ALBERTA LAW REPORTS Sixth Series Reports of Selected Cases from the Courts of Alberta and Appeals

VOLUME 40 (Cited 40 Alta. L.R. (6th))

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[Indexed as: Lakhoo v. Lakhoo] Shamim Lakhoo, Appellant (Plaintiff) and Rahim Lakhoo, Respondent (Defendant) Alberta Court of Appeal Docket: Calgary 1501-0313-AC 2016 ABCA 200 Catherine Fraser C.J.A., Peter Martin, Jack Watson JJ.A. Heard: June 17, 2016 Judgment: June 29, 2016 Civil practice and procedure –––– Pre-trial procedures — Case management and status hearing — Case management — Appeals –––– Plaintiff alleged that, in family litigation, case management judge became frustrated and engaged unfairly with counsel during course of submissions — Exchange related to proposed amendment of pleadings and earlier, advance costs order that case management judge made in favour of plaintiff — Plaintiff appealed, and allegation of reasonable apprehension of bias was raised — Appeal dismissed; there was no basis for finding of reasonable apprehension of bias — Remarks of case management judge, which counsel took to be minatory, on this record had no effect on counsel, whose energy and bluntness to case management judge was unabated — Case management judge appeared to have felt that counsel was not cooperating in judge’s efforts to regulate proceedings — If counsel felt that case management judge’s conduct reached point of disqualification, he should have sought recusal as soon as he reached that conclusion — It was part of duty of case management judge to seek to develop more of “tail wind” in this litigation, which seemed to judge to have become bogged down by process hurdles — Significant part of behaviour said to evidence reasonable apprehension of bias actually related to separate order of case management judge in related matter; there was no appeal of that order. Family law –––– Division of family property — Practice and procedure — General principles –––– In course of family litigation, case management judge made ruling with respect to amendment of pleadings — Plaintiff was dismissive 2 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

of defendant’s proposal that defendant should be allowed to argue either limitations statute or laches — Plaintiff asserted that defendant’s claim that pre-nuptial agreement was invalid for several reasons could not include “amorphous” doctrine of laches — Plaintiff contended that laches and limitations statute could not apply because her claim against defendant was under Matrimonial Property Act and her allegations of unconscionability, duress or undue influence arose only as ’defence’ to defendant’s invoking of pre-nuptial agreement in answer to her claim — Plaintiff appealed — Appeal dismissed — Context of deference to discretion of case management judge to allow amendments to pleadings should not be overlooked — Case management judge did not err in concluding that amendment was not hopeless and letting it go forward — Judge did not suggest that ultimate decision on merits of limitations or laches should end up one way or other. Family law –––– Costs — In family law proceedings generally — Costs of particular proceedings — Miscellaneous –––– In family litigation, case management judge made advance costs order in favour of plaintiff — Language of case management judge in order appeared to have been intended to allow defendant to be satisfied that advance costs were being used as contemplated — Case management judge in his reasons on this topic showed that he assumed counsel would develop method for doing this; this had not happened — Plaintiff appealed related order of case management judge — Appeal dismissed — Rather than refer matter related to costs back, it was appropriate that appellate court address matter — Defendant was not entitled to know precisely what plaintiff’s counsel was doing in service of plaintiff in this litigation against defendant — Defendant was not entitled to decide at this stage of process if that work was reasonable — What case management judge meant by “bill of costs” was: plaintiff’s counsel would provide statement of fees and disbursements applicable to each three-month period with certificate that invoice (1) reflected fees and disbursements for that period; and (2) related to work done or steps taken in this litigation — Defendant’s counsel was not entitled to have particulars of what specific work was performed by plaintiff’s counsel or any junior under counsel’s direction — Defendant’s counsel was also not entitled to know what disbursements were for, because it was distinctly possible that litigation privilege would cover those matters. Cases considered: Attila Dogan Construction & Installation Co. v. AMEC Americas Ltd. (2014), 2014 ABCA 74, 2014 CarswellAlta 269, 569 A.R. 308, 6 Alta. L.R. (6th) 358 (Alta. C.A.) — considered Balogun v. Pandher (2010), 2010 ABCA 40, 2010 CarswellAlta 177, 474 A.R. 258, 479 W.A.C. 258 (Alta. C.A.) — referred to Lakhoo v. Lakhoo 3

Barker v. Budget Rent-A-Car of Edmonton Ltd. (2012), 2012 ABCA 76, 2012 CarswellAlta 1338, 522 A.R. 134, 544 W.A.C. 134 (Alta. C.A.) — referred to Barker v. Budget Rent-A-Car of Edmonton Ltd. (2012), 2012 CarswellAlta 1608, 2012 CarswellAlta 1609, [2012] S.C.C.A. No. 218, 440 N.R. 392 (note), 553 A.R. 399 (note) (S.C.C.) — referred to Blicharz v. Blicharz (2016), 2016 ABCA 157, 2016 CarswellAlta 940, [2016] A.J. No. 513 (Alta. C.A.) — referred to Canada (Procureur général) c. Chambre des notaires du Québec (2016), 2016 SCC 20, 2016 CSC 20, 2016 CarswellQue 4459, 2016 CarswellQue 4460, 100 Admin. L.R. (5th) 222 (S.C.C.) — referred to Canadian Natural Resources Ltd. v. ShawCor Ltd. (2014), 2014 ABCA 289, 2014 CarswellAlta 1582, 376 D.L.R. (4th) 581, [2014] A.J. No. 976, 580 A.R. 265, 620 W.A.C. 265, 2 Alta. L.R. (6th) 146 (Alta. C.A.) — referred to Cojocaru (Guardian ad litem of) v. British Columbia Women’s Hospital & Health Center (2013), 2013 SCC 30, 2013 CarswellBC 1400, 2013 Car- swellBC 1401, 357 D.L.R. (4th) 585, 51 Admin. L.R. (5th) 1, [2013] 7 W.W.R. 211, 44 B.C.L.R. (5th) 1, (sub nom. Cojocaru v. British Columbia Women’s Hospital and Health Centre) 445 N.R. 138, (sub nom. Cojocaru v. British Columbia Women’s Hospital and Health Center) 336 B.C.A.C. 1, (sub nom. Cojocaru v. British Columbia Women’s Hospital and Health Center) 574 W.A.C. 1, [2013] S.C.J. No. 30, (sub nom. Cojocaru v. British Columbia Women’s Hospital and Health Centre) [2013] 2 S.C.R. 357, 1 C.C.L.T. (4th) 1 (S.C.C.) — referred to Demb v. Valhalla Group Ltd. (2015), 2015 ABCA 29, 2015 CarswellAlta 82, 593 A.R. 368, 637 W.A.C. 368, 26 Alta. L.R. (6th) 280 (Alta. C.A.) — referred to Garfin v. Mirkopoulos (2009), 2009 ONCA 421, 2009 CarswellOnt 2818, 71 C.P.C. (6th) 210, 250 O.A.C. 168 (Ont. C.A.) — referred to Harb v. Aziz (2016), [2016] EWCA Civ 556 (Eng. C.A.) — considered Kerslake v. Kerslake (2016), 2016 ABCA 150, 2016 CarswellAlta 836, [2016] A.J. No. 472 (Alta. C.A.) — referred to Lakhoo v. Lakhoo (2015), 2015 ABQB 357, 2015 CarswellAlta 1022, 62 R.F.L. (7th) 24 (Alta. Q.B.) — referred to Lax Kw’alaams Indian Band v. Canada (Attorney General) (2011), 2011 SCC 56, 2011 CarswellBC 2861, 2011 CarswellBC 2862, 62 C.E.L.R. (3d) 1, [2011] 12 W.W.R. 209, (sub nom. Lax Kw’alaams Indian Band v. Canada) 338 D.L.R. (4th) 193, 23 B.C.L.R. (5th) 217, 423 N.R. 3, [2011] 3 S.C.R. 535, 313 B.C.A.C. 3, 533 W.A.C. 3, [2011] S.C.J. No. 56, [2011] 4 C.N.L.R. 346, [2011] S.C.C.A. No. 353 (S.C.C.) — considered Maranda c. Québec (Juge de la Cour du Québec) (2003), 2003 SCC 67, 2003 CarswellQue 2477, 2003 CarswellQue 2478, 178 C.C.C. (3d) 321, [2003] S.C.J. No. 69, (sub nom. Maranda v. Richer) 232 D.L.R. (4th) 14, 15 C.R. 4 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

(6th) 1, (sub nom. Maranda v. Leblanc) 311 N.R. 357, (sub nom. Maranda v. Richer) [2003] 3 S.C.R. 193, 113 C.R.R. (2d) 76 (S.C.C.) — considered Marlborough Ford Sales Ltd. v. Ford Motor Co. of Canada (2003), 2003 ABQB 298, 2003 CarswellAlta 447, [2003] A.J. No. 410, 13 Alta. L.R. (4th) 336, 42 C.P.C. (5th) 72 (Alta. Q.B.) — referred to Minister of National Revenue v. Thompson (2016), 2016 SCC 21, 2016 CSC 21, 2016 CarswellNat 1933, 2016 CarswellNat 1934, 100 Admin. L.R. (5th) 185 (S.C.C.) — referred to Paniccia Estate v. Toal (2012), 2012 ABCA 397, 2012 CarswellAlta 2159, 71 Alta. L.R. (5th) 411, [2013] 3 W.W.R. 1, 99 C.C.L.T. (3d) 50, 539 A.R. 349, 561 W.A.C. 349, [2012] A.J. No. 1395 (Alta. C.A.) — referred to Yukon Francophone School Board, Education Area No. 23 v. Yukon Territory (Attorney General) (2015), 2015 SCC 25, 2015 CSC 25, 2015 CarswellY- ukon 37, 2015 CarswellYukon 38, 383 D.L.R. (4th) 579, 84 Admin. L.R. (5th) 185, (sub nom. Commission scolaire francophone du Yukon No. 23 v. Yukon (Procureure générale)) 471 N.R. 206, (sub nom. Commission scolaire francophone du Yukon No. 23 v. Yukon (Procureure générale)) 370 B.C.A.C. 1, (sub nom. Commission scolaire francophone du Yukon No. 23 v. Yukon (Procureure générale)) 635 W.A.C. 1, [2015] 2 S.C.R. 282, 75 B.C.L.R. (5th) 1, [2015] 11 W.W.R. 217, 336 C.R.R. (2d) 137, [2015] S.C.J. No. 25 (S.C.C.) — followed 410675 Alberta Ltd. v. Trail South Developments Inc. (2010), 2010 ABCA 7, 2010 CarswellAlta 11, 469 A.R. 261, 470 W.A.C. 261 (Alta. C.A.) — referred to Statutes considered: Matrimonial Property Act, R.S.A. 2000, c. M-8 Generally — referred to

APPEAL by plaintiff from order of case management judge in family litigation.

J.D. Poole, A. Zelmer, for Appellant M. Lemmens, for Respondent

The Court:

1 In family law cases, even where disputes about children are not involved but are limited to issues involving property or support claims, ten- sions often run high. That is why the expression “high conflict” is frequently seen in judgments in family proceedings across Canada. 2 Trial court judges, case management judges and chambers judges dealing with high conflict matters place great reliance on the counsel that appear before them to do their best to dial down the temperature of the Lakhoo v. Lakhoo The Court 5

litigation and present the case in an objective and forthright manner. This reliance is routinely vindicated by our able professional bar. 3 However, even capable lawyers with integrity can get so committed to what they perceive to be the righteousness of their client’s position that they succumb to impatience, whether with opposing counsel or the court. Judges too, being human, can also lose patience. Nonetheless, not only the justice of the result but the fairness of the occasion usually sur- vives. Oliver Wendell Holmes Sr wrote in The Professor at the Breakfast Table, published in The Atlantic Monthly (May 1859): “Truth is tough. It will not break, like a bubble, at a touch; nay, you may kick it about all day like a football, and it will be round and firm at evening”. 4 In this appeal, the appellant’s counsel asserts that the case management judge became frustrated and engaged unfairly with counsel during the course of submissions. What happened in court was unfortunate. We understand the pressures on front-line judges who want to do more to help but must try to cope with the reality that this is not feasible without adequate judicial resources and support services. Nevertheless, judges must strive always to remain patient, even in the face of legitimate criticisms about systemic problems over which they have little personal control. 5 Here, counsel seeks to draw a straight line from what he asserts to be the case management judge’s inappropriate conduct towards him to a reasonable apprehension of bias against his client. There is no basis for such bridge reasoning on this record. As recently observed by the En- gland and Wales Court of Appeal in Harb v. Aziz, [2016] EWCA Civ 556 (Eng. C.A.) [Harb ] at para 71: “.... even if a judge is irritated by or shows hostility towards an advocate, it does not follow that there is a real possibility that it will affect his approach to the parties and jeopardise the fairness of the proceedings.” [Emphasis added by Lord Dyson, Master of the Rolls.] For the reasons that follow, we have concluded that there is no basis for a finding of apprehension of bias. 6 First, the remarks of the case management judge to counsel, which counsel took to be minatory, on this record had no effect on counsel. Counsel’s level of energy and bluntness to the case management judge was unabated. The case management judge appears to have felt that counsel was not cooperating in the judge’s efforts to regulate the proceedings before him. Counsel felt he was being unfairly chided for his determination. But he was unbowed. If he felt the case management judge’s conduct reached the point of disqualification as to further case 6 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

management, he should have sought recusal as soon as he reached that conclusion. 7 Second, it was part of the duty of the case management judge to seek to develop more of a tail wind in this litigation which has, after a number of years, still not gotten on to trial and seemed to the case management judge to have become bogged down by process hurdles. The case management judge did not attribute that delay to either side. But since he was not to try the case ultimately, he could be expected to be direct with counsel about events or matters which he thought counsel should have worked out. As stated by Binnie J in Lax Kw’alaams Indian Band v. Canada (Attorney General), 2011 SCC 56 (S.C.C.) at para 41, [2011] 3 S.C.R. 535 (S.C.C.): “The trial of an action should not resemble a voy- age on the Flying Dutchman with a crew condemned to roam the seas interminably with no set destination and no end in sight.” 8 What a case management judge says, and notably what the judge directs, is exercise of discretion. Each interim ruling is also intended to be ‘final’ for its limited purposes even if it may be later adjustable at trial: Kerslake v. Kerslake, 2016 ABCA 150 (Alta. C.A.) at para 3, [2016] A.J. No. 472 (Alta. C.A.). Each ruling is not to be revisited by counsel at later appearances, even if counsel sincerely thinks that it is faulty because it is adverse. 9 Similarly, absent a serious and material error of law or principle or a decision which is unreasonable and caused serious mischief or a miscar- riage of justice, this Court defers to such interlocutory exercises of discretion: see eg Balogun v. Pandher, 2010 ABCA 40 (Alta. C.A.) at paras 8-9, (2010), 474 A.R. 258 (Alta. C.A.); Paniccia Estate v. Toal, 2012 ABCA 397 (Alta. C.A.) at para 64, (2012), 539 A.R. 349 (Alta. C.A.); Demb v. Valhalla Group Ltd., 2015 ABCA 29 (Alta. C.A.) at para 26, (2015), 593 A.R. 368 (Alta. C.A.). Seen in that light, counsel should not be surprised if a case management judge instructs the counsel to move on with their submissions, or to yield the floor, or to sit down. Not every instance of a judge doing so implies prejudgment as to that topic, let alone as to any future decision to be made. 10 The unfortunate exchange related to a proposed amendment of pleadings and an earlier order that the case management judge had made in favour of the appellant wife. He had ordered advance costs in the amount of $400,000 from the respondent husband to the appellant wife to enable her to persevere in her suit against him: 2015 ABQB 357, 62 R.F.L. (7th) 24 (Alta. Q.B.). The case management judge had also ruled that the wife Lakhoo v. Lakhoo The Court 7

should provide through her counsel “a bill of costs every three months to the Respondent and his counsel”. The respondent husband appears to have thought that he was therefore entitled to substantively review the reasonableness of the ongoing legal accounts of the appellant. Plainly, the case management judge had hoped counsel would be able to work out the details of how the Bill of Costs should be handled, and was disap- pointed that had not happened. While we agree in part with the appellant’s position that the order thus made now requires fine-tuning, we fail to see any support for any reasonable apprehension of bias in the case management judge’s reaction to the submissions of counsel on that subject. We return to the substance of this issue, as well as that of the proposed amendment, below. 11 Third, the test for reasonable apprehension of bias requires substantial evidence that overcomes the presumption of judicial propriety: see eg Cojocaru (Guardian ad litem of) v. British Columbia Women’s Hospital & Health Center, 2013 SCC 30 (S.C.C.) at para 22, [2013] 2 S.C.R. 357 (S.C.C.). As noted in Yukon Francophone School Board, Education Area No. 23 v. Yukon Territory (Attorney General), 2015 SCC 25 (S.C.C.) at para 20, [2015] 2 S.C.R. 282 (S.C.C.) , the established test is “what would an informed person, viewing the matter realistically and practically — and having thought the matter through — conclude. Would he think that it is more likely than not that [the decision-maker], whether consciously or unconsciously, would not decide fairly.....” See also Harb. 12 Particularly where the informed person is counsel in the proceedings, counsel can be taken to be aware of the overall context, of the purposes of what is happening, and not to think with a “very sensitive or scrupu- lous conscience”. See also Blicharz v. Blicharz, 2016 ABCA 157 (Alta. C.A.) at paras 16, 21-22, [2016] A.J. No. 513 (Alta. C.A.). What happened here, on this record, even having regard to the proposed fresh evidence, and assuming without deciding the admissibility of such fresh evidence, does not meet the standard of reasonable apprehension of bias. There is no basis to suggest the case management judge took sides in this case at the time of the amendment decision or on the costs decision. 13 The respondent suggests that the appellant’s counsel’s failure to make a timely complaint about the tone of the proceedings was strategic and that doing so undermines the validity of the current and belated complaint of apprehension of bias. There is something to that. If counsel felt the events put his client’s interests in active jeopardy, he should have applied to the judge to recuse himself at that time. That said, we appreci- 8 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

ate that sometimes counsel may require a period of reflection to put events in perspective. But in this case, we note that a significant part of the behaviour said to evidence a reasonable apprehension of bias actually related to a separate order of the case management judge that the appellant pay costs in a related summary judgment matter. And yet, there has been no appeal of that order on the basis of a claimed apprehension of bias or otherwise. 14 The ruling of the case management judge to allow the respondent husband to amend his statement of claim does not support the argument of reasonable apprehension of bias. Discretionary rulings, even incorrect ones, do not necessarily evidence reasonable apprehension of bias. In- deed, case management would cease to have any benefit if a party who was unsuccessful at one point could therefore spin a wheel for a new judge. That would scarcely make sense let alone work. In any event, we see no reviewable error in the case management judge’s amendment ruling, that there is an issue to be tried relating to the alleged limitations and laches defences. 15 On this point of the pleadings amendment, counsel for the appellant was dismissive of the respondent’s proposal that the respondent should be allowed to argue either the limitations statute or laches. The appellant’s counsel asserts that the respondent’s claim that the pre-nuptial agreement is invalid for several reasons cannot include the “amorphous” doctrine of laches: see Lindsay Petroleum Co v. Hurd [1874] UKPC 2. The appellant contends, flatly, that laches and the limitations statute cannot apply because her claim against the respondent is under the Matrimo- nial Property Act, RSA 2000, c M-8 and her allegations of unconscionability, duress, or undue influence arise only as a ‘defence’ to the respondent’s invoking of the pre-nuptial agreement in answer to her claim. On this rationale, the amendment is said by the appellant’s counsel to be “hopeless” within the meaning of Attila Dogan Construction & Installation Co. v. AMEC Americas Ltd., 2014 ABCA 74 (Alta. C.A.) at para 25(b), (2014), 569 A.R. 308 (Alta. C.A.). 16 The context of deference to the discretion of the case management judge to allow amendments to pleadings should not be overlooked: see eg 410675 Alberta Ltd. v. Trail South Developments Inc., 2010 ABCA 7 (Alta. C.A.) at para 1, (2010), 469 A.R. 261 (Alta. C.A.). Amendments are not considered restrictively, although they have to have an arguable basis: see eg Marlborough Ford Sales Ltd. v. Ford Motor Co. of Canada, 2003 ABQB 298 (Alta. Q.B.) at para 10, (2003), 13 Alta. L.R. (4th) 336 Lakhoo v. Lakhoo The Court 9

