2018 ABCA 147 (CanLII)

Except as modified by this Regulation, a municipal entity

(a) is entitled to the benefits of the rights, processes,

(b) is subject to the obligations of taxpayers under the tax

c. Section 20(1)(c)(i) of the ITA

[32] The relevant portion of s 20(1)(c)(i) of the ITA provides as follows:

Notwithstanding paragraphs 18(1)(a), 18(1)(b) ..., in computing a

(c) an amount paid in the year ... pursuant to a legal

(i) borrowed money used for the

or a reasonable amount in respect thereof, whichever is the lesser.

1. Setting the Scene

[33] In 1997, Calgary incorporated ENMAX to facilitate Calgary=s participation in the

2018 ABCA 147 (CanLII)

2. Making the Loans to Energy and PSA

i) On December 1, 2004, ENMAX loaned Energy $497

2018 ABCA 147 (CanLII)

3. Reassessment of Balancing Pool Payments and Resulting Appeal

2018 ABCA 147 (CanLII)

III. Proceedings Below