(Alta. Q.B.) , cited in Barker v. Budget Rent-A-Car of Edmonton Ltd., 2012 ABCA 76 (Alta. C.A.) at para 11, (2012), 522 A.R. 134 (Alta. C.A.), leave to appeal to SCC refused, [2012] S.C.C.A. No. 218 (S.C.C.) (SCC No 34812). Pleadings are important in family law cases just as in others: see eg Garfin v. Mirkopoulos, 2009 ONCA 421 (Ont. C.A.) at paras 20-21, (2009), 71 C.P.C. (6th) 210 (Ont. C.A.). 17 We cannot say that the case management judge erred in concluding that the amendment was not hopeless and letting it go forward. He did not suggest that the ultimate decision on the merits of limitations or laches should end up one way or the other. Similarly, we stress that we are also not deciding any of the issues raised by the amendment at this stage. This is all for a trial judge on a complete record to determine. The appeal on the amendment fails. 18 For the reasons thus explained, the claim of a basis for reasonable apprehension of bias also fails. 19 As noted above, however, the language of the case management judge in the order regarding advance costs appears to have been intended to allow the respondent to be satisfied that the advance costs were being used as contemplated. Once again, the case management judge in his reasons on this topic showed that he assumed that counsel would develop a method for doing this. That has not happened. Rather than refer this topic back to the Court of Queen’s Bench for a fresh look — especially since the case management judge has now chosen to retire from that role and no substitute has been sought — we conclude that we should address this issue ourselves. 20 To begin with, the respondent is not, in our view, entitled to know precisely what the appellant’s counsel is doing in service of the appellant in this litigation against the respondent. Further, the respondent is without doubt not entitled to decide at this stage of the process if that work is reasonable. As pointed out in Maranda c. Québec (Juge de la Cour du Québec), 2003 SCC 67 (S.C.C.) at para 32, [2003] 3 S.C.R. 193 (S.C.C.): “The existence of the fact consisting of the bill of account and its payment arises out of the solicitor-client relationship and of what transpires within it. That fact is connected to that relationship, and must be regarded, as a general rule, as one of its elements.” 21 The Supreme Court has yet again recently reinforced the centrality of lawyer-client privilege to the functioning of our legal system and its relationship to Constitutional values: Canada (Procureur général) c. Chambre des notaires du Québec, 2016 SCC 20 (S.C.C.); Minister of 10 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

National Revenue v. Thompson, 2016 SCC 21 (S.C.C.). We cannot be oblivious to this. It is true that as to discovery of pre-existing client documents related to the action, opposing counsel’s global claim of privilege is vulnerable to judicial review for lack of clarity or sufficiency: Canadian Natural Resources Ltd. v. ShawCor Ltd., 2014 ABCA 289, 580 A.R. 265 (Alta. C.A.). But this is not a situation like ShawCor. 22 In our view, what the case management judge meant by a “bill of costs” in his June, 2015 decision was this. The appellant’s counsel would provide a statement of fees and disbursements applicable to each three- month period coupled with the appellant’s counsel’s certificate that the invoice (1) reflects the fees and disbursements for the period in question; and (2) relates to work done or steps taken in litigation in this case (being the one to which the advance costs order applies). 23 The respondent’s counsel is not entitled to have particulars of what specific work was performed by the appellant’s counsel or any junior under counsel’s direction. The respondent’s counsel is also not entitled to know what the disbursements are for, because it is distinctly possible that litigation privilege would cover those matters. However, we also would make clear that the trial judge in this action would have the right to insist on review even of privileged information when the issue of costs arises again at the end of the proceedings. Further, the bills presented may be reviewed on an ongoing basis as proposed by the case management judge, although such reviews would not be triggered simply by doubt. 24 The appeal is dismissed with the direction that a formal order be taken out to reflect what is set out in these reasons regarding the costs issue. 25 As results are mixed, we order that each party bear its own costs of the appeal. 26 We conclude by mentioning that at the end of the hearing, the Court offered the possibility of judicial dispute resolution before a member of this Court, to be arranged through the Court’s Case Management Officer. Appeal dismissed. Orphan Well Assn. v. Grant Thornton Ltd. 11

[Indexed as: Orphan Well Assn. v. Grant Thornton Ltd.] IN THE MATTER OF REDWATER ENERGY CORP. IN THE MATTER OF THE BANKRUPTCY AND INSOLVENCY ACT. R.S.C. 1985. c. B-3, as amended Orphan Well Association (Respondent / Status on Appeal: Appellant) and Grant Thornton Limited and Alberta Treasury Branches (Respondents / Status on Appeal: Respondents) and Canadian Association of Petroleum Producers, Canadian Association of Insolvency and Restructuring Professionals, Attorney General for Saskatchewan, and Her Majesty the Queen in Right of the Province of British Columbia as represented by the Ministry of Natural Gas Development and British Columbia Oil and Gas Commission (Applicants for Intervener Status on Appeal / Status on Appeal: Not Parties to the Appeal) Alberta Energy Regulator (Respondent / Status on Appeal: Appellant) and Grant Thornton Limited and Alberta Treasury Branches (Respondents / Status on Appeal: Respondents) and Canadian Association of Petroleum Producers, Canadian Association of Insolvency and Restructuring Professionals Attorney General for Saskatchewan, and Her Majesty the Queen in Right of the Province of British Columbia as represented by the Ministry of Natural Gas Development and British Columbia Oil and Gas Commission (Applicants for Intervener Status on Appeal / Status on Appeal: Not Parties to the Appeal) Alberta Court of Appeal Docket: Calgary Appeal 1601-0129-AC, 1601-0130-AC 2016 ABCA 238 Sheilah Martin J.A. Heard: August 9, 2016 Judgment: August 11, 2016 Bankruptcy and insolvency –––– Practice and procedure in courts — Ap- peals — To Court of Appeal — General principles –––– Trustee in bankruptcy and receiver for bankrupt energy company disclaimed certain non-producing wells — Alberta Energy Regulator (AER) and Orphan Well Association brought unsuccessful application for declaration that disclaimer was void due to necessary environmental work arising from abandonment — Court found that 12 ALBERTA LAW REPORTS 40 Alta. L.R. (6th) doctrine of federal paramountcy was triggered; that compliance with both provincial regulatory regime and federal insolvency regime was not possible; that abandonment orders were inoperative; and that trustee was entitled to disclaim assets — AER appealed to Court of Appeal — Leave to appeal was granted — Canadian Association of Petroleum Producers, Canadian Association of Insol- vency and Restructuring Professionals, Attorney General for Saskatchewan, and Queen in Right of British Columbia as represented by Ministry of Natural Gas Development and British Columbia Oil and Gas Commission (applicants) applied for leave to intervene on appeal — Application granted on conditions — Applicants had interest and would be directly and significantly affected by outcome of appeals — Applicants met criteria for permission for leave to intervene. Cases considered by Sheilah Martin J.A.: AbitibiBowater Inc., Re (2012), 2012 SCC 67, 2012 CarswellQue 12490, 2012 CarswellQue 12491, 352 D.L.R. (4th) 399, 71 C.E.L.R. (3d) 1, 95 C.B.R. (5th) 200, (sub nom. Newfoundland and Labrador v. AbitibiBowater Inc.) 438 N.R. 134, [2012] S.C.J. No. 67, [2012] A.C.S. No. 67, (sub nom. Newfoundland and Labrador v. AbitibiBowater Inc.) [2012] 3 S.C.R. 443 (S.C.C.) — considered Grant Thornton Ltd. v. Alberta Energy Regulator (2016), 2016 ABQB 278, 2016 CarswellAlta 994, 37 C.B.R. (6th) 88, 33 Alta. L.R. (6th) 221 (Alta. Q.B.) — considered Panamericana de Bienes y Servicios S.A. v. Northern Badger Oil & Gas Ltd. (1991), 8 C.B.R. (3d) 31, 81 Alta. L.R. (2d) 45, [1991] 5 W.W.R. 577, 81 D.L.R. (4th) 280, 7 C.E.L.R. (N.S.) 66, 117 A.R. 44, 2 W.A.C. 44, 1991 CarswellAlta 315, [1991] A.J. No. 575, 1991 ABCA 181 (Alta. C.A.) — considered Papaschase Indian Band No. 136 v. Canada (Attorney General) (2005), 2005 ABCA 320, 2005 CarswellAlta 1407, (sub nom. Lameman v. Canada (Attorney General)) 380 A.R. 301, (sub nom. Lameman v. Canada (Attorney General)) 363 W.A.C. 301, [2005] A.J. No. 1273 (Alta. C.A.) — considered Pedersen v. Van Thournout (2008), 2008 ABCA 192, 2008 CarswellAlta 648, (sub nom. Pedersen v. Thournout) 432 A.R. 219, (sub nom. Pedersen v. Thournout) 424 W.A.C. 219, [2008] A.J. No. 543 (Alta. C.A.) — followed R. v. Morgentaler (1993), [1993] 1 S.C.R. 462, 1993 CarswellNS 429, 1993 CarswellNS 429F, EYB 1993-67405, [1993] S.C.J. No. 48 (S.C.C.) — considered R. v. N. (L.C.) (1996), 40 Alta. L.R. (3d) 18, [1996] 8 W.W.R. 294, 108 C.C.C. (3d) 126, 184 A.R. 359, 122 W.A.C. 359, 1996 CarswellAlta 530, [1996] A.J. No. 570, 1996 ABCA 242 (Alta. C.A.) — referred to Statutes considered: Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 Generally — referred to Orphan Well Assn. v. Grant Thornton Ltd. Sheilah Martin J.A. 13

s. 14.06 [en. 1992, c. 27, s. 9(1)] — considered s. 14.06(4) [en. 1997, c. 12, s. 15] — considered s. 14.06(4)(a) [en. 1997, c. 12, s. 15] — considered s. 14.06(7) [en. 1997, c. 12, s. 15] — considered s. 20 — considered Judicature Act, R.S.A. 2000, c. J-2 Generally — referred to Oil and Gas Conservation Act, R.S.A. 2000, c. O-6 Generally — referred to s. 1(1)(cc) “licensee” — referred to Pipeline Act, R.S.A. 2000, c. P-15 Generally — referred to Rules considered: Alberta Rules of Court, Alta. Reg. 124/2010 R. 14.37(2) — considered R. 14.58 — considered R. 14.58(3) — referred to Rules of the Supreme Court of Canada, SOR/2002-156 R. 57(2) — referred to

APPLICATION for leave to intervene on appeal to Court of Appeal.

M.W. Selnes, for Respondent, Orphan Well Association K. Cameron, for Respondent, Alberta Energy Regulator T.S. Cumming, J.L. Oliver, for Respondent, Grant Thornton Limited C. Nyberg, R. Zahara, for Respondent, Alberta Treasury Branches T.J. Coates, for Applicant, Canadian Association of Petroleum Producers C.E. Hanert, A.C. Maerov, for Applicant, Canadian Association of Insolvency and Restructuring Professionals R.J. Fyfe, for Applicant, Attorney General, for Saskatchewan C. Nicholson, for Applicants, Her Majesty the Queen in Right of the Province of British Columbia as represented by the Ministry of Natural Gas Develop- ment and the British Columbia Oil and Gas Commission C. King, for Minister of Justice and Solicitor General of Alberta and the Attor- ney General of Alberta

Sheilah Martin J.A.: Introduction 1 Four different entities seek leave to intervene in a constitutional appeal that concerns the interpretation of federal and provincial legislation, the division of legislative powers and the doctrine of paramountcy. 14 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

2 The applicants are the Canadian Association of Petroleum Producers; Canadian Association of Insolvency and Restructuring Professionals; At- torney General for Saskatchewan and a joint application from Her Maj- esty the Queen in Right of the Province of British Columbia as represented by the Ministry of Natural Gas Development and the British Columbia Oil and Gas Commission. 3 I granted permission to intervene (with terms and conditions) to each of the applicants with reasons to follow. These are those reasons.

Background 4 At issue is Wittmann CJ’s decision Grant Thornton Ltd. v. Alberta Energy Regulator, 2016 ABQB 278 (Alta. Q.B.), which thoroughly reviews the factual and legal background. In brief, the trustee in bankruptcy and receiver for Redwater Energy Corporation sought a determination of the applicable law and issues related to oil and gas assets of the bankrupt company. The trustee disclaimed and renounced certain non- producing wells. The Alberta Energy Regulator (AER) and the Orphan Well Association (OWA) jointly applied for a declaration that the disclaimer was void and unenforceable due to the necessary environmental work arising from abandonment. They additionally sought an order compelling the receiver to fulfill its statutory obligations as licensee in relation to abandonment, reclamation and remediation of all Redwater licensed properties. 5 Chief Justice Wittmann found the purpose of section 14.06 of the Bankruptcy and Insolvency Act (BIA), was to permit receivers and trustees to make rational economic assessments of the costs of remedying environmental conditions, with discretion to determine whether to comply with orders to remediate property affected by these conditions. He found an operational conflict arose between section 14.06(a) of the BIA and the definition of a licensee under the Oil and Gas Conservation Act (OGCA), and the Pipeline Act (PA). Under section 14.06 of the BIA, the trustee could renounce assets without responsibility for environmental abandonment and remediation work. Under the OGCA and the PA, a licensee (including a trustee) could not renounce licensed assets in such a manner. Wittmann CJ found dual compliance with the provincial regime and the BIA was not possible, thereby triggering the doctrine of federal paramountcy. He found there was a conflict between the trustee’s power to renounce and continuing liability under provincial legislation. The def- initions of licensee in the OGCA and PA were declared inoperative to the Orphan Well Assn. v. Grant Thornton Ltd. Sheilah Martin J.A. 15

extent they frustrated the purpose of the BIA by requiring the trustee to comply with abandonment orders, provide security deposits, or create priorities to any claims against Redwater. Other provisions that frustrated the purpose of the BIA, by preventing renouncement of licensed assets without economic benefit to creditors, were also declared inoperative. The remedies sought by the AER and the OWA were accordingly denied and they appealed.

Issues on Appeal 6 On June 29, 2016, the parties were granted leave to appeal on the following questions: a) Did the court err in the interpretation and application of section 14.06 of the Bankruptcy and Insolvency Act, RSC 1985, c B-3 (the BIA)? b) Did the court err in finding that the doctrine of federal paramountcy was triggered by the AER requiring Grant Thornton Limited as Trustee and Receiver to comply with abandonment orders issued pursuant to the Oil and Gas Conservation Act, RSA 2000, c O-6 (OGCA), and the Pipeline Act, RSA 2000, c P-15, in relation to certain assets that Grant Thornton renounced and declined to take possession of? c) Did the court err in finding that there is an operational conflict between section 14.06(4) of the BIA and the definition of “licensee” under the OGCA and Pipeline Act, and that dual compliance with both the Alberta provincial regulatory regime under the OGCA and the Pipeline Act and the federal insolvency regime under section 14.06(4) of the BIA is not possible? d) Did the court err in finding that certain abandonment orders issued by the AER were inoperative and that the Respondent, Grant Thornton Limited, was entitled to disclaim certain AER licensed assets? e) Did the court err in the interpretation and application of the decision of the Supreme Court of Canada in AbitibiBowater Inc., Re, 2012 SCC 67 (S.C.C.)? f) Did the court err in the interpretation and application of the decision of the former Chief Justice Laycraft in Panamericana de Bienes y Servicios S.A. v. Northern Badger Oil & Gas Ltd., 1991 ABCA 181 (Alta. C.A.)? 16 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

Tests for Permission to Intervene 7 Rules 14.37(2) and 14.58 of the Alberta Rules of Court, AR 124/2010, authorize a single appeal judge to grant permission to a party to intervene in an appeal and impose conditions on the intervention. The intervener cannot raise or argue novel issues on appeal unless otherwise permitted: Rule 14.58(3). 8 Granting intervener status is a two-step process. The court first con- siders the subject matter of the appeal and then determines the proposed intervener’s interest in it: Papaschase Indian Band No. 136 v. Canada (Attorney General), 2005 ABCA 320 (Alta. C.A.) at para 5, (2005), 380 A.R. 301 (Alta. C.A.). In determining a proposed intervener’s interest, a court should examine (a) if the intervener will be directly and significantly affected by the appeal’s outcome, and (b) if the intervener will provide some expertise or fresh perspective on the subject matter that will be helpful in resolving the appeal. 9 Papaschase stated parties could be granted intervener status if they met either criterion. However, subsequent decisions have set out that simply establishing an affected interested is not enough to grant leave. A proposed intervener must also provide fresh information or a fresh perspective: Pedersen v. Van Thournout, 2008 ABCA 192 (Alta. C.A.) at para 10, (2008), 432 A.R. 219 (Alta. C.A.). If parties can intervene simply because they have affected interests, the number of potential interveners would greatly increase and unduly delay the appeal process without a corresponding benefit. 10 In Pedersen, this court stated (at para 3) that the following questions are relevant factors to consider when determining whether to grant intervener status: 1. Will the intervener be directly affected by the appeal; 2. Is the presence of the intervener necessary for the court to properly decide the matter; 3. Might the intervener’s interest in the proceedings not be fully protected by the parties; 4. Will the intervener’s submission be useful and different or bring particular expertise to the subject matter of the appeal; 5. Will the intervention unduly delay the proceedings; 6. Will there possibly be prejudice to the parties if intervention is granted; Orphan Well Assn. v. Grant Thornton Ltd. Sheilah Martin J.A. 17

7. Will intervention widen the lis between the parties; and 8. Will the intervention transform the court into a political arena? 11 The power to allow interveners is discretionary and should be exercised sparingly: R. v. N. (L.C.), 1996 ABCA 242 (Alta. C.A.) at para 16, (1996), 184 A.R. 359 (Alta. C.A.). However, interveners have been allowed when they add significantly to complex constitutional issues, especially those, like the case at bar, with serious and wide ranging policy implications. 12 As explained in R. v. Morgentaler, [1993] 1 S.C.R. 462 (S.C.C.) at para 1, “[t]he purpose of an intervention is to present the court with submissions which are useful and different from the perspective of a non- party who has a special interest or particular expertise in the subject matter of the appeal.” 13 The court’s ability to assess whether an intervener has something useful and different to add is tied to how clearly the intervener articulates the submissions they seek to advance. A bare assertion that one has a unique perspective is far less helpful than an overview of the arguments the intervener seeks to advance. The Supreme Court requires applicants to identify the position of the intervener intends to take, set out the submissions to be advanced, the questions on which they propose to intervene, their relevance to the proceeding and the reasons for believing that the submissions will be useful to the Court and different from those of the other parties. See rule 57(2) of the Rules of the Supreme Court of Canada, SOR/83-74. This level of specificity is to be encouraged in this court as well.

Have these Intervener Applicants met the Pedersen Test? Her Majesty the Queen in Right of the Province of British Columbia as represented by the Ministry of Natural Gas Development and the British Columbia Oil and Gas Commission 14 Her Majesty the Queen in Right of the Province of British Columbia, as represented by the Ministry of Natural Gas Development and the Brit- ish Columbia Oil and Gas Commission, (collectively the British Colum- bia applicants) seek to intervene in support of the appellants. While Brit- ish Columbia legislation differs from Alberta legislation, the British Columbia applicants seek permission to intervene because Alberta receivership orders directly affect the British Columbia regulator when an Alberta insolvent has assets or carries on operations in British Columbia. 18 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

As well, the interpretation of section 14.06 of the BIA could affect the interpretation and application of the legislative provisions in British Co- lumbia, and directly impact the regulation and management of the oil and gas industry in British Columbia, the British Columbia orphan fund, and the British Columbia taxpayers. 15 While British Columbia played no role the court below, they submit they can bring a perspective on the extra-provincial implications of the interpretation of section 14.06 of the BIA, and address Alberta legislative provisions similar to British Columbian’s regarding the liability management rating system and provisions permitting the regulator’s imposition of conditions on transfers of licenses, as well as the practical effect of a trustee or receiver being able to disclaim or renounce oil and gas licenses. They submit this will assist the court in understanding how its decision will potentially affect the oil and gas industry in British Colum- bia, including potential unanticipated consequences. 16 They expect to advance arguments on the interpretation of section 14.06 of the BIA, which are different from those of the parties. In particular, they would address the interpretation of section 14.06(7) of the BIA regarding ownership rights and the definition of “contiguous”. They would also make submissions on the interpretation of section 20 of the BIA as it informs renouncement rights, which they claim did not receive a lot of focus in the decision under appeal. As well, they submit they would advance a different argument on the errors in the interpretation of the decisions in AbitibiBowater Inc. and Northern Badger Oil & Gas Ltd. 17 They submit they would not widen the lis nor prejudice the parties or cause any delay. 18 I find that British Columbia has an interest, and would be directly and significantly affected by the outcome of these appeals. The British Co- lumbia applicants would bring an extra-provincial perspective, but are not to widen the lis by explaining the differences and similarities in the British Columbia and Alberta legislation. They would make submissions on the interpretation of the BIA and the case authorities different from the other parties that would be helpful to the panel hearing the appeals. Subject to the conditions imposed below, they meet the criteria for permission to intervene.

Canadian Association of Petroleum Producers 19 CAPP represents over 85 percent of the companies that explore for, develop and produce natural gas and crude oil throughout Canada. Orphan Well Assn. v. Grant Thornton Ltd. Sheilah Martin J.A. 19

CAPP’s mission, on behalf of the Canadian upstream oil and gas industry, is to advocate for and enable economic competitiveness and safe, environmentally, and socially responsible performance. It made submissions in the court below. 20 CAPP’s members are key players in both the oil and gas industry and the regulatory regime. Through the levies charged to licensees by the AER, CAPP’s members are the primary source of funding for both the orphan fund and the AER, and as a result, the appeals directly affect the members of CAPP. As well, the appeals affect the reputation of license holders and the industry. 21 CAPP seeks to intervene in support of the appellants and made submissions on appeal. It submits it has special expertise and is uniquely positioned to provide insight from the oil and gas industry as a whole into the effect of the possible outcomes in the appeals. It is able to provide industry perspective on the public interest considerations the industry believes are at play in requiring oil and gas companies to meet their obligations to properly reclaim and abandon their wells and facilities in accordance with the obligations under the AER licensing regime. As well, it can provide its perspective on which parties are best able and suited to manage the risks of licensees failing to live up to their obligations. Using the “broad voice of industry”, it seeks to provide a different and broader perspective regarding the issues that differ from and are un- available to the appellants, or which the appellants may be restrained in making. 22 It does not propose to expand the issues and it submits it will not repeat any of the arguments or issues raised by any of the appellants. 23 I find that CAPP has an interest and would be directly and significantly affected by the outcome of these appeals. It possesses expertise in the oil and gas industry that can bring a broader policy perspective to the issues and that would be helpful to the panel hearing the appeals. Subject to the conditions set out below, CAPP meets the criteria for permission to intervene.

Attorney General for Saskatchewan 24 Attorney General for Saskatchewan did not intervene in the court below. The Attorney General seeks permission now because Saskatchewan has legislative provisions very similar to the legislative provisions at issue in these appeals. If the decision below is upheld on appeal, and followed in Saskatchewan, it would negatively impact Saskatchewan’s or- 20 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

phan well program, the oil and gas industry in Saskatchewan, and Saskatchewan taxpayers. I accept the characterization of Saskatchewan, that the case at bar involves resource based issues arising throughout Western Canada that are first being addressed in Alberta. 25 The Attorney General seeks to intervene in support of the appellants. It submits it will focus on common law bankruptcy principles such as the principle that bankruptcy proceedings should not place creditors in a better position than they would be absent the bankruptcy. It also submits such principles must be applied together with guiding constitutional principles such as co-operative federalism, which mandate that federal paramountcy should be narrowly construed and applied in order to allow the continued operability of valid provincial legislation. It submits such broader principles appear not to have been applied in the court below. As well, it would make specific analysis of Chief Justice Wittmann’s reasons on the cost of compliance to argue conflict can be avoided as the issue is not an either/or situation. Saskatchewan would also address its concern that the application of the paramountcy doctrine to bankruptcy is taking on the characteristic of immunity to provincial legislation and would make submissions regarding interjurisdictional immunity. 26 It submits it will avoid causing any delay in the proceedings. 27 I find that Saskatchewan has an interest and would be directly and significantly affected by the outcome of these appeals. The Attorney General would be helpful to the panel hearing the appeals by bringing a fresh perspective with argument on common law bankruptcy principles not applied in the court below, and by addressing broader issues of constitutional interpretation, including co-operative federalism. Subject to the conditions imposed below, the Attorney General for Saskatchewan meets the criteria for permission to intervene.

Canadian Association of Insolvency and Restructuring Professionals 28 CAIRP is a national professional association representing receivers, trustees, agents, monitors and consultants working in the insolvency field, and designed to advance the practice of insolvency administration in Canada as well as the public interest in connection with insolvency matters. Its mission is to advocate for a fair, transparent and effective system of insolvency and restructuring administration throughout Can- ada. It made submissions in the court below. 29 CAIRP submits it has particular experience and insight into the practice and procedures in insolvency and restructuring, including questions Orphan Well Assn. v. Grant Thornton Ltd. Sheilah Martin J.A. 21

of priorities; and has expertise on the interplay of provincial regulatory legislation and federal insolvency legislation. 30 It submits it is able to inform the court on the practical outcomes of the policy decisions the court will be called upon to consider. It can speak to the impact of a change to the legislation currently governing the administration of insolvency proceedings. 31 CAIRP submits its perspective is both unique and broader than the parties to the appeal. Its position differs from the position of Grant Thornton Limited who, as court-appointed receiver and trustee, is an officer of the court and therefore unable to advocate freely for the interests of insolvency professionals generally. CAIRP would support the decision under appeal, and address the implications and impacts of the decision to receivers and trustees. Specifically, CAIRP would stress the need for certainty in the practical, day-to-day workings of their members. 32 It submits it will not widen the lis between the parties. 33 I find that CAIRP has an interest and would be directly and significantly affected by the outcome of these appeals. Its expertise in insolvency administration would bring a broader policy perspective to the appeal that will be helpful to the panel hearing the appeals. Subject to the conditions imposed below, CAIRP meets the criteria for permission to intervene.

Conclusion 34 In granting permission to intervene, terms and conditions were imposed to balance the benefit of the interveners’ submissions with a timely and fair hearing by preserving the appeal scheduled for October 11, 2016, and avoiding any prejudice to the parties. Therefore, permission was granted as follows: • Her Majesty the Queen in Right of the Province of British Colum- bia as represented by the Ministry of Natural Gas Development and the British Columbia Oil and Gas Commission may file a joint factum of no more than 15 pages; • CAPP may file a factum of no more than 15 pages; • The Attorney General for Saskatchewan may file a factum of no more than 15 pages; and • CAIRP may file a factum of no more than 15 pages. 22 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

35 The Minister of Justice and Solicitor General of Alberta is entitled to be heard as of right under the Judicature Act, RSA 2000, c J-2, and may file a factum of no more than 25 pages. 36 All interveners and Alberta may make oral submissions to a maximum of 10 minutes, subject, as always, to the appeal panel’s determination of its own needs. 37 All intervener factums and materials must be filed no later than 3:00 pm on Monday, August 22, 2016. 38 The two respondents’ written submissions are to be filed no later than 3:00 pm on Monday, August 29, 2016. They are each granted an additional 10 pages to address the interveners’ submissions. 39 The two appellants may file, but are not required to file, a reply to CAIRP’s intervener factum of no more than five pages, no later than 3:00 pm on Monday, August 29, 2016. 40 None of the interveners may supplement the record nor add new issues to those identified in Rowbotham JA’s order of June 29, 2016. 41 All the interveners and the respondents may file one factum for the two appeal numbers. 42 No general costs, either in favour or against the interveners, shall be payable in respect of these applications or the appeal. Application granted. RFG Private Equity v. Value Creation 23

[Indexed as: RFG Private Equity Limited Partnership No. 1B v. Value Creation Inc.] RFG Private Equity Limited Partnership No. 1B, RFG Private Equity Limited Partnership No. 1C, Richardson Capital Private Equity Limited Partnership No. 2B, Richardson Capital Private Equity Limited Partnership No. 2C and RFG GP No. 1 Limited, Opus Capital Corp., Ronald Poelzer and Carpenter Capital Inc., Plaintiffs and Value Creation Inc., Defendant Alberta Court of Queen’s Bench Docket: Calgary 1001-04077 2016 ABQB 391 B.E. Romaine J. Judgment: July 15, 2016 Business associations –––– Specific matters of corporate organization — Shares — Miscellaneous –––– Group of shareholders holding approximately 4.4 percent of shares of VC Inc. exercised rights to dissent from proposed transaction that involved sale of significant asset of company — Valuation date for purpose of assessment was March 11, 2010 — Hearing held to determine fair value assessment of shares of certain dissenting shareholders of VC Inc. — Fair value of VC Inc.’s common shares on valuation date was $1.89 per share — Judgment was made in that amount against VC Inc. in favour of dissenting shareholders — Decision was based on imminent sale of properties, and fact that company was holding company — VC Inc. was not holding company — In addition, property was on non-depreciable land, and capital gain at some point was unavoidable — VC Inc. leases, however, were depreciable property: they were not purchased with virtual certainty that value would continue to appreciate until day that capital gains were eventually realized — They were leased as long-term operating assets with intent that resources will be depleted over very long term and they will eventually become worthless — Expert retained by VC Inc. was in error in deducting taxes on assumed sale of assets, and court declined to take notional taxes into account in assessment of fair value. Cases considered by B.E. Romaine J.: Allenson v. Midway Airlines Corp. (2001), 789 A.2d 572 (U.S. Del. Ch.) — considered Brant Investments Ltd. v. KeepRite Inc. (1987), 37 B.L.R. 65, 60 O.R. (2d) 737, 42 D.L.R. (4th) 15, 1987 CarswellOnt 135, [1987] O.J. No. 574 (Ont. H.C.) — followed 24 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

Brant Investments Ltd. v. KeepRite Inc. (1991), 1 B.L.R. (2d) 225, 3 O.R. (3d) 289, 45 O.A.C. 320, 80 D.L.R. (4th) 161, 1991 CarswellOnt 133, [1991] O.J. No. 683 (Ont. C.A.) — referred to Campbell v. Campbell (2007), 2007 ABQB 637, 2007 CarswellAlta 1862, 49 R.F.L. (6th) 320, [2007] A.J. No. 1188 (Alta. Q.B.) — considered Canadian Gas & Energy Fund Ltd. v. Sceptre Resources Ltd. (1985), 29 B.L.R. 178, [1985] 5 W.W.R. 43, 38 Alta. L.R. (2d) 223, 61 A.R. 67, 1985 CarswellAlta 101 (Alta. Q.B.) — referred to Canadian Rocky Mountain Properties Inc., Re (2006), 2006 ABQB 251, 2006 CarswellAlta 408, 16 B.L.R. (4th) 182 (Alta. Q.B.) — considered Cede & Co. v. Technicolor, Inc. (1996), 684 A.2d 289, 65 U.S.L.W. 2334 (U.S. Del. S.C.) — considered Cyprus Anvil Mining Corp. v. Dickson (1986), 8 B.C.L.R. (2d) 145, 33 D.L.R. (4th) 641, 1986 CarswellBC 362, [1986] B.C.J. No. 1204 (B.C. C.A.) — considered Deer Creek Energy Ltd. v. Paulson & Co. (2008), 2008 ABQB 326, 2008 CarswellAlta 779, 49 B.L.R. (4th) 1, [2008] A.J. No. 643 (Alta. Q.B.) — referred to Deer Creek Energy Ltd. v. Paulson & Co. (2009), 2009 ABCA 280, 2009 CarswellAlta 1285, 60 B.L.R. (4th) 31, 460 A.R. 180, 462 W.A.C. 180, [2009] A.J. No. 923 (Alta. C.A.) — referred to Domglas Inc. v. Jarislowsky, Fraser & Co. (1980), 13 B.L.R. 135, [1980] C.S. 925, 1980 CarswellQue 51, [1980] Q.J. No. 89 (C.S. Que.) — referred to Ford Motor Co. of Canada v. Ontario (Municipal Employees Retirement Board) (2000), 2000 CarswellOnt 1530, 48 C.P.C. (4th) 272, [2000] O.J. No. 1480 (Ont. S.C.J.) — considered Grandison v. NovaGold Resources Inc. (2007), 2007 BCSC 1780, 2007 Car- swellBC 2979, 43 B.L.R. (4th) 251, [2007] B.C.J. No. 2639 (B.C. S.C.) — considered Grimes v. Vitalink Communications Corp. (August 28, 1997), Doc. No. 12334 (U.S. Del. Ch.) — considered Manning v. Harris Steel Group Inc. (1986), 7 B.C.L.R. (2d) 69, [1987] 1 W.W.R. 86, 1986 CarswellBC 304, [1986] B.C.J. No. 816 (B.C. S.C.) — referred to Morrison v. United Westburne Industries Ltd. (1988), 1988 CarswellOnt 2813, [1988] O.J. No. 378 (Ont. H.C.) — considered Neonex International Ltd. v. Kolasa (1978), [1978] 2 W.W.R. 593, 3 B.L.R. 1, 84 D.L.R. (3d) 446, 1978 CarswellBC 389, [1978] B.C.J. No. 19 (B.C. S.C.) — referred to New Quebec Raglan Mines Ltd. v. Blok-Andersen (1993), 9 B.L.R. (2d) 93, [1993] O.J. No. 727, 1993 CarswellOnt 173 (Ont. Gen. Div. [Commercial List]) — referred to RFG Private Equity v. Value Creation B.E. Romaine J. 25

Shoom v. Great-West Lifeco Inc. (1998), [1998] O.J. No. 2220, (sub nom. Shoom (in trust) v. Great-West Lifeco Inc.) 40 O.R. (3d) 672, 1998 Carswell- Ont 2192, 42 B.L.R. (2d) 25, [1998] B.C.J. No. 2220, 67 O.T.C. 345 (Ont. Gen. Div. [Commercial List]) — referred to Silber v. BGR Precious Metals Inc. (1998), 1998 CarswellOnt 2994, 41 O.R. (3d) 147, 46 B.L.R. (2d) 75, [1998] O.J. No. 2931, 73 O.T.C. 26 (Ont. Gen. Div.) — referred to Smeenk v. Dexleigh Corp. (1990), 74 O.R. (2d) 385, 49 B.L.R. 1, 72 D.L.R. (4th) 609, 1990 CarswellOnt 130 (Ont. H.C.) — considered Smeenk v. Dexleigh Corp. (1993), 105 D.L.R. (4th) 193, 11 B.L.R. (2d) 67, 15 O.R. (3d) 608, 65 O.A.C. 72, 1993 CarswellOnt 154, [1993] O.J. No. 2020 (Ont. C.A.) — referred to Union Illinois 1995 Inv. Ltd. Partnership v. Union Financial Group, Ltd. (2004), 847 A.2d 340 (U.S. Del. Ch.) — considered Weinberger v. UOP, Inc. (1983), 457 A.2d 701 (U.S. Del. S.C.) — considered Zeller Estate v. R. (2008), 2008 TCC 426, 2008 CarswellNat 2595, (sub nom. Zeller v. R.) 2008 D.T.C. 4441 (Eng.), 2008 CCI 426, 2008 CarswellNat 5133 (T.C.C. [General Procedure]) — considered Statutes considered: Business Corporations Act, R.S.A. 2000, c. B-9 s. 191(3) — considered Canada Business Corporations Act, R.S.C. 1985, c. C-44 Generally — referred to Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36 Generally — referred to

HEARING held to determine fair value assessment of shares of certain dissenting shareholders of VC Inc.

A. Robert Anderson, Q.C., Len Sali, Q.C., Mary Peterson, Emily Paplawski, for Value Creation Inc. Stephen H. Leitl, Chase Holthe, Lisa Hodgson, for RFG

B.E. Romaine J.: I. Introduction 1 This decision involves the fair value assessment of the shares of certain dissenting shareholders of Value Creation Inc. A group of shareholders holding approximately 4.4% of the shares of Value Creation exercised their rights to dissent from a proposed transaction that involved the sale of a significant asset of the company. The valuation date for the purpose of the assessment is March 11, 2010. Value Creation submits 26 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

that the shares have a fair value of $1.06 per share, while the dissenting shareholders submit that their shares should be valued at between $2.82 to $3.13 per share. 2 The primary issues are the appropriate valuation methodology, the value of certain proprietary technologies and the question of whether synergies and benefits that may have arisen from the transaction should be excluded from the fair value of the Value Creation shares or should enure to the benefit of the dissenting shareholders.

II. Factual Overview 3 Value Creation Inc. is a private oil sands development company founded by Dr. Columba Yeung, who remains its majority shareholder. The company acquired oil sands leases in the Athabasca region of Al- berta, which allows for production by steam assisted gravity drainage (“SAGD”) technology. Value Creation’s plan was to become a fully integrated oil sands production and upgrading company. At the time in issue, its assets included oil sands leases, certain proprietary technologies in- vented by Dr. Yeung (the “Technologies”) and an interest in BA Energy Inc., a company that Value Creation had incorporated with a view to building and commercializing a merchant upgrading operation in Fort Saskatchewan, Alberta. 4 In 2007, Richardson Capital Limited, the manager of RFG Private Equity Limited Partnership No. 1B, RFG Private Equity Limited Partner- ship No. 1C, Richardson Capital Private Equity Limited Partnership No. 2B, Richardson Capital Private Equity Limited Partnership No 2C, RFG GP No. 1 Limited, Opus Capital Corp. and Carpenter Capital Inc. (together with Ronald Poelzer, collectively “RFG”) invested in BA Energy, largely because of the value seen in Value Creation’s Technologies. BA Energy held a licence from Value Creation to use the Technologies at the upgrader that it planned to construct. 5 On the Valuation Date of March 11, 2010, Mr. Yeung, directly and indirectly, held approximately 56% of the Value Creation common shares. RFG held 23,836,458 or approximately 4.4% of the common shares. 6 As part of its investment, RFG was entitled to appoint a director on the BA Energy board of directors. RFG also had a representative director on the Value Creation board. RFG Private Equity v. Value Creation B.E. Romaine J. 27

7 Richardson Capital knew at the time of the RFG investment that BA Energy and Value Creation intended to go public by December 2009. However, the 2008 financial crises interfered with that plan. 8 On December 30, 2008, BA Energy became subject to proceedings under the Companies Creditors’ Arrangement Act (R.S.C., 1985, c. C- 36)(“CCAA”). BA Energy had invested approximately $500 million in developing an upgrader facility that would incorporate the Technologies, but work on the upgrader was suspended. By this point, Value Creation owned all of BA Energy’s shares. 9 The purpose of the CCAA proceedings from Value Creation’s point of view was to protect its value in BA Energy to the extent possible. The CCAA Monitor, Neil Narfasen, reported that BA Energy was expected to emerge from the proceedings under the control of Value Creation. Value Creation recognized value in preserving the ability to restart the upgrader project after the completion of the CCAA proceedings. 10 Value Creation had entered into a credit agreement (“Credit Agree- ment”) with a syndicate of lenders in 2007. In 2009, the Credit Agree- ment was amended to extend the due date of the loan to February 15, 2010. By January, 2009, Value Creation was facing a default under the agreement. It was required to consent to a receivership order if the loan was not paid by February 15, 2010. Approximately $477 million was required to pay out the loan. 11 Value Creation decided on a three-prong strategy: a) to find a strategic joint venture partner to help with the development of the oilsands leases; b) to find a financial partner to invest in Value Creation; and c) to divest Value Creation assets. 12 In February, 2009, Value Creation retained BMO Capital Markets (“BMO”) and Genuity Capital Markets (“Genuity”) to find a transaction that would provide sufficient funds to pay Value Creation’s Credit Agreement debt while allowing it to retain BA Energy, its Technologies and its TriStar lease, and which would allow Mr. Yeung to remain in control of the company. 13 Neither TriStar nor the Technologies were marketed, and the financial advisors were to seek a joint venture partner with respect to its Terre de Grace lease rather than a sale of the company. Initially, the board of Value Creation was of the view that divestiture would scare away potential joint venture partners and should not be pursued at the same time as 28 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

the search for a strategic joint venture partner. However, by November, 2009, Value Creation was forced to pursue a divestiture process, and appointed a Special Committee of directors. The financial advisors were instructed to pursue a divestment of the Terre de Grace, Firebag, High Hill River and South Clarke Creek (part of TriStar) leases. 14 Problems arose among the board members with respect to strategy. The RFG director favoured a sale of the company, which was opposed by Dr. Yeung. RFG also had concerns with respect to the governance of the company and whether it could raise sufficient funding to develop the Technologies while Dr. Yeung remained in control. 15 In November, 2009, Value Creation received an offer of a $1 billion debt-refinancing from Alberta Investment Management Corp. (“AIMCo”) 16 This proposed transaction involved AIMCo purchasing $500 million of 10% convertible debentures with a five-year term, with AIMCo undertaking to subscribe for up to an additional $500 million of such debentures to be issued in tranches upon Value Creation achieving certain defined milestones. 17 The AIMCo offer was subject to the certain conditions, including that, if an event of default occurred with respect to the debentures, Dr. Yeung would have to surrender his voting rights to AIMCo. In addition, AIMCo’s nominee on the board of directors would be the “lead director”, which meant that Dr. Yeung would be required to resign as Chairman of the board. 18 Dr. Yeung also would have had to resign as President and Chief Ex- ecutive of Value Creation by February 28, 2010. He would be allowed to stay on the board of directors as a non-executive director. This was unac- ceptable to him, and, after further discussions, the offer was terminated. 19 The BMO/Genuity process gave rise to a number of offers for a joint venture involving Terre de Grace. Ultimately, the Value Creation board determined that an offer from BP best addressed the objectives of the joint venture process. 20 In the meantime, BA Energy had developed a plan to put to its creditors. The plan depended on funds to be received on the closing of the BP transaction. 21 Discussions between Value Creation and BP about a possible Terre de Grace joint venture began in 2009 and BP began to conduct due diligence in December 2009. RFG Private Equity v. Value Creation B.E. Romaine J. 29

22 BP proposed a joint venture in which BP would acquire 75% of Terre de Grace and Value Creation would retain 25% in exchange for, among other things, an immediate payment of US$500 million and a covenant by BP to fund certain capital costs. 23 On about January 27, 2010 Mr. Yeung was of the view and had reported to management and the board that Value Creation had entered into a “binding obligation” with BP. “Heads of Agreement” with BP were executed. 24 On January 28, 2010, the Value Creation board of directors met to consider the BP offer and an offer by Reliance Industries Limited. Mr. Yeung told the board that the BP proposal would allow for the commercial production of Value Creation’s assets and clear its debt. 25 The board of directors approved the BP transaction (the “BP Transac- tion”) and the Heads of Agreement. At that time, it was apparent to the board that shareholder approval of the transaction would be sought and dissent rights offered to shareholders. Ronnie Mo, Value Creation’s Chief Financial Officer, testified that Value Creation’s management then used its best efforts to make the transaction a certainty. 26 The Heads of Agreement provided that BP and Value Creation would form a partnership in which Value Creation would receive a 25% partnership interest and certain payments in consideration for its contribution of the Terre de Grace property. As part of the consideration payable to Value Creation, BP covenanted to spend U.S. $1.6 billion in development capital, annually escalated by 3%. As project operator, BP would decide when the U.S. $1.6 billion would be spent; however, the BP agreement provided that if it had not been fully spent by March 15, 2017, Value Creation would receive U.S. $400 million plus interest. 27 Counsel to Value Creation wrote to its lenders, taking the position that the BP Heads of Agreement was sufficient to satisfy the lenders’ requirement of a binding agreement to sell property, and thus would justify an extension to the due date of the loan. 28 Following execution of the BP Heads of Agreement, Mr. Yeung peri- odically reported to the board of directors regarding the progress being made in satisfying BP’s due diligence condition and the finalization of definitive joint venture documents. 29 On February 1, 2010, Mr. Yeung and Mr. Mo sent a letter to all Value Creation shareholders, representing that the company had “entered into a 30 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

binding heads of agreement with an international super-major for a resource development joint venture”. 30 Mr. Yeung also reported to management that completion of BP’s due diligence was the only uncertainty left in the deal. 31 On February 5, 2010, Value Creation received an unsolicited proposal from another party to acquire Mr. Yeung’s equity stake. He refused the offer. On the same day, BP confirmed to Value Creation that all closing conditions under the BP Heads of Agreement had been satisfied, and that BP expected due diligence to be waived by February 15, 2010. On Feb- ruary 10, 2010, the President of BP wrote to Value Creation to confirm that BP’s due diligence condition had been satisfied. 32 She confirmed that among the closing documents was an “irrevocable commitment to pay off [Value Creation’s] debt”. 33 On February 11, 2010, the lenders agreed to extend the maturity date of the debt to March 31, 2010. 34 On February 12, 2010, Value Creation sent another letter to its shareholders, advising that the BP agreements were at an advanced stage of drafting and fully reflected the terms of the BP Heads of Agreement. The company advised and noted that the lenders had extended the maturity date of the debt to March 31, 2010, stating that “[the BP Transaction] will resolve our debt and provide VCI with secured financing...”. 35 On February 18, 2010 Value Creation distributed a Circular to its shareholders relating to a vote on the BP joint venture proposal. By the time the Circular was sent out, over two-thirds of Value Creation’s shareholders had agreed to vote in favour of the BP Transaction, making the necessary shareholder approval a certainty. 36 On March 3, 2010, Mr. Yeung reported to the board that all issues regarding the final form of the BP joint venture documents had been resolved. Proxy votes in favour of the transaction by almost 80% of shareholders had been received by March 4, 2010; and shortly thereafter, BP advised Value Creation that it had made arrangements to wire the debt payment directly to the lenders, with the balance to the company. 37 By March 7, 2010, the form of definitive joint venture agreements had been finalized, and on March 10, 2010 (one day before the Valuation Date), Value Creation gave notice to its lenders that it intended to pay off the debt early. 38 The BP Transaction was formally approved by the company’s shareholders on March 12, 2010. Thus the Valuation Date is March 11, 2010. RFG Private Equity v. Value Creation B.E. Romaine J. 31

The BP transaction closed on March 15, 2010. Mr. Mo conceded that BP had been pressing to close earlier, as the only thing in the way was the shareholder vote, which was a foregone conclusion.

III. Expert Opinions Re Value A. Clark Opinion 39 Clark Valuation Group (“Clark” or “Mr. Clark”) was retained by counsel to RFG to provide an opinion with respect to the en bloc fair market value of the Value Creation common shares as the Valuation Date. Clark’s opinion is that the value is in the range of $2.82 to $3.13 per share, with a mid-point of $2.98 per share. 40 “Fair market value” for the purposes of the Clark opinion is defined as the highest price obtainable in an open and unrestricted market between informed, prudent parties acting at arm’s length and under no compulsion to act, expressed in terms of money or money’s worth. 41 The assets of Value Creation considered in the valuation included: a) the oilsands and related contingent resources; b) the Technologies; and, c) other assets, such as working capital and tax pools. 42 Clark made the following key assumptions in formulating its opinion: a) that Value Creation was a going concern at the Valuation Date; b) that by the Valuation Date, Value Creation was in a position to pay its upcoming debt obligation as BP and Value Creation had agreed to terms regarding the Terre de Grace property; c) that in addition to BP, several other interested prospective investors of sufficient financial means would have invested in Value Creation; d) that therefore, on the Valuation Date, Value Creation was no longer in financial distress or under a compulsion to act; e) that, at the Valuation Date, BA Energy was still under the CCAA, and that no value would be ascribed to BA Energy in the valuation, other than a debt payment of $42.4 million that was expected to flow from the sale of the BA Energy Stonefell Terminal in the CCAA proceedings; and f) that, except for the receipt of these funds, there was no material change in the affairs of Value Creation between the Valuation 32 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

Date and March 31, 2010, the date of the next complete set of financial statements. 43 In explaining the approach he took to valuation, Mr. Clark noted that since Value Creation was a private company at the Valuation Date, it was not possible to use the market value approach to directly value the shares, although market value was used to estimate the value of Value Creation resource assets. An investment value approach was used to estimate the value of the Technologies, and the net asset value was used to determine the fair market value of the common shares by restating the recorded book values of the company’s assets and liabilities to their respective market values, assuming the continuation of the business as a going concern. 44 Clark thus used a combination of three methods of valuation recognized in the case law: Canadian Gas & Energy Fund Ltd. v. Sceptre Resources Ltd. (1985), 38 Alta. L.R. (2d) 223 (Alta. Q.B.) at 233; Neonex International Ltd. v. Kolasa (1978), 3 B.L.R. 1, 2 W.W.R. 593, 84 D.L.R. (3d) 446 (B.C. S.C.). 45 As Mr. Clark assumed that Value Creation would be able to meet its debt service requirements as they fell due, he applied a going concern approach rather than a liquidation approach. 46 The following is a summary of the Clark assessment of fair market value at trial: Millions Millions Low High Contingent resources and properties $809 $924 Technologies 156 201 Uplift barrels made possible by Tech- 80 92 nologies Carried interest in BP/VCI partnership 405 405 Working capital 11 11 Stonefell Terminal proceeds 42 42 Tax pools 39 39 Fair Market Value — March 11, 2010 $1,542 $1,714 Outstanding common shares and war- 546,980,495 rants Equivalent per share FMV $2.82 to $3.13 Midpoint $2.98 RFG Private Equity v. Value Creation B.E. Romaine J. 33

47 In an earlier report, Clark had given a higher value opinion, but on November 23, 2014, Mr. Clark delivered a revised report acknowledging that he had not made an allowance for sales, general and administrative expense related to the sale operations that are part of the fair market valuation of the Technologies, and that he wished to make a correction to an income tax calculation.

1. Valuation of properties and contingent resources 48 As at the Valuation Date, Value Creation held the following oilsands leases; a) Terre de Grace; b) TriStar; c) Firebag, and d) High Hill River. 49 Clark valued Terre de Grace and TriStar using the market value approach, considering: (a) the quality of the resources; (b) comparable companies and transactions including a PetroChina/AOSC transaction; and (c) an improvement in the oil sands market following the Pe- troChina/AOSC transaction and prior to the Valuation Date. Clark’s analysis of comparables was supported by a report prepared by Douglas Ho dated January 22, 2014 (the “Sproule Report”), which explained similarities and differences of properties located in the subject formation from those located elsewhere in Alberta. 50 Clark concluded that, at the Valuation Date, the market value of Value Creation’s contingent resources was in the range of $0.70 to $0.80 per barrel. While he did not relay on a Macquarie Equities research report dated February, 2010, his conclusion was consistent with the Mac- quarie conclusion that the average valuation for oil sands transactions had cleared the $0.76/bbl level. 51 In valuing Terre de Grace, Clark applied the $0.70-0.80 range only to the 25% interest in Terre de Grace retained by Value Creation through its interest in the partnership with BP. The 75% interest conveyed to BP was valued at the price of the BP transaction ($0.57 per barrel). All parties agree that this was a distressed price. 52 In valuing TriStar, Clark was aware of Mr. Ho’s opinion that it is important to compare relative geographical features of properties in assessing market comparable transactions. He reviewed, among others, the PetroChina/AOSC transaction, a report from McDaniel and Associates 34 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

Consultants Ltd. (“McDaniel”) with respect to TriStar which corroborates Value Creation’s analysis of the qualities of the TriStar resources; and the positive changes that occurred in the oil sands market subsequent to the PetroChina/AOSC transaction and prior to the Valua- tion Date. 53 The result was a valuation range for TriStar of $0.70 to $0.80 per barrel, a fair market range of $365 million to $418 million. 54 Clark determined the market value of a recent bid for the east portion of Firebag to reflect a value range for the entirety of Firebag of $68 to $77 million. 55 He assigned no value to High Hill River, as no engineering reports had been produced for that lease.

2. Value of Technologies 56 As Value Creation had never marketed its Technologies, it was difficult for both experts to determine how they should be valued. 57 Mr. Clark relied on work done on the technologies by McDaniel. 58 McDaniel’s contingent resource evaluations were based upon an incorporation of the net positive impact of the Value Creation Technolo- gies. Mr. Clark segregated the costs and revenues that McDaniel had specifically attributed to the incorporation of the Technologies, updated the McDaniel price decks and recalculated the tax liabilities accordingly, and discounted the present value attributable to the benefits of the application of the technologies by a 25% risk rate. 59 Excluding the “uplift barrels” associated with the use of the Technol- ogies and applying the economic benefit only to part of TriStar and Terre de Grace, Mr. Clark concluded that the additional cash flows resulting from the application of the Technologies represented a present value in the range of $233 to $297 million. 60 He delivered a supplemental report that corrected certain calculations regarding, among other things, costs associated with the Technologies, giving rise to a corrected value range of $156 million to $201 million.

3. Value of uplift barrels 61 Clark noted that the McDaniel evaluation of the Technologies reported that using the Technologies would result in the production of additional oil, the “uplift barrels”. RFG Private Equity v. Value Creation B.E. Romaine J. 35

62 Clark’s analysis extracted the additional barrels and valued them based on market comparables. However, he applied a significantly higher discount rate to reflect various risks, ultimately concluding that the uplift barrels had a value in the range of $80 to $92 million.

4. Value of carried interest in the BP Transaction 63 BP committed to fund US $1.6 billion of capital in the Terre de Grace partnership, subject to an annual 3% increase and additional amounts for “new recoverable resources”. 64 The BP Transaction included a commitment on the part of BP to pay the Value Creation debt due on March 31, 2010. BP did in fact pay the debt on March 15, 2010, four days after the Valuation Date, and paid the balance of the $500 million directly to Value Creation. 65 The Clark opinion present value of $405 million for the BP/VCI partnership was based on Clark’s assumption that BP would spend the bulk of the funds in the later years of the seven year period of the partnership. No value was assigned to the commitment to pay amounts for “new recoverable resources”.

5. Value of tax pools 66 Clark combined BA Energy’s tax pools with Value Creation’s tax pools.

B. Fair Value v Fair Market Value 67 MNP LLP (“MNP”), the expert retained by Value Creation, was critical of Clark’s use of fair market value as a standard of value for its opinion. MNP instead used “fair value” in its opinion, meaning “the intrinsic value of the ownership of the Shares, having regard to the relevant facts and circumstances”. MNP’s opinion is described in detail later in this decision, but a fundamental issue with respect to the Clark opinion is whether the use of fair market value was an error affecting the validity of the opinion. 68 While MNP concedes that fair market value may be the starting point in determining fair value, it submits that an expert opinion should address fair value as a valuator understands that term to be interpreted by case authority. Mr. Clark responds that it is inappropriate for a valuator to presume to opine about fair value, as that can only be determined by the Court. 69 MNP also criticized Clark’s definition of fair market value. 36 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

70 These criticisms are unjustified. As noted by RFG, a common approach to determining fair value is to determine fair market value and then determine whether other considerations or factors warrant an adjustment to arrive at fair value: Brant Investments Ltd. v. KeepRite Inc. (1987), 60 O.R. (2d) 737 (Ont. H.C.), aff in [1991] O.J. No. 683 (Ont. C.A.) at para. 109. Deer Creek Energy Ltd. v. Paulson & Co., 2008 ABQB 326 (Alta. Q.B.), aff in 2009 ABCA 280 (Alta. C.A.) at paras. 482-3, 512; Domglas Inc. v. Jarislowsky, Fraser & Co. (1980), 13 B.L.R. 135 (C.S. Que.) para. 411. 71 RFG does not assert that fair market value is equal to fair value, and the Clark opinion should not be discounted for its emphasis on fair market value. Fair market value is an important consideration for a court in determining fair value while not the only consideration. As noted in Cyprus Anvil Mining Corp. v. Dickson, [1986] B.C.J. No. 1204 (B.C. C.A.), the “one true rule is to consider all the evidence that might be helpful and ... the particular factors in the particular case ...”. 72 The criticism of the Clark definition of fair market value is also unjustified. While MNP prefers a slightly different wording, the definition it proposes is materially the same. 73 It is unnecessary to consider RFG’s criticism that the MNP opinion contravenes the “ultimate issue” rule, as the submissions on that issue were a response to MNP’s criticism of Clark’s use of fair market value as a standard of value.

C. MNP Opinion. 74 MNP was retained by Value Creation to give an opinion of the fair value of the Value Creation common shares as at the Valuation Date. MNP’s opinion in its report dated September 30, 2014 is that the value is in the range of $1.19 to $1.34 per share. 75 Originally, MNP’s range of value was materially lower, but it issued a revised opinion dated September 30, 2014, which it said had been revised on a result of receiving additional material, particularly a report of Robert S. White dated July 18, 2014 (the “White Report”), supplemen- tary documents that were submitted to Mr. White in connection with the preparation of his report and certain additional information requested from Value Creation. 76 MNP then presented a second revised report dated September 30, 2014 that is substantially the same as the 1st revised report of that date, except that it includes a new provision under “Scope of Review”, in RFG Private Equity v. Value Creation B.E. Romaine J. 37

which MNP states that, while it reviewed the White Report and had discussions with Mr. White, its opinions “are not dependent upon nor made in reliance on the White Report or on discussions we have held with Mr. White”. 77 The White Report was not introduced in evidence. It was the subject of a pre-trial application, and the implications of that pre-trial order were the subject of some discussion at trial. Given my findings, it is not necessary that I address this issue. 78 For the purpose of its opinion, MNP took “fair value” to mean “the intrinsic value of the right of ownership of the [common shares], having regard to the relevant facts and circumstances. “MNP took “fair value” to be “the rateable (pro-rata) portion of the en bloc fair market value of the issued and outstanding common shares of [Value Creation] on the Valua- tion Date, as represented by the proportion that the Dissenters’ Shares is to the total issued and outstanding common share capital of the company”. 79 MNP’s definition of fair market value is the “highest price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm’s length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts”. 80 Notably, MNP took the position that Value Creation was in a “distressed financial condition” on the Valuation Date, and that therefore the fair market value (and fair value) of certain assets of the company were affected. 81 The reports were authored by Richard Wise and Drew Dorweiler, both of whom testified at trial. 82 MNP made the following assumptions in formulating its opinion: a) that there were no identifiable special interest purchasers in the marketplace on or about the Valuation Date; b) that there were no material contracts or agreements in effect, or being negotiated, that would otherwise have a bearing on its opinion, of which it was unaware; c) that the respective financial statements of Value Creation reflect all of its assets and liabilities (including, but not limited to, intellectual property); 38 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

d) that there were no material contingent assets or liabilities, unusual contractual obligations or substantial commitments, other than in the ordinary course of business, or litigation pending or threatened, of which it was unaware; e) that there are no significant factors bearing ion the fair value of the shares that it had not considered in reaching its opinion. 83 MNP referenced a general decline in stock markets in the third and fourth quarters of 2008, and drastically reduced liquidity in the marketplace. With respect to its opinion that Value Creation was in a distressed financial condition on the Valuation Date, MNP referenced: a) Value Creation’s acknowledgement in its shareholder’s circular dated February 18, 2010 that, if the BP Transaction was not approved by shareholders or completed, Value Creation would not have sufficient funds to pay its debt under the Credit Agreement due on March 31, 2010, the lenders would have the right to appoint a receiver and Value Creation may no longer be able to carry on business as a going concern; b) that Value Creation had incurred significant historical operating losses in the last three fiscal years; and c) that Value Creation was facing a payment of approximately U.S. $462.3 million to its lenders due on March 31, 2010 and had be- gun to consider the possibility of a CCAA filing 84 Based on economic uncertainty and the company’s financially-distressed situation, MNP concluded that the pool of likely purchasers for Value Creation’s assets or the shares was limited and that its financing alternatives were very restricted at the Valuation Date. Value Creation’s distressed financial situation, its looming repayment obligations under the Credit Agreement, combined with the illiquidity in the financial markets, led MNP to conclude that it was highly improbable that, at the Val- uation Date, there was significant interest in the marketplace for an investment in the shares in the short term. 85 MNP adopted the asset-based-approach to the valuation of Value Cre- ation, applying the Adjusted Balance Sheet Method (Adjusted Share- holders’ Equity Method) under a going-concern premise, on the assumption that Value Creation would continue on an ongoing basis rather than being liquidated in the near future. 86 MNP explained that, in applying the Adjusted Balance Sheet Method to value Value Creation’s issued and outstanding shares, each asset and RFG Private Equity v. Value Creation B.E. Romaine J. 39 liability on the balance sheet was written up or down, as the case may be, to its respective current or fair market value as of the Valuation Date, on an going-concern (as opposed to liquidation) basis. Corporate income taxes relating to the above adjustments were notionally deducted (or added) to arrive at adjusted shareholders’ equity on a net basis. MNP: a) aggregated the estimated values of the Terre de Grace, TriStar and Firebag oil sands leases; b) estimated the values of property, plant and equipment appearing on the company’s balance sheet as at March 11, 2010; c) estimated the values of the loans to and the receivable from BA Energy, as well as the issued share of BA Energy (the “BAE Shares”); d) estimated the value of the Technologies; e) estimated the value of Value Creation’s non-capital losses and research expenditure credits for income tax purposes; f) aggregated the values in (a) to (e), arriving at the estimated value of Value Creation’s total assets; g) calculated estimated transaction costs relating to the total assets in (f) (excluding the said loans and receivable in (c), the non-capital losses and the research expenditure credits in (e)); h) deducted the amounts in (g) from the aggregate value of Value Creation’s assets in (f), arriving at the value of Value Creation’s assets (net of transaction costs) at the Valuation Date; i) calculated the notional provision for taxes attributable to the Terre de Grace, TriStar and Firebag blocks of oil sands leases and the Technologies; j) calculated Value Creation’s debt and accrued interest, net of cash and cash equivalents, non-cash working capital and proceeds from the notional exercise of outstanding warrants; k) aggregated the taxes in (i) and the debt and accrued interest in (j), arriving at the company’s total liabilities for valuation purposes; l) deducted the liabilities in (k) from the total assets in (h), arriving at the company’s Net Asset Value (“NAV”); m) applied an “Illiquidity Discount” to the NAV in (l), arriving at the estimated fair market value of Value Creation’s equity; n) added to Value Creation’s outstanding common share capital the common shares that would be issued upon the exercise of “in-the- 40 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

money” warrants, resulting in the number of Value Creation’s common shares outstanding on a fully-diluted basis; and o) divided the fair market value of Value Creation’s equity in (m) by the fully-diluted number of common shares outstanding in (n), arriving at the fair market value per share at the Valuation Date. 87 MNP applied an “Illiquidity Discount” to the issued shares of the company to reflect its view that shareholders would be unable to quickly convert their shareholding to cash or pay a liability. This, it says, is dis- tinct from a “marketability discount”, which is an amount or percentage deducted from the value of an ownership interest to reflect the relative absence of marketability. 88 MNP considered certain offers received by Value Creation for blocks of its oil sands leases during the four months immediately preceding the Valuation Date as potentially providing meaningful indicia of value for these leases. 89 The following schedule sets out MNP’s calculation of fair value per share of Value Creation as at the Valuation Date: Low High (millions) (millions) Terre de Grace $1,000.00 $1,000.00 TriStar 164.20 197.04 Firebag 55.00 55.00 Property, plant and 4.07 4.07 equipment BAE loan and receivable 57.27 57.27 Investment in BAE - - Shares Technologies - 30.41 Technologies — SR & 2.34 2.34 ED expenditures Notionally-available non- - - capital losses Total asset value 1,282.89 1,346.13 Portfolio Discount 0.0% - 0.0% - Transaction costs 1.0% (12.23) 1.0% (12.87) RFG Private Equity v. Value Creation B.E. Romaine J. 41

Low High (millions) (millions) Total asset value (net of (a) $1,270.65 $1,333.27 transaction costs) Notional taxes payable $87.77 $102.29 Debt and accrued interest 460.88 460.88 (net) Contingency reserve 0.0% - 0.0% - Total liabilities (b) $548.64 $563.16 Estimated NAV (a) - (b) $722.01 $770.11 Illiquidity Discount ap- 10.0% (72.20) 5.0% (38.51) plicable to Shares Estimated Fair Market $649.81 $731.60 Value of equity Number of issued and outstanding Shares (fully diluted) 546.36 546.36 Fair Value per Share $1.19 $1.34 90 In valuing Terre de Grace, MNP did not use the BP Transaction value, but instead an offer made by CNPC/PetroChina. On February 15, 2010, CNPC/PetroChina offered $800 million for an 80% interest in Terre de Grace. MNP conceded that the BP offer was the highest bid, but did not use it on the basis that it was the transaction from which RFG had dissented. 91 In valuing TriStar, MNP used the McDaniel bitumen contingent resource estimate included in a January 5, 2010 report prepared by Genuity (the “BMO/Genuity Update”). It also reviewed the February 1, 2010 report authored by Macquarie Equity Research. It then applied a “distress discount” of 25% to the value per barrel range. 92 For Firebag, MNP reviewed an offer from Esso Imperial for part of the lease, and relied on information from Value Creation management that the other part of the lease could not be economically developed. 93 MNP used book value for Value Creation’s property plant and equipment. It adjusted BA Energy’s balance sheet to its estimated net realiza- 42 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

ble values, writing book values up and down. MNP took into account BA Energy’s sale of certain assets and part of the offer from Reliance. 94 No value was assigned to BA Energy shares. 95 MNP originally gave negligible value to the Technologies, largely as a result of discussions with Value Creation management. However, after reviewing the White Report, and the February 1, 2010 offer from Reli- ance in which Reliance attributed a value to the Technologies of between zero and $134 million, MNP applied a 50% probability factor to the $134 million. MNP assumed that the resulting $67 million optimal scenario would be paid at the end of four years subsequent to the Valuation Date, and therefore applied a 15% present value discount, arriving at an estimated high end value of $38.4 million, from which it deducted the $8 million value of the licence agreement held by BA Energy. 96 Research technology deductibles were estimated from Value Crea- tion’s 2009 tax return. 97 MNP then deducted transaction costs from the total asset value on the basis that a notional purchaser of the assets would do so. It deducted notional taxes and payment of the Credit Agreement debt minus an amount received from the notional exercise of outstanding warrants. It then applied its “Illiquidity Discount”.

D. Financial Distress 98 Mr. Clark is critical of MNP’s assertion that Value Creation was in financial distress at the Valuation Date. Clark’s view is that the company’s debt repayment issue had been effectively resolved by the Valua- tion Date. 99 I agree with Mr. Clark that, given the BP Transaction, Value Creation was out of financial distress at the Valuation Date. On February 10, 2010, the President of BP had confirmed by letter that it had completed its due diligence, that due diligence was no longer a condition to closing and that there were no regulatory filings required to close the transaction. More than 2/3 of shareholders were compelled by agreement to approve the transaction, definitive agreements were at an advanced stage, and BP had confirmed an irrevocable commitment to pay up to $500 million to Value Creation’s lenders on closing. The approval of the BP Transaction by the shareholders was a certainty, given that by February 18, 2010, approximately 79% had entered into agreements with BP to vote in favour of the transaction. By March 7, 2010, the definitive agreements RFG Private Equity v. Value Creation B.E. Romaine J. 43

were in final form. By March 10, 2010, assurances had been given to the lenders that the debt payment would be made before the due date. 100 While it may have been theoretically possible that the BP Transaction would not close after the Valuation Date, that theoretical possibility was insignificant in the circumstances. Value Creation was no longer realistically in a situation where it would not be able to pay its debt under the Credit Agreement. 101 It is also not the case that the pool of likely purchasers for Value Creation’s assets or shares was severely limited at the Valuation Date, particularly given that the search for offers had resulted in several other offers, less desirable for Value Creation management for a variety of reasons than the BP Transaction, but nevertheless capable of resolving Value Creation’s immediate need for sufficient cash to pay down its Credit Agreement debt. 102 If it is incorrect to assume that the BP Transaction was a virtual certainty to close, there were other potential purchasers and investors that could have resolved Value Creation’s distressed circumstances. Given the offers that had been made, Value Creation could have reached agreements that would have resolved its current debt crisis with Reliance, CNOOC, CNPC or AOCS. I agree with Value Creation and MNP that none of these options would likely have closed before March 30, 2010, but the assumption that the lenders would immediately use the option of a consent receivership if the BP Transaction did not close is not the only possible outcome. While the conditions to closing a different transaction may have taken longer than March 30, 2010 date, it is equally plausible that the lenders may have agreed to a further forbearance, given that Value Creation’s process appears to have resulted in a number of viable offers. 103 Value Creation appears to submit that MNP’s assumption that Value Creation was in distress is supported by the fact that the BP Transaction would not provide the company with sufficient capital to build upgraders without selling some of its properties. 104 It also argues that Clark’s valuation depends on the Court accepting that Value Creation would have raised sufficient capital to build several upgraders without selling any properties. 105 I must disagree with this interpretation of Mr. Clark’s opinion. He did not assume that Value Creation would either retain or develop its assets. Instead, he applied the definition of fair market value to each asset. In addition, challenges in raising capital do not equate to financial distress. 44 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

106 It follows that I do not accept MNP’s “distress discount” to per barrel values. 107 Mr. Clark is also critical of MNP’s view that the BP Transaction should not be considered in its valuation of the Terre de Grace lease. Again, I agree that there would be no reason not to use the BP Transac- tion as evidence of the fair market value of Terre de Grace if MNP was correct in using current offers and expressions of interest to value that property. Using that offer to value Terre de Grace is not an impermissible use of transaction to which RFG’s dissented, as discussed later in this decision.

E. Value Creation Proposal 108 Value Creation in its final argument submits that, despite the MNP opinion, evidence adduced at trial supports the following fair value for the RFG shares; Asset Value (millions) Technologies $0 to $30 Uplift barrels $0 Terre de Grace $1,000 TriStar $156.48 to $194.56 Firebag $55 BA Energy, PP&E, Working Capital $40 Taxes ($95) Liabilities ($477) Transaction Costs (1%) ($6.79 to $7.48) Illiquidity Discount (5% to 10%) ($50.96 to $56.07) Distress Discount (10%) ($67.95 to $74.76) TOTAL $553.78 to $609.26 Outstanding shares 546,980,495 Value per share $1.01 to $1.11 109 Value Creation’s proposed value appears to be based on portions of the MNP opinion and certain submissions made in argument, as follows: a) that the market “clearly” indicated its lack of interest in the Tech- nologies unless and until Value Creation proved them; RFG Private Equity v. Value Creation B.E. Romaine J. 45

b) that there is no evidence that can be used to quantify “uplift barrels”, and Mr. Clark is not qualified to give an opinion in that area; c) that the market (other than the BP Transaction) established the value of Terre de Grace, even though Value Creation was under distress; d) that the market established that TriStar is less valuable than Terre de Grace, and TriStar has surface restrictions that affects its value; e) that the Firebag value should reflect Value Creation’s distressed position; and f) that MNP’s approach to notional taxes is correct.

IV. Analysis A. Statutory basis for determination of fair value 110 Pursuant to section 191(3) of the Alberta Business Corporations Act, RSA 2000, Ch. B-9, as amended, dissenting shareholders are entitled to be paid “fair value” for their shares, determined as of the last business day before the day on which the resolution from which the shareholder dissents was adopted. 111 The ABCA does not define fair value but it provides that it may be fixed by the Court. 112 In Brant Investments Ltd., a leading case that combined an oppression action with the determination of fair value, the trial Court reflected on the meaning of fair value at paras 132 and 133: ...The right as I view it is to recover the value of the investment so that the proceeds may be utilized elsewhere. In such circumstances I see no reason why market value is not “fair value”. Market value (in some comment called “fair value”, in some “intrinsic value”) is defined as the highest price available in an open and unrestricted market between informed, prudent parties acting at arm’s length and under no compulsion to act, expressed in terms of money or money’s worth. In my view, on the facts of this case, “market value” will constitute “fair value” within the meaning of that term as used in s. 184(3) [of the CBCA]. It is on that basis that I propose to determine the award to the dissenting shareholders... “Market value” as defined above is a notional or hypothetical concept; and opinion arrived at by evidence, assumptions, calculations and judgment, in the absence of an actual transaction. The distinction is important for the disposition of this case. 46 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

113 On appeal the Court agreed that, on the facts of that case, “fair value” and “market value” could be equated, but such is not necessarily always the case. What is clear is that fair value is a value that is “just and equita- ble”, one that provides adequate compensation or indemnity, consistent with the requirements of justice and equity: Manning v. Harris Steel Group Inc. (1986), 7 B.C.L.R. (2d) 69 (B.C. S.C.), at 75 citing Domglas Inc. v. Jarislowsky, Fraser & Co. (1980), 13 B.L.R. 135 (C.S. Que.), at 164. 114 MNP defines fair value as meaning “the intrinsic value of the right of ownership of the Shares”. As noted in Morrison v. United Westburne Industries Ltd., [1988] O.J. No. 378 (Ont. H.C.) at p 11, “intrinsic value” has a particular meaning that may not make it synonymous with fair value and I prefer not to use that term. 115 The determination of fair value pursuant to the statutory right set out in the ABCA and similar legislation is highly fact specific. In making its determination, a court is advised to be prudent — to proceed not on the basis of the most optimistic approach, but to recognize that a prudent purchaser will have certain fall-back positions in mind: New Quebec Raglan Mines Ltd. v. Blok-Andersen (1993), 9 B.L.R. (2d) 93 (Ont. Gen. Div. [Commercial List]), at 132. While each party who asserts a proposition must prove it by a preponderance of evidence on the balance of probabilities, there is no burden on either side to establish value, as this is a judgment for the court to make: Silber v. BGR Precious Metals Inc. (1998), 41 O.R. (3d) 147 (Ont. Gen. Div.). 116 As the valuation experts point out, there are at least four accepted methods of valuing shares: a) market valuation, which is sometimes restricted to the use of quoted prices on a stock exchange; b) net asset valuation; c) investment valuation; and d) a combination approach. 117 As noted in Grandison v. NovaGold Resources Inc., 2007 BCSC 1780 (B.C. S.C.) at para 154, these options are not exhaustive and “[e]verything that has a bearing on the question of value must be considered”. 118 The approaches that may be appropriate to this valuation are the market-based approach, the net asset valuation approach, or a combination of RFG Private Equity v. Value Creation B.E. Romaine J. 47

the two. As noted in Cyprus Anvil Mining Corp. v. Dickson (1986), 33 D.L.R. (4th) 641 (B.C. C.A.), at 652: The one true rule is to consider all the evidence that might be helpful, and to consider the particular factors in the particular case, and to exercise the best judgment that can be brought to bear on all the evidence and all the factors. 119 The Court in Cyprus Anvil also noted at pp 652-3 that no method of determining value that might provide guidance should be rejected, but that in the end it is up to the court to exercise judgment to determine fair value. The determination of “fair value” is not a process characterized by mathematical certainty and exact calculation.

B Hindsight evidence and benefits from transaction 120 As noted by the expert witnesses, the issue of whether, and to what extent, RFG is able to rely on the fact and consequences of the BP Trans- action is a major issue in this case. 121 Generally, neither the parties nor the court may rely on hindsight evidence. Events that were not known as of the valuation date or that occurred afterwards are not relevant to determination of fair value on the valuation date. At trial in Smeenk v. Dexleigh Corp. (1990), 74 O.R. (2d) 385 (Ont. H.C.), affirmed on this point by the Court of Appeal at (1993), 15 O.R. (3d) 608 (Ont. C.A.) at 614, Henry, J stated at p 404: The advantages of hindsight are not available either to the applicant or to the court. It is the policy of the Act to divorce the value of the shares on the valuation date from the effects of the amalgamation whether anticipated or ex post facto. Events that were not known on the valuation date or which occurred thereafter are therefore, in ordinary circumstances, not relevant to the issue which is to determine fair value on the valuation date; where they may nevertheless have some relevance or probative value they should on the basis of the same principle be given little weight. 122 In Smeenk, the primary issue of hindsight was evidence of a sale of assets that took place after the valuation date. 123 It is noteworthy that this case was decided after the Canada Business Corporations Act was amended to delete a provision that specifically prevented a court from taking into account any effect that the resolution dissented from would have on share value. The Court in Smeenk commented that the amendment did not signify an intention to change the 48 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

prior approach, but framed the proposition as a general rule applicable “in ordinary circumstances”. 124 It is also noteworthy that the dissenting shareholders in Smeenk did not present any expert valuation evidence and thus the Court had only the uncontroverted evidence of a single valuator who followed the general rule. 125 The reason for the general rule was set out by Anderson, J in Brant Investments Ltd at p 113: The basic ground upon which the dissenting shareholders took their position of dissent was objection to the impugned transaction. Be- cause the manner of carrying that transaction forward involves a fundamental change within the meaning of the Act, they were accorded by the Act a right of dissent and a right to be paid the ‘fair value’ of their shares. In my view they should have no enhancement of the value of their investment attributable to the transaction which gave rise to their dissent 126 The Court of Appeal endorsed this decision, but referenced, at para 103 of the case, the 1977 proceedings of the Standing Senate Committee on Banking, Trade and Commerce dealing with Bill S-2, entitled “An Act to amend the Canada Business Corporation Act.” The parliamentary secretary to the Minister of Consumer and Corporate Affairs remarked on the proposed deletion: Finally, clause 56, in effect, broadens the court’s discretion to evaluate a dissenter’s shares by considering the benefits that flow to the remaining shareholders after the fundamental change has been effected. [emphasis added] 127 Thus, the Court of Appeal noted at para 104 that: ... In appropriate cases, particularly where the dissenters are forced out, the trial Judge may exercise his discretion so as to allow the dissenters to participate in the benefits of the transaction. The availability and nature of the participation would necessarily depend on the particular facts of the case... 128 The general rule was clarified in Ford Motor Co. of Canada v. Ontario (Municipal Employees Retirement Board) (2000), 48 C.P.C. (4th) 272 (Ont. S.C.J.) at para 5, where Ground, J comments that factual hindsight information (not opinions) may be used to compare actual results achieved after the valuation date to projected corporate results said RFG Private Equity v. Value Creation B.E. Romaine J. 49

to be reasonably foreseeable or to challenge the reasonableness of assumptions made by the valuators. 129 The issue of whether benefits and synergies arising from the transaction dissented from can be taken into account in a valuation arose in Deer Creek Energy Ltd. v. Paulson & Co., 2008 ABQB 326 (Alta. Q.B.), aff’d 2009 ABCA 280 (Alta. C.A.), in the context of a two-stage squeeze-out transaction. The issue was whether benefits and synergies that may result when the purchaser becomes the sole owner of the shares after the second stage should be taken into account in valuing the shares. The dissenting shareholders in that case dissented from the first stage of the transaction, and the second did not occur for several months. 130 I found that the impact of the anticipation of the second stage of the transaction was recognized in the price offered to shareholders in the first stage (at para 546) and that there was no justification for allowing dissenting shareholders additional benefits that might have accrued in the period of time between the first stage and the second stage (at para 547). 131 I noted at para 543 that under Canadian law, as a general rule, a dissenting shareholder cannot benefit from an increase in underlying share value created by a corporate transaction from which that shareholder dissented: Smeenk at p 404; Canadian Gas & Energy Fund Ltd at paras 15- 19; Brant Investments Ltd at p 772. While a narrow exception to this general rule exists in the circumstances of a squeeze-out transaction, it appears that courts have been reluctant to exercise their discretion to take into account the benefits of the transaction dissented from in assessing fair value: Fraser Inc at 112; New Quebec Raglan Mines Ltd at p 109- 110. 132 Given the lack of Canadian authority on the issue, I also reviewed American cases, but noted that care must be taken in considering the American position, as the Delaware statute that is considered in many of them includes a provision that specifically excludes from the calculation of fair value “any element of value arising from the accomplishment or expectation of the merger”, and the cases focus generally on the scope of this statutory provision. It also appears that the dissenting shareholder provisions in the Delaware statute apply in a narrower range of cases than do those in Canadian business corporations statutes. 133 However, despite this provision, the Court in Cede & Co. v. Technicolor, Inc., 684 A.2d 289 (U.S. Del. S.C. 1996) found that a lower Court had erred in failing to include in the calculation of fair value the merged company’s new business plans and strategies. Prior to the 50 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

merger, Technicolor planned to open a number of film processing stores, but had encountered difficulties in following its plans, reporting operating losses. After a takeover bid by MacAndrews & Forbes Group Incor- porated (“MAF”), MAF and Technicolor were consolidated for tax and financial reporting purposes, even though MAF had acquired only 82% of the Technicolor shares. The lower Court found as a fact that, before the later squeeze-out merger of the companies, the management of MAF “began to dismember what they saw as a badly conceived melange of business”, actively marketing several of the Technicolor divisions rather than continuing with the original plan to open further film processing outlets. As the appellate Court put it at p 14, there was a “fundamental disagreement between the litigants...concerning the nature of the enterprise to be appraised”. One party’s experts assumed that the Technicolor businesses would continue as going concerns; the other party’s experts assumed that the businesses would be sold in accordance with the marketing plan. Given the lower Court’s finding that the MAF plan to liquidate the Technicolor business was “an operative reality” prior to the merger date, the issue was whether any value attributable to that plan as of the merger date had to be excluded as falling within the statutory exclusion of “arising from the ...expectation of the merger.” 134 The Court harkened back to a decision in Weinberger v. UOP, Inc., 457 A.2d 701 (U.S. Del. S.C. 1983), wherein it had been commented that “[o]nly the speculative elements of value that may arise from the accomplishment or expectation of the merger are excluded”. The Court in Tech- nicolor noted at p 34 that: The “accomplishment or expectation” of the merger exception in Section 262 is very narrow, “designed to eliminate use of pro forma data and projections of a speculative variety relating to the completion of a merger.” Weinberger v UOP, Inc 457 A 2d at 713. That narrow exclusion does not encompass known elements of value, including those which exist on the date of the merger because of a majority acquiror’s interim action in a two-step cash-out transaction. 135 Lawrence A. Hamermesh & Michael Wachter in an article entitled “The Fair Value of Cornfields in Delaware Appraisal Law” (2005) 33 J. Corp. L. 119, note that the opinions in Weinberger and Technicolor have left a “troublesome uncertainty” in defining the proper approach to valuation in the United States. They discuss the principles of United States law in these types of cases, dividing them into categories. RFG Private Equity v. Value Creation B.E. Romaine J. 51

136 In analysing these categories, the authors note at p 148, quoting the latter paragraph from Union Illinois 1995 Inv. Ltd. Partnership v. Union Financial Group, Ltd., 847 A.2d 340 (U.S. Del. Ch. 2004) at 364 that: Of all the claims we make, the assertion that “fair value” excludes gains arising from the merger itself is the most clearly established and visible in Delaware law...Such excluded gains include, for example, those resulting from economies of scale or increased market share, or those that derive from the acquirer’s plans to operate the post-merger enterprise more effectively... Logically, if this mandate is to be faithfully followed, this court must endeavor to excluded from any appraisal award the amount of any value that the selling company’s shareholders would receive because a buyer intends to operate the subject company, not as a stand-alone going concern, but as a part of a larger enterprise, from which synergistic gains can be extracted. 137 However, they also note at p 149 that, through a “wooden interpretation” of Weinberger and Technicolor, a reader could draw a contrary in- ference. They suggest that such literal reading of the cases is not required, and is in fact “intolerably inconsistent with the language” of the legislation itself. 138 Two subsequent Delaware cases have distinguished Technicolor and interpreted it narrowly. In Grimes v. Vitalink Communications Corp., [, Doc. No. 12334 (U.S. Del. Ch. August 28, 1997)], [1997] WL 538676, dissenting shareholders sought an appraisal remedy after the completion of a two-stage merger. By the time of the second-stage merger, the target company, Vitalink, previously an industry leader, had fallen from its once prominent market position and urgently sought a buyer with expertise in a new router technology. The dissenting shareholders’ assessment of “fair value” presumed the router system would be supplied by the acquiring company vis-`a-vis the merger. 139 The Court of Chancery distinguished the Technicolor case, citing significant factual differences, including the fact that, in Technicolor, the new management plan “was the operative reality on the date of the merger.” In Grimes, by contrast, the Court found at paras 23-6 that there was “no evidence of any value added by [the acquiring company] between the date on which it obtained majority control and the date of which petitioners became entitled to appraisal rights”. While there was a plan and an expectation that the acquirer would be able to fulfil the target company’s needs, that plan had not been implemented and was merely speculative. As such it was to be disregarded in assessing fair value. 52 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

140 In Allenson v. Midway Airlines Corp., 789 A.2d 572 (U.S. Del. Ch. 2001), a decision involving a single-stage cash-out merger, the Court of Chancery interpreted Technicolor as requiring actual implementation of a new plan or activity before the element of value could be included in a fair value assessment. It was held that a suite of debt concessions were not to be considered in the “fair value” determination even though they had been negotiated before the merger was completed because they had not been implemented by that time. 141 The Court noted that, in Technicolor, the acquirer in implementing its new business plan before the merger had subjected the minority shareholders to the economic risks that the new plan posed. 142 In Deer Creek, I found that the acquiror had not implemented a new plan and that the evidence failed to establish that Deer Creek had done anything but follow its existing plan and timeline, with normal variations. As in Grimes, while there were expectations that Deer Creek would profit operationally and financially from the acquirer’s strengths in these areas, these were still speculative. 143 To the extent that American law is helpful on this issue, both in Deer Creek and in this case, it appears that synergies and benefits that arise from an acquirer’s further implementation of a business plan are not to be included in determining fair value as long as they are not “operationally implemented” before the transaction occurs. 144 In this case, there are three issues of valuation that depend on the extent to which the BP Transaction can be relied upon: 1) whether Value Creation should be considered to be in financial distress on the Valuation Date; 2) whether the BP Transaction can be taken into account in valuing Terre de Grace; and 3) whether the value of the BP covenants other than the payment of the Credit Agreement debt can be taken into account in a valuation.

1. Financial distress 145 As noted previously, I accept Mr. Clark opinion that, as at the Valua- tion Date, Value Creation was no longer in financial distress. Despite the general rule, the events that would save Value Creation from receivership in this case occurred prior to the Valuation Date, whether they were the virtual certainty of the repayment of debt through the BP Transaction, RFG Private Equity v. Value Creation B.E. Romaine J. 53

or the existence of other credible offers that could do the same, albeit perhaps not by March 30, 2010. 146 Even in Delaware, with a strict statutory rule that excludes from a fair value determination “any element of value arising from the accomplishment or expectation of the merger or consolidation,” this exclusion did not include “elements of future value ... which are known or susceptible of proof as at the date of the merger and not the product of speculation”: 8 Del C at 262(h); Weinberger at p. 713.

2. BP Transaction 147 MNP did not consider the BP Transaction in valuing Terre de Grace. As noted previously, if negotiated transaction prices are the appropriate approach to value of the property, using that transaction would not be an impermissible use of the hindsight rule. That an offer on the property made by an informed arm’s length party was accepted by Value Creation is a fact that was known at the Valuation Date, and it is relevant evidence of the market value of the property. Mr. Clark did not accept the BP Transaction Value for Terre de Grace, on the basis that Value Creation was in distress at the time of the offer, but the same was true for the other offers received during the time period, including the CNPC/PetroChina offer relied upon by MNP.

3. Future benefits 148 The BP Transaction included a capital commitment of US $1.6 million, the present value of which Mr. Clark took into account in valuing the Value Creation shares. 149 RFG submits that the limited jurisprudence in this area has developed a principle (the synergy principle) in relation to valuations based on future earnings. Under the proposed synergy principle, the courts generally exclude from fair value any future enhancements to value created by operational synergies that are uniquely derived from the transaction that gives rise to the right to dissent. Thus, RFG submits that the synergy principle does not require the court to exclude value inherent in the company at the Valuation Date, such as the fair market value of a stand-alone asset. 150 As postulated by RFG, the synergy principle was developed in relation to valuations based on projected future earnings. The question is whether the subject transaction would result in enhanced future earnings that can only be attributed to the transaction. If so, under the synergy 54 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

principle, the court may determine that the present value of that component of the earnings should be excluded from fair value. 151 RFG submits that, logically, the synergy principle does not have any application to the determination of the fair market value of a stand-alone asset, which is what RFG submits that Mr. Clark has done in his opinion. 152 Both expert valuators agreed that Value Creation should be valued as a going concern using the asset-based approach. The value of Value Cre- ation is thus the combined value of its stand-alone assets. Mr. Clark excluded from his valuation the 75% interest in Terre de Grace purchased by BP at a distressed price. He then valued the remaining Value Creation assets on the basis of what an arm’s-length purchaser would pay for them, in accordance with the definition of fair market value. RFG submits that the synergy principle has no application to such a valuation. 153 RFG submits that the relevant jurisprudence demonstrates that the synergy principle seeks to segregate value inherent to the enterprise as at the Valuation Date (such as existing earnings potential or the market value of assets) from newfound synergistic value which would not exist but for the transaction. It cites an article by Clark Hunter and Clarissa Pearce, Fair Value — A Common Issue with Sparse Authority, 2011 Ann Rev Civ Lit 25 (“Hunter”), as follows: Often, a merger or takeover will create new business circumstances or opportunities from which the existing company will benefit. Bene- fits that increase the value of the company are referred to as “synergistic benefits”. Whether synergistic benefits should be considered in determining the “fair value” of shares has been the subject of some difficulty within Canadian jurisprudence. Often a company will offer synergistic benefits to more than one potential purchaser. In such circumstances, the value of the synergistic benefits are not limited to a specific transaction and can be regarded as inherent to the company itself and therefore properly included in fair value. However, in circumstances in which only one specific transaction leads to an increase in value, courts have typically held that such synergistic benefits belong to the acquirer and should not be included in fair value. 154 Anderson, J. in Brant Investments, adopted the following definition of “synergy” at para 121: Synergy is the effect created by economies of scale; that is, the realization of increased earnings and cash flows as a result of the combination of two or more business operations over and above the aggregate earnings and cash flows of the two businesses reviewed RFG Private Equity v. Value Creation B.E. Romaine J. 55

separately. Aside from possibly affecting earnings and cash flows, the effect may also reduce risk, thereby increasing the aggregate going concern value on a combination of businesses. 155 I accept that the circumstances of this case are different from those of Smeenk or of Deer Creek, for example, where the issue was whether dissenting shareholders should be entitled to the benefit of an enhancement of their investment attributable to events that supervened after the Valua- tion Date. 156 To determine whether the value Mr. Clark placed on Value Creation’s carried interest in the BP/VCI partnership is value that falls within the general rule of exclusion or should be recognized in the assessment, I must carefully review how that value was calculated. 157 Mr. Clark described his analysis as follows: 17.4 Carried Interest: Part of the compensation VCI received from BP for the sale of its interest in TDG was a carried interest in future capital expenditures. This was referred to in the BP documentation as “Working Commitment Contributions” (WCC). BP undertook to spend an additional US$1.6B of development capital on TDG in the BP/VCI Partnership. VCI would receive credit of 25% of that amount, as carried interest. 17.5 As the project operator, BP would decide when that money would be spent, however, according to section 6.5 of the Partnership Agreement, if BP had not entirely invested the $1.6B before March 15, 2017, 25% of the remaining unspent WCC must be paid to VCI in cash, as a return of capital at that time. 17.6 The carried interest represents value to VCI because approximately US$400 million will be spent on its behalf in the development of productive partnership assets at TDG of VCI will receive a cash payment from BP at the end of seven years (in March 2017). BP is not compelled to accelerate the development of the TDG project and in the extreme it might be that BP delays the injection of the WCC until the seventh year. For the purposes of this valuation, we have estimated a present value for VCI’s carried interest on the basis that BP will invest the WCC progressively on an increasing sum-of- the years basis. This results in the bulk of the US$1.6B being spent in the later years of the seven year period, as shown in the Table below. 17.8 In our view, BP has the financial strength to honour its obligation, whether it spends the money on TDG development or ultimately pays cash to VCI under the terms of the Partnership Agreement (US$400 million plus an annual 3.0% inflation adjustment). Since VCI’s position in the arrangement is reasonably secure, i.e., it will 56 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

receive either investment credit or cash from BP, we discount the receivable/carried interest, with the inflation adjustments, for the time value of money at the Canadian risk-free rate of 3.25%. The corresponding present value is approximately $405 million, ... 158 Thus, it is clear that this value arises only from the execution of the business plan that was part of the BP Transaction, and no part of it was implemented on the Valuation Date. While, it appears reasonably certain that BP would honor its obligation, and while it may be appropriate for business valuation purposes to include this benefit in a fair market value assessment, it must be excluded from the fair value determination as it is a benefit flowing from the transaction that was the subject of the dissent. It had not been implemented or operationally operative at the Valuation Date. As noted in Allenson v. Midway Airlines Corp., a new business plan does not add value to a company “simply because it exists”, but rather “only if it is actually being implemented”: 789 A.2d 572 (U.S. Del. Ch. 2001) at ftn. 2, cited in Hunter at page 53. 159 Mr. Clark considered the BP covenant of conditional payment for new recoverable resources, but did not add value for that benefit given that it was sufficiently uncertain at the Valuation Date.

C Analysis of Competing Opinions of Value 1. Terre de Grace 160 As noted previously, Clark valued Terre de Grace and TriStar using the market value approach, considering: (a) the quality of the resources; (b) comparable companies and transactions including a Pe- troChina/AOSC transaction); and (c) an improvement in the oil sands market following the PetroChina/AOSC transaction and prior to the Val- uation Date. Clark’s analysis of comparables was supported by a report prepared by Douglas Ho dated January 22, 2014 (the “Sproule Report”), which explained similarities and differences of properties located in the subject formation from those located elsewhere in Alberta. 161 Clark concluded that, at the Valuation Date, the market value of Value Creation’s contingent resources was in the range of $0.70 to $0.80 per barrel. While he did not relay on a report prepared by Macquarie Equities Research in February, 2010 his conclusion was consistent with the Macquarie conclusion that the average valuation for oil sands transactions had cleared the $0.76/bbl level. 162 In valuing Terre de Grace, Clark applied the $0.70-0.80 range only to the 25% interest in Terre de Grace retained by Value Creation through its RFG Private Equity v. Value Creation B.E. Romaine J. 57

interest in the partnership with BP. The 75% interest conveyed to BP was valued at the price of the BP transaction ($0.57 per barrel). All parties agree that this was a distressed price. 163 MNP valued Terre de Grace on the basis of the CNPC/PetroChina offer. As noted previously, this was inappropriate. If consideration of received expressions of interest is the best way to value Value Creation’s properties, the BP Transaction should not be excluded. 164 Given that I have found that Value Creation was no longer in distress on the Valuation Date, I agree with Mr. Clark that the offers received by Value Creation while Value Creation was in financial distress do not reflect the fair market value of the Value Creation resources. I accept that Mr. Clark’s approach to valuing these assets is the appropriate approach in the circumstances. 165 Value Creation is critical of Mr. Clark’s reference to the Pe- troChina/AOSC transactions as a comparable in respect of the valuation of Terre de Grace. Value Creation and MNP submits that these transactions are not of value because: (1) there are material differences between AOSC’s properties and Value Creation’s properties (AOSC has probable reserves while Value Creation only has contingent resources); and (2) the PetroChina/AOSC transaction did not involve distress. 166 Mr. Clark considered the PetroChina/AOSC transactions to be comparable to Value Creation’s oil sands lease assets because the properties are located in the same formation as Terre de Grace and were in startup situations, pending regulatory approvals. He also considered them to be fair market value benchmarks as of August 28, 2009. 167 Value Creation submits that Mr. Clark did not do the work necessary to assess whether the AOSC properties were comparable to Terre de Grace and TriStar, nor did he have the expertise to do so. It submits that RFG should have spent the approximately $300-400,000 necessary to obtain an expert opinion on that issue. 168 Mr. Clark used the AOSC transaction because of its timeline to the Valuation Date, the similarity of the contingent resources of AOSC’s Dover and McKay properties to the Value Creation properties (relying on information provided by Mr. Ho), the similarity of the structure of the transaction and because, effectively, a price was paid for resource barrels that did not have a tax base equal to the fair market value of the asset, thus precluding consideration of a tax shield adjustment when compared to the Value Creation resource assets. I accept that these factors made the 58 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

AOSC transaction an appropriate comparable for the Terre de Grace and TriStar assessments, without further engineering assessment. 169 Value Creation also submits that Clark erred in inflating the imputed per barrel price of the AOSC/CNPC transaction by 20% using the Clay- more Index. It submits that if the transaction is used as a comparable, the per barrel price should be reduced to $0.58 based on the evidence. Whether it was appropriate for Mr. Clark to use the Claymore Index in assessing Terre de Grace and TriStar is discussed later in this decision when the TriStar assessment is discussed. 170 I therefore accept the Clark opinion with respect to the value of the Terre de Grace contingent resources that Value Creation continued to own after the BP Transaction.

2. TriStar 171 TriStar is one of Value Creation’s key assets, and Clark and MNP came to significantly different valuations of this lease. 172 As previously noted, in valuing TriStar, Mr. Clark was aware of Mr. Ho’s opinion that it is important to compare relative geographical features of properties in assessing market comparable transactions. He reviewed, among others, the PetroChina/AOSC transaction, a report from McDaniel and Associates Consultants Ltd. (“McDaniel”) with respect to TriStar which corroborates Value Creation’s analysis of the qualities of the TriStar resources; and the positive changes that occurred in the oil sands market subsequent to the PetroChina/AOSC transaction and prior to the Valuation Date. 173 The result was a valuation range for TriStar of $0.70 to $0.80 per barrel, a fair market range of $365 million to $418 million. 174 In valuing TriStar, MNP used the McDaniel bitumen contingent resource estimate included in a January 5, 2010 report prepared by Genuity (the “BMO/Genuity Update”). It also reviewed the February 1, 2010 report authored by Macquarie Equity Research. It then applied a “distress discount” of 25% to the value per barrel range. 175 MNP’s opinion is substantially premised on its “understanding” that the contingent resources of TriStar were impacted by: a) bitumen thickness; b) overburden; c) insignificant drilling delineation; RFG Private Equity v. Value Creation B.E. Romaine J. 59

d) uncertainty with respect to regulatory approval of a pilot project; and e) the potential of “regulatory risk” with respect to “holding reservations”. 176 Mr. Ho questioned MNP’s qualifications to opine on such matters, and disagreed with all of them in a rebuttal report. MNP conceded that its understanding with respect to the quality of the resources was based only on advice from Value Creation management. I accept Mr. Ho’s analysis of these issues on the basis of his greater expertise. 177 MNP also considered the McDaniel contingent resource estimate in the BMO/Genuity Update to the Value Creation board of directions, a Genuity Analyst Report, the Macquarie Analyst Report; and undisclosed discussions with Value Creation management but did not consider any of the McDaniel evaluations of the TriStar contingent resources. It also did not consider the Genuity advice given to the board of directors that TriS- tar had an NPV in excess of $1 billion, thus raising concern about its selective use of the Genuity Analyst Report. 178 The MNP report discussed the rationale for discounting the data in the Genuity and Macquarie reports as follows: Accordingly, we initially estimated that a value range of $0.25/bbl to $0.30/bbl would be applicable to the TriStar leases (based on our review of data contained in the Genuity and Macquarie Reports). How- ever, assuming that the companies from which the pricing data in the Genuity and Macquarie Reports had been obtained enjoyed access to capital markets, were financially healthy and were not (from what we understand) facing potential material regulatory risk (e.g., HRS that may prohibit further development of a portion of the lease area and/or possible forfeiture of certain leased sections), (whereas VCI, as operator of TriStar, was in a distressed situation as at the Valua- tion Date), we applied a distress discount of 25% to the $0.25/bbl to $0.30/bbl bitumen-resource value range (Schedule 1). Assigning the resulting $0.1875/bbl to $0.2250/bbl discounted price range to the McDaniel contingent resource estimate of 876 million bbls, we arrived at values in the rage of $164.20 million to $197.04 million for TriStar under this method. [emphasis added.] 179 As noted previously, I do not accept a “distress discount” as I have found that Value Creation was not in a position of financial distress on the Valuation Date. In addition, it appears from Mr. Dorweiler’s testimony that MNP chose the lowest of the ranges suggested by Genuity and 60 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

Macquarie on the basis that TriStar was “pre-production”, thus starting MNP’s assessment from the lowest point possible pre-discount. 180 The “HRS” regulations mentioned in the MNP report are an issue that impact only a small portion of the lease, about 7% of the resources. Mr. Clark considered this to be negligible and notes that the issue was not cited by McDaniel in its contingent resource reports. 181 Mr. Clark pointed out that Value Creation’s own technical assessment of TriStar indicated superior resource quality, which was reinforced by the McDaniel reports and Mr. Ho. He disputed whether the Genuity Ana- lyst report was an appropriate source for a valuation, and stated there was no good reason for MNP to use the low range of that report in any event. 182 MNP argued that Mr. Clark should not have noted the Claymore Oil Sands Sector ETF Common Index in its valuation because, in its opinion, the index is not meaningful in determining the “fair value” of contingent resources of either Terre de Grace or TriStar. 183 At trial, Mr. Clark explained the nature and significance of the Clay- more index, including that it demonstrated that the market for contingent resources in the oil sands had improved since the AOSC/PetroChina transaction, which was strongly corroborated by the Genuity Analyst Re- port and the Macquarie Analyst Report. 184 He noted that, while the Claymore index is not perfect: ... what it does show is that in a period from sometime in 2009 until our Valuation Date, the price being paid for oil sands, either directly in transactions or indirectly through the stock prices, was showing a steady increase; and, in fact, from August, 2009, when PetroChina signed its agreement to purchase, until March 11th, 2010, there was a 20 percent increase in the value of the index. So we’ve used that, imperfect as it may be, to say that there is a likelihood that a price that is comparable and involves similar properties in August of ’09 is likely of some greater value eight months later. 185 As it had been with Terre de Grace, Value Creation is critical of Mr. Clark’s use of the PetroChina/AOSC transaction as a comparable, noting that Mr. Ho had not analyzed the resources involved in that transaction. It notes that Sproule critiqued the McDaniel evaluation as being too generous with respect to TriStar. However, Mr. Clark included summary points of comparison with respect to the quality of reserves for the Pe- troChina/AOSC transaction and a number of others gathered from a variety of sources as support for his opinion. He performed a thorough re- RFG Private Equity v. Value Creation B.E. Romaine J. 61

view of precedent transactions that support the validity of the comparison. 186 Mr. Clark did not in fact use the McDaniel estimates of recoverable volumes to value the TriStar contingent resources. He instead used the GLJ estimates that were 40% lower than McDaniel’s. 187 In its final argument, Value Creation appears to resile from the MNP valuation of TriStar, and submits that the Court should value TriStar using the $0.30 per barrel that Reliance expressed interest in paying for TriStar and Terre de Grace in its initial offer. 188 In the alternative, it submits that the Court could use the $0.466 per GLJ barrel that it submits should be used to value Terre de Grace, and reduce it by 20% to reflect the difference in quality, resulting in a per GLJ barrel price of $0.373. As no entity offered to pay more than $0.30 per barrel for TriStar, Value Creation submits that it is more appropriate to use $0.30 per GLJ barrel. 189 There is no expert support for Value Creation’s new proposal on how to value the TriStar, contingent resources, and its criticism of Mr. Clark’s assessment is not persuasive. I accept Mr. Clark’s assessment of the value of the TriStar resources for the purpose of assessing fair value.

3. Firebag 190 Both MNP and Clark agree that, of the three properties associated with Firebag, only Firebag East could be ascribed a value. Both MNP and Clark agree that the Imperial Oil letter of intent offer of $55 million is a value indicator. 191 However, Value Creation is critical of the fact that Mr. Clark increased the amount derived from the Imperial Oil offer by 19-29% to account for the fact that it was a distress offer. 192 Value Creation points out that, after the Valuation Date, it concluded a land swap transaction with Imperial Oil and recorded the value of the swapped Firebag lease as $55 million. While this may fall within an exception to hindsight evidence, it is weak evidence to counter the Clark opinion that the $55 million was a distress offer. I accept Clark’s assessment of the value of the Firebag contingent resources.

4. BA Energy, plant & equipment and working capital 193 Clark assigned a value of $42 million from the proceeds of the sale of the Stonefell Terminal to Value Creation’s investment in BA Energy, but 62 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

allocated nothing for property, plant and equipment. MNP assigned a value of $57 million to BA Energy and $4 million to property, plant and equipment. The difference between Clark’s use of $11 million for working capital and MNP’s use of $15 million relates to the date of the balance sheet used by the valuators. Both valuators conceded that there were issues with respect to the amount reported for BA Energy, and MNP’s use of tax pools complicates this assessment. 194 In argument, Value Creation submits that $40 million is a reasonable conclusion for the total value for BA Energy, working capital and property, plant and equipment, compared to Clark’s assessment of $53 million. Given the difficulty in evaluating Value Creation’s return from the reorganization of BA Energy, I accept the Value Creation submission and agree that $40 million is a reasonable assessment of value for these categories of assets.

5. Technologies 195 Value Creation was established as a vehicle to demonstrate the commercial viability of two processes developed by Dr. Yeung: a) Accelerated Decontamination™ or ADC™; process, and b) Ultra Selective Pyrolysis™ process

a) ADC™ 196 Conventional in situ bitumen contains asphaltene particles that cause the bitumen to have a high viscosity, so thick it does not flow at room temperature. 197 The ADC™ process would remove much of the asphaltene content at the well site, using a mechanical process to precipitate the asphaltene particules out of the crude oil and into a water slurry. The extracted asphaltenes can then be used as a fuel source in the production of steam for SAGD wells. The partially upgraded oil is called decontaminated oil or DCO. 198 The ADC™ process integrated with upstream bitumen production would give rise to options for product that is easily transported by pipeline.

b) Ultra Selective Pyrolysis™ 199 The USP™ process further upgrades DCO, and produces synthetic fuel gas as a by product, which can be used as a substitute for natural gas in the steam generation process. RFG Private Equity v. Value Creation B.E. Romaine J. 63

200 In conventional SAGD operations, natural gas is typically the single largest operating cost. The virtual elimination of this expense by using the Technologies could amount to savings of hundreds of dollars per year over the corresponding cost of natural gas in conventional SAGD operations. 201 In addition, the cost to build the equipment for the Technologies is estimated to be significantly less than the corresponding cost of current upgrader technology. 202 The Technologies have not been commercially operated. By the Val- uation Date, Value Creation had built a small demonstration facility, but had not tested the Technologies on a commercial basis. 203 Both Clark and MNP agree that the Technologies have value. 204 In assessing the fair market value of the Technologies, Mr. Clark relied on contingent resource valuations prepared by McDaniel, the last dated September 30, 2009. McDaniel incorporated the Technologies into its engineering analysis starting in December 31, 2007. 205 Clark made several assumptions in assessing the Technologies, including that: (1) Value Creation could raise sufficient capital to fund construction of an upgrader to prove the Technologies. (2) there would be no delay in construction of the TriStar upgrader; (3) BP would proceed with an upgrader for Terre de Grace; (4) there would be no escalation of capital costs from 2007 estimates; (5) McDaniel’s 2009 forecast of share production and revenues could be appropriately be used to calculate net present value of projected cash flow from the Technologies if they perform commercially as hoped; and (6) application of a risk discount was appropriate to reflect the risk that the Technologies may not be commercially proven and performed as hoped. 206 MNP largely based its assumptions about the viability of the Technol- ogies on discussions with Value Creation management. 207 From these discussions, MNP understood that: (1) the Technologies could not be developed because of capital constraints and Value Creation’s distress; (2) the Technologies were commercially unproven; 64 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

(3) the market place was not willing to commit capital acquire or finance the Technologies; and (4) the Technologies were impaired and written down in Value Cre- ations 2008 Audited Consolidated Financial Statements. 208 MNP estimated that the value of the Technologies at the Valuation Dates was $8 million (at the low end of its valuation range), considering risk factors such a Value Creation’s distressed and urgent financial and operating situation, perceived questionable scalability and absence of commercial development of the Technologies, potential technological obsolescence, difficulty in obtaining requisite financing for continued development, and dearth of interest among potential acquirers and/or licensees of the Technologies in the marketplace, as well as the $8 million value assigned to the BA Energy licence of the Technologies in the Re- port of the Monitor of BA Energy, dated March 16, 2010. 209 Having said that, MNP then reviewed an offer made to Value Crea- tion by Reliance Industries Limited on February 1, 2010 in which Reli- ance would attribute a value of $0.05/bbl, up to a possible maximum 2.687 billion bbls of contingent resources at Terre de Grace, as an additional portion of the purchase price if ADC™ were ever to be successfully used in production. MNP then considered that the value of the Technologies could be represented by an option in which two different outcomes are possible: (a) the maximum amount of contingent resources at Terre de Grace would be successfully produced using the Technolo- gies and (b) the Technologies would not be commercially proven, resulting in their value being nil It applied a 50% probability factor to both of these outcomes (equally weighting the case where the Technologies would eventually be successfully utilized and the case in which they would not be commercially viable). Under the successful outcomes scenario, MNP assumed that the maximum additional value attributed to the achievement of the milestone of successful use of ADC™ would be paid at the end of the four years immediately subsequent to the Valuation Date and applied a present-value discount thereto of 15% (which was not part of the Reliance offer). MNP thus arrived at an estimated high value of $38.41 million for the Technologies. 210 MNP then deducted the $8 million value of the licence agreement for the Technologies held by BA, giving rise to a range of value from nil to $30.41 million. It is not clear why this deduction was appropriate. 211 MNP did not consider the McDaniel reports in its assessment of value of the Technologies. RFG is critical of MNP’s focus on the Reliance of- RFG Private Equity v. Value Creation B.E. Romaine J. 65

fer instead of the McDaniel detailed cost, revenue and production forecasts. 212 Mr. Clark disagreed with MNP’s statement of “escalating costs” as at the Valuation Date, citing evidence that showed that, at the relevant time, the industry was experiencing capital cost deflation. He also disagreed that there was no interest in the Technologies expressed by potential purchasers. He noted that there were several expressions of interest by major international companies to provide funding for continued development of the Technologies, even though they were not being marketed, and reviewed the terms of those expressions of interest. He also found significant that, before Value Creation became financially distressed, it had raised more than $500 million to begin development of the Technologies. In 2010, once the debt payment was assured, Mr. Clark assumed that Value Creation would have been once again free to pursue financing for development of the Technologies. 213 Mr. Clark was of the opinion that the potential economic advantages of the Technologies based on the costs and production estimated in the McDaniel reports support significant value for them, even allowing for the higher rates of return generally demanded by venture capital investors. 214 Another issue of disagreement between Clark and MNP is the significance of the financial impairment report. 215 In March 2008, Value Creation had acquired the remaining share of BA Energy that it did not own (31.4% of the outstanding BA Energy shares). It recorded the technology rights held by BA Energy in its financial accounts at $215.6 million. 216 In September 2008, KPMG was engaged to conduct an impairment test concerning the carrying value of the technology rights. KPMG produced a report that determined that the carrying value of the technology rights for financial reporting purposes should be written down to zero. 217 MNP has assumed that the write-down of the technology rights is an indication that the Technologies have little or no value. Clark disagrees, in part because the technology rights that BA Energy owned were not the Technologies themselves, but only the limited rights to employ those Technologies, principally at a particular merchant upgrader. Clark is of the opinion that there are additional significant benefits that are particular to using the Technologies in the field and world-wide, compared to the relatively limited application at a single upgrader. 66 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

218 Also, Clark believes that the KPMG analysis did not take into account that the Technologies would virtually eliminate the need to purchase natural gas for upgrading, while the McDaniel reports do take that advantage into account. 219 Mr. Clark did not assume that Value Creation would have to finance the development of the properties itself; he noted that the company would have to find the capital, to raise the money from well-funded companies. He noted that Dr. Yeung had been successful in raising $500 million for an upgrader in the past. 220 Nevertheless, it is correct that in the few years prior to the Valuation Date, Value Creation had been unable to raise sufficient funds to repay its lenders and that it had experienced several failed IPOs. 221 It is also correct that Value Creation’s business plan had changed in 2008 from that relied upon in the McDaniel reports. 222 Another issue that raises questions with respect to Mr. Clark’s assumptions is that the McDaniel reports assumed that the timing of upgrading based on the use of the Technologies would proceed on the basis that Value Creation owned 100% of Terre de Grace. 223 Mr. Clark adjusted for the fact that, as a result of the BP Transaction, BP would be the operator of Terre de Grace, and it was not unreasonable, even likely, that BP would delay implementation of the Technologies until they were proven. To take that into account, Mr. Clark delayed the implementation of the Technologies at Terre de Grace a further three and a half years to five and one-half years. 224 The Monitor of BA Energy, Mr. Narfason, was required to consider the realizable value of BA Energy’s technology licence for the purpose of the CCAA proceedings, in to determine whether BA Energy’s proposed plan of arrangement was better than a liquidation of its assets. In Mr. Narfason’s view, it was not possible at the time to find someone to finance and finish building the upgrader that was one of BA Energy’s assets, which was to be used to develop the Technologies. He used the upgrader, which he knew Value Creation wanted to retain, as leverage to reduce Value Creation’s secured claim to the BA Energy estate, and thus free up cash for distribution to BA Energy’s other creditors. 225 Mr. Narfason testified that, because of the state of the economy in 2008 and 2009 and because of the unproven nature of the Technologies, the Monitor decided to value the licence as an option value, and negotiated heavily with Value Creation on a range of value. RFG Private Equity v. Value Creation B.E. Romaine J. 67

226 Mr. Narfason took into account that Value Creation would be resis- tant to assigning the licence to a third party, and that under the licence agreement, it had the right to withhold consent (albeit not unreasonably). He took advice from his firm’s valuation group, and considered the ability at the time to acquire further financing to prove the Technologies, together with his time constraints within the CCAA proceedings. The Monitor assessed the Technologies within the licence agreement within the construct of the upgrader. 227 It was anticipated that Value Creation would receive about $25 million on its secured claim of about $59 million against BA Energy, with the remainder of its claim unaffected and received, effectively, through the unliquidated assets of BA Energy. 228 The technology licence was valued at a low of zero and a high of $8 million, on the basis that someone might pay that option value. 229 Value Creation submits in its argument that the evidence supports a value of $0 to $30 million for the Technologies at the Valuation Date because: (a) the McDaniel reports are not meant to imply fair market value; (b) the Technologies were commercially unproven; (c) Value Creation did not have the funds to prove the Technologies and would not have been able to raise the necessary capital to build five upgraders; (d) BP would not provide the funds to prove the Technologies at Terre de Grace; (e) the market did not express interest in funding an upgrader that would prove the Technologies; (f) market conditions did not favour construction of upgraders at the Valuation Date; (g) the Monitor of BA Energy valued the Technologies at nil to $8 million; and (h) KPMG valued the Technologies, and therefore the license, at nil to $30 million for financial reporting purposes. 230 Not all of these factors were established by the evidence. It is clear that Value Creation would have to raise the funds from external sources to prove the Technologies, and this does not affect their value, except to the extent that there may be difficulties in raising those funds in the economic climate of the time, and the reality that there are a limited number 68 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

of parties with the resources to commit to this. While BP may not use the Technologies until they are proven, it is reasonable that they would be used on Terre de Grace when proven. 231 The Technologies were not marketed, but still Value Creation received some indications of interest from the market. It is true that market conditions at the Valuation Date did not favour the construction of upgraders. The Monitor’s position in the CCAA proceedings was coloured by the nature of the CCAA proceedings and his obligations in the difficult circumstances of the financial distress of BA Energy. While the valuation of the licence is relevant evidence in this assessment, it is not as conclusive as submitted by Value Creation with respect to the value of the Technologies in Value Creation’s hands. The asset he was valuing was a limited licence, not the Technologies directly. Value Creation was not in financial distress on the Valuation Date, and had unlimited rights to the Technologies. 232 Contrary to Value Creation’s position of the value of the Technolo- gies for the purpose of this valuation, Value Creation has always been extremely positive about the potential of the Technologies. They have been studied by independent engineers, and, while development risks exist with respect to every new development, Purvin & Gertz Inc., which reported on the Technologies on several occasions, found that the technology risks asserted with the commercialization of ADC™ “should be manageable”. The R.W. Beck report of September 12, 2007 noted that: Based on the information provided to [R.W. Beck] by VCI, the commercial scale version of the new processes to be employed in the Pro- ject appear to be conservatively designed. ... the Project is not burdened with undue technological risk when compared to similar projects that include the first time application of new technology. ... Based on our literature review, our review of the pilot plant balances, plus our witnessing of the ADC™ pilot plant operation, we believe that the ADC™ process is fundamentally sound. 233 Thus, MNP’s assignment of nil value for the Technologies as part of the range of values is an unreasonably negative assessment of value. 234 MNP’s disregard of the McDaniel reports, and its reliance on Value Creation’s management for a number of its assumptions casts doubt on its opinion of value. However, Mr. Clark’s assumption about the availability of obtaining funding for development of the Technologies, given the financial climate on the Valuation Date and Value Creations history is also of concern, and his adjustments to the date of development of the RFG Private Equity v. Value Creation B.E. Romaine J. 69

Technologies with respect to Terre de Grade appear overly optimistic. Nevertheless, Mr. Clark’s analysis of value is more supportable by the evidence then that of MNP in the circumstances, and I accept it as a starting point for fair market value. 235 However, although he applied a risk factor discount rate of 25% to his initial assessment of value, the reality of the economic climate as it existed on the Valuation Date, the uncertainty of BP’s involvement, and the risk of problems during attempts at commercialization justify a further discount of 50% to Mr. Clark’s fair market value in assessing fair value of this asset. His assumptions are not incorrect, but they are speculative with respect to this asset.

6. Uplift Barrels 236 Clark noted that the McDaniel evaluation of the Technologies reported that using the Technologies would result in the production of additional oil, the “uplift barrels”. 237 Clark’s analysis extracted the additional barrels and valued them based on market comparables. However, he applied a significantly higher discount rate to reflect various risks, ultimately concluding that the uplift barrels had a value in the range of $80 to $92 million. 238 MNP assigned no value to uplift barrels, although it appears to recognize the possibility of recovering additional resource barrels arising from lower production costs made possible by the Technologies. Value Crea- tion in its argument concedes that the Technologies could conceivably have the impact of producing uplift barrels, but submits that the difficulty is in quantifying them. 239 The problem with quantification is that, although the McDaniel reports state that using the Technologies on a commercial scale would increase Value Creation’s production of bitumen, Brian Hamon, a petroleum engineer employed by McDaniel as an engineer trainee when the reports were prepared, testified that the quantity of estimated recoverable resources in the reports could not be affected by the incorporation of the Technologies because “the geological model and the engineering model which determined the recoverable volumes are unaffected by the technology or the upgrade”. While the Technologies impacted the economics of the project, that anticipated impact was not used by McDaniel to change its estimate of contingent resources. 240 Mr. Clark attempted to quantify the uplift barrels by comparing Mc- Daniel’s estimate of gross salable barrels to a GLJ estimate of SAGD — 70 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

only barrels. However, that assumption is untenable: it is clear that different assumptions underlying the GLJ and McDaniel reports are more likely the reason for the differing numbers of contingent barrels. Unfor- tunately, the evidence offered in the Clark report about the quantification of uplift barrels is insufficient to establish the value attributed to them, and since there is no other evidence, I am unable to assign a value to this asset.

7. Notional taxes 241 Mr. Clark did not deduct any notional taxes in arriving at his opinion as to fair market value, consistent with his going concern approach. 242 MNP, on the other hand, noted that proceeds from the “notional disposition of the blocks of Terre de Grace, TriStar and Firebag blocks of oil sands leases, as well as the proprietary technologies ... would be taxed at a 26.5% rate as active business income (rather than capital gains). MNP therefore used a 26.5% 2011 income tax rate and then applied a 12.5% discount “to reflect the estimated timing and risk of non-realization of the [tax] losses, etc.”, resulting in a deduction in the range of $279.9 million to $294.4 million. 243 MNP then used its calculation of all available losses and other tax pools of both Value Creation and BA Energy to shelter income and avoid tax from sale of the properties, and estimated the remaining unsheltered notional taxes to be between $87.8 - $102.3 million. Its midpoint is $95 million in notional taxes (net of the tax shelter). 244 In rebuttal, Mr. Clark noted that deducting notional income taxes on the assumed sale of Value Creation’s major assets resulting in assumed taxes ($273-$290 million to $280-$294 million) was the largest deduction MNP made in arriving at a value for Value Creations’ shares. He concluded that this deduction is not appropriate in determining fair market value, as there were no asset sales imminent other than the completion of the BP Transaction, the taxes on which would be sheltered. Fur- ther, he noted that the assumption of such tax liability is associated with a liquidation scenario, which MNP had agreed was not appropriate. 245 Mr. Clark noted that the only way that Value Creation would become almost immediately liable for nearly $300 million in income taxes as of the Valuation Date would be if all its major assets were sold. 246 Mr. Clark notes that, under a going concern presumption, the only income taxation that will occur over the productive life of the company’s properties will be income taxes on the taxable income generated as the RFG Private Equity v. Value Creation B.E. Romaine J. 71

resources are gradually extracted, processed and sold, either as raw bitumen or synthetic crude oil. All of these taxes are anticipated and implic- itly deducted in the market price per barrel observed in comparable transactions. 247 MNP submits that the notional tax approach applies whether or not Value Creation intends to sell the properties because that is how assets are valued using the net asset approach. It submits that notional taxes are calculated and then discounted to reflect uncertainty regarding when the property would likely be sold and the tax incurred. The longer the projected time until sale, the higher the discount. MNP and Value Creation submit that, if there is substantial uncertainty regarding timing, some cases use a 50% discount. If a sale is likely in the near term, the discount rate is much lower. In cases where sale and consequent tax is likely imminent, there may be no discount rate applied. In such a case, the total anticipated tax would be deducted. This is not an entirely accurate statement of the case law, as later discussed. 248 Value Creation then proceeds to submit that, since it was in financial distress on the Valuation Date, I should assume that all or substantially all of its properties would have to be promptly sold, either in a receivership or to avoid receivership. However, it submits, even if some but not all of its properties were sold immediately, it is likely that in the near term Value Creation would have to sell substantially all of the balance because it did not have access to the capital needed to develop (or fund its share of development) of the properties. As such there should be little or no discount. 249 Since I have found that Value Creation was not in financial distress on the Valuation Date, I do not accept this argument. 250 Value Creation submits that the case law recognizes that notional taxes must be properly accounted for to arrive a net asset value, citing Canadian Rocky Mountain Properties Inc., Re, 2006 ABQB 251 (Alta. Q.B.). It is correct that I found that the deduction “of at least a portion” of taxes was appropriate in that case, noting at para 20 that with respect to tax at the corporate level, being the trapped-in capital gains taxes, the deduction of at least a portion of those taxes was appropriate with respect to certain properties, as liquidation of these assets was clearly contemplated. In the Canadian Rocky Mountain Properties case, MNP in its opinion arbitrarily discounted the tax calculated to be payable on these properties by 50%, “to recognize deferral of the liquidation of these properties.” I found that such a discount was not appropriate, given that 72 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

one property was sold prior to the valuation date, and the evidence was that the sale of the other two properties on an immediate basis would be prudent for any purchaser. I found that 100% of the income tax payable on a disposition of these properties should be deducted from value. 251 In Canadian Rocky Mountain Properties, I also considered whether trapped-in capital gains should be deducted from a property called Ever- green, which represented 98.6% of the company’s assets. I referenced an article suggesting that the full amount of trapped-in tax should be deducted from fair value of a holding company, whether or not a liquidation of the assets of such company was imminent or even foreseeable. I noted at para 22 that the position taken by the article was not adopted by Revenue Canada where a corporate asset is non-depreciable property, such as land, and at least one subsequent author has suggested that the deduction from value of trapped-in capital gain taxes is speculative if liquidation is not imminent. I adopted the Revenue Canada position, and found that discounting the tax on the capital gain on the Evergreen property by 50% was an appropriate and fair approach, consistent with the prudent purchaser test. Such a discount recognized the possibility of tax minimization strategies and the probable deferral of realization of such tax if the property is an asset of a going-concern business. 252 My decision in that case was based on a) the imminent sale of the properties, and b) the fact that the company was a holding company. As noted by RFG, Value Creation is not a holding company. In addition, the Evergreen property was on non-depreciable land and a capital gain at some point was unavoidable. 253 The Value Creation leases, however, are depreciable property: they were not purchased with the virtual certainty that their value would continue to appreciate until the day that capital gains are eventually realized. They are leased as long-term operating assets with the intent that their resources will be depleted over a very long term and they eventually become worthless. 254 It is interesting that in the Rocky Mountain Properties case, MNP cited in its opinion an American decision that commented that a) a liquidation must be imminent or contemplated for the full amount of built in capital gains tax to be taken as a discount or adjustment in value; and b) it should be demonstrated that an avoidance of the tax on built-in capital gains is unlikely before taking account of the potential tax liability. 255 Zeller Estate v. R., 2008 TCC 426 (T.C.C. [General Procedure]) is also a case involving a holding company, and a finding by the trial judge RFG Private Equity v. Value Creation B.E. Romaine J. 73

that the respondent had not established how capital gains on the property in question could be avoided. The Court noted that “(t)hese contingent liabilities are a controversial issue within the valuation community and CRA”: para 36. 256 Value Creation cited Campbell v. Campbell, 2007 ABQB 637 (Alta. Q.B.), where it notes that Mr. Clark included in his value calculation a discount for income taxes anticipated on the eventual sale of the real property using a 50% discount rate. As noted by RFG, the nature of the proceedings in that case were such that, given that Mr. Campbell’s personal holdings were in shares and real property, he would eventually have to liquidate a portion of these in order to pay Mrs. Campbell. A realization of the trapped-in capital gains was unavoidable. The case is distinguishable from this case, where there is no reason why a hypothetical purchaser would need to liquidate any additional assets. 257 In conclusion on this issue, I accept Mr. Clark’s position that MNP was in error in deducting taxes on an assumed sale of assets, and I decline to take notional taxes into account in my assessment of fair value. 258 Given this decision, it is not necessary to address the tax shield adjustment issue.

8. Illiquidity discount 259 MNP (and Value Creation) applied an “illiquidity discount” of 5% (low) to 10% (high) to its estimated net asset value for Value Creation “to reflect the inability of the shareholder(s) to quickly convert their shareholding to cash or pay a liability.” It cites no authority for this discount, but suggest that “fair value” contemplates that ... notional transaction ... of shares, in this case minority shares, on the open market ...”. The discount appears to be related to Value Creation’s “precarious financial situation” at the Valuation Date, and MNP also refers to the compli- cations of regulatory review. 260 Mr. Clark disagreed with the concept, noting that: ... the issue is not whether VCI could have been sold “immediately” at the Valuation Date, but what VCI would have fetched in an or- derly sales process at that time. The definition of fair market value describes a thoughtful process involving “informed”, “prudent” parties, “under no compulsion to act”. There is no sense of or need for urgency in the process that defines fair market value. 261 As noted by RFG, the “illiquidity discount” formulated by MNP on the basis of the “ability of the shareholders to access the NAV” is re- 74 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

markably similar in effect to a minority discount. Further, this discount is at odds with both MNP’s stated going concern assumption and the asset valuation approach. 262 RFG’s knowledge that their investment in Value Creation may be risky and illiquid, and its concerns about Dr. Yeung’s management are irrelevant to the assessment of fair value and do not justify this illiquidity discount. 263 I decline to apply an illiquidity discount in my assessment of fair value.

9. Transaction costs 264 MNP deducted 1.0% as estimated brokerage/selling costs and professional fees that it submits would likely be incurred in a disposition of assets by Value Creation. 265 As noted previously, Mr. Clark concluded that a fair market valuation of the shares of Value Creation was most appropriately conducted using the asset-based valuation approach, and MNP appears to concur. 266 In addition, both valuators used a going-concern premise. Thus, the deduction of “transaction costs” that may be incurred in liquidating the assets appears to be illogical. 267 Value Creation submits that, even when using the asset value approach, it is necessary to deduct liabilities such as transaction costs that would be incurred if Value Creation’s assets were sold, whether or not Value Creation intends to sell the properties. No authority is cited for that approach, which is inconsistent with the going-concern premise. 268 I decline to deduct transaction costs in my assessment of fair value. 269 I note that Mr. Clark included in its calculation of net working capital a deduction of transaction costs related to the BP Transaction. That is appropriate, given that this transaction was a reality, but given my finding with respect to a value for the carried interest, the issue is moot.

10. Holding company discount 270 Initially, MNP applied a “portfolio discount” in estimating net asset value, describing Value Creation as a “holding company”. In later revisions to its report, it removed the portfolio discount, “recognizing that there was uncertainty as to whether a notional purchaser of the shares would apply some or all of these value-reductions” to the assets of Value Creation. RFG Private Equity v. Value Creation B.E. Romaine J. 75

271 It is not clear whether MNP continues to consider Value Creation as a holding company, but I accept Mr. Clark’s opinion that it is not. Mr. Clark explained, and I accept, that a holding company model is used to value companies that own several or more diverse assets. I also accept that oil industry analysts do not use the holding company model to value oil sand companies.

11. Tax pools 272 Given that I have rejected the MNP approach to notional taxes, there is no reason not to accept Mr. Clark’s calculation of the value of Value Creation’s tax pools.

V. Qualifications of Experts 273 Expert opinion evidence was given at trial by a number of witnesses, including Brian Clark, Drew Dorweiler and Richard Wise. 274 Although considerable trial time was spent on the issue of the inde- pendence and impartiality of Mr. Clark, Value Creation did not pursue that issue at the end of the trial or in argument. 275 However, RFG submits that the files of MNP and Mr. Dorweiler’s testimony demonstrate that MNP was acting as Value Creation’s advocate in giving its opinion. 276 Given my decision on valuation, it is not necessary that I deal with this submission. Each of Mr. Clark, Mr. Dorweiler and Mr. Wise are well-qualified to give the opinions that they gave, in their reports and at trial. Any objection that MNP relied too heavily on instructions or advice from Value Creation has been dealt with in the analysis of its reports.

VI. Conclusion 277 .In summary, I accept the Clark opinion with respect to fair market value as rational, measured and balanced, and adopt it as fair value of the Value Creation assets, and therefore common shares, except with respect to: a) the value of the Technologies, which I have discounted from Mr. Clark’s fair market value by 50% for the reasons set out herein; b) the value of the carried interest in the BP/VCI partnership, which must be excluded from fair market value of the company because it arises from the execution of a business plan that is part of the BP Transaction; 76 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

c) the fair market value of working capital and the Stonefell Termi- nal proceeds because I accept Value Creation’s submission that a value of $40 million for these assets is more appropriate given the returns received in the CCAA proceedings; and d) the value of uplift barrels, as there is insufficient evidence of the value of that asset. 278 I am satisfied that Mr. Clark’s key assumptions are established by the evidence. There is no other reason to adjust fair market value up or down in assessing fair value. 279 In determining fair value, it is not appropriate to have regard to the characteristics or motivation of the dissenting shareholders. Value Crea- tion submits that RFG was anxious to liquidate its position in Value Cre- ation. That may be so, but it is irrelevant; Shoom v. Great-West Lifeco Inc., [1998] O.J. No. 2220 (Ont. Gen. Div. [Commercial List]) at para 22. 280 Value Creation also argues that RFG is somehow prevented from placing too high a value on the properties other than Terre de Grace because it accepted that shareholder approval of the BP Transaction was required, and that this implies that the value of Terre de Grace exceeded the value of Value Creation’s other properties. The knowledge of the dissenting shareholders does not bind an independent expert from giving an opinion, or Mr. Clark has done, on fair market value. In this case, the conduct of the RFG director in approving a shareholder vote on the transaction does not cause a variation from the fair market value opinions as a company can decide to expose a transaction to the requirement of shareholder approval for a variety of prudent reasons. The evidence is that the board accepted counsel’s recommendation on that issue. 281 RFG’s internal valuation of its interest also does not affect the assessment of fair value, although, after the BP Heads of Agreement was signed, RFG’s internal valuation was higher than Mr. Clark’s fair market value opinion. 282 Therefore, my conclusion with respect to fair value of the Value Cre- ation Shares is as follows: Low ($ High ($ millions) millions) Contingent resources and $809 $924 properties Technologies 78 100.5 RFG Private Equity v. Value Creation B.E. Romaine J. 77

Low ($ High ($ millions) millions) Working capital and BA Energy 40 40 proceeds Tax pools 39 39 Fair Market Value — March 11, $966 $1,103.5 2010 Outstanding common shares and 546,980,495 warrants Equivalent per share FMV $1.76 to $2.02 Midpoint $1.89 I find that the fair value of Value Creation’s common shares on the Valu- ation Date was $1.89 per share and I give judgment in that amount against Value Creation and in favor of the RFG dissenting shareholders. 283 The issues of pre-judgment interest and cots were addressed by RFG in its final argument, but not by Value Creation. If the parties are unable to agree on these issues, they may make further written submissions to this Court. Order accordingly. 78 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

[Indexed as: H. (B.R.) v. S. (R.P.)] BRH, Plaintiff and RPS, Defendant Alberta Court of Queen’s Bench Docket: Edmonton FL03-47061 2016 ABQB 346 Robert A. Graesser J. Heard: April 26-27, 2016; May 4-5, 2016 Judgment: June 24, 2016 Family law –––– Custody and access — Terms of custody order — Removal of child from jurisdiction –––– Parties had one child, who struggled with learning issues and was assessed as having severe delay involving language — Child received professional services from speech language, occupational therapy and emotional behaviour consultants for past four years — Mother’s husband was Spanish and was in Canada on visitor visa and was required to leave in near future — Mother and husband were expecting child of their own — Since separation, child resided with mother with father having reasonable and generous access, which he always exercised — Mother applied for permission to relocate with child to Spain with father seeking for child to live with him following mother’s move to Spain — Application dismissed — Existing parenting arrangement was to continue until mother left and once mother left, father was to have primary care of child with generous access to mother — Move was not in child’s best interests — Mother proposed to move child to country where child did not speak language and would attend school in Spanish — Access costs would be significant if child moved and mother would have limited income in Spain — There was no obvious financial advantage to child being in Spain and having all of child support spent on travel — Mother’s move had no benefit for child and mother failed to think about impact may have on child — Mother downplayed child’s needs identified by his teachers and there was concern she was putting her own interests first ahead of child’s educational needs as she did not have reasonable plan in place to meet child’s education needs — Credibility of mother’s evidence in relation to child’s education needs was concern and unfavourable view of mother’s evidence reflected adversely on her parenting skills — Child’s specialized programming in province was very important at this stage of child’s development and disruption to this education posed great risk. Cases considered by Robert A. Graesser J.: Cavanaugh v. Balkaron (2008), 2008 ABCA 423, 2008 CarswellAlta 1963, 60 R.F.L. (6th) 64, (sub nom. E.A.C. v. R.B.) 446 A.R. 302, (sub nom. E.A.C. v. R.B.) 442 W.A.C. 302, [2008] A.J. No. 1393 (Alta. C.A.) — considered H. (B.R.) v. S. (R.P.) 79

F. (R.J.) v. F. (C.M.) (2014), 2014 ABCA 165, 2014 CarswellAlta 775, [2014] 9 W.W.R. 569, 47 R.F.L. (7th) 1, 100 Alta. L.R. (5th) 219, 575 A.R. 125, 612 W.A.C. 125 (Alta. C.A.) — considered Gordon v. Goertz (1996), [1996] 5 W.W.R. 457, 19 R.F.L. (4th) 177, 196 N.R. 321, 134 D.L.R. (4th) 321, 141 Sask. R. 241, 114 W.A.C. 241, [1996] 2 S.C.R. 27, (sub nom. Goertz c. Gordon) [1996] R.D.F. 209, 1996 Carswell- Sask 199, [1996] S.C.J. No. 52, 1996 CarswellSask 199F (S.C.C.) — followed MacPhail v. Karasek (2006), 2006 ABCA 238, 2006 CarswellAlta 1035, 30 R.F.L. (6th) 324, 65 Alta. L.R. (4th) 205, 273 D.L.R. (4th) 151, [2006] A.J. No. 982, 409 A.R. 170, 402 W.A.C. 170 (Alta. C.A.) — considered McAlpine v. Leason (2016), 2016 ABCA 153, 2016 CarswellAlta 838 (Alta. C.A.) — considered Milton v. Letch (2013), 2013 ABCA 248, 2013 CarswellAlta 1154, 32 R.F.L. (7th) 57 (Alta. C.A.) — considered R. (C.C.) v. V. (M.A.) (2010), 2010 ABQB 237, 2010 CarswellAlta 718, [2010] A.J. No. 427 (Alta. Q.B.) — considered R. (G.) v. M. (C.) (2003), 2003 ABCA 268, 2003 CarswellAlta 1348, [2003] A.J. No. 1169 (Alta. C.A.) — referred to S. (L.M.) v. A. (R.) (2014), 2014 ABQB 507, 2014 CarswellAlta 1425 (Alta. Q.B.) — referred to Sangha v. Sandhar (2013), 2013 ABCA 259, 2013 CarswellAlta 1195, [2013] A.J. No. 745 (Alta. C.A.) — considered Singer v. Davila-Singer (2002), 2002 CarswellOnt 4473, 35 R.F.L. (5th) 208, [2002] O.J. No. 5445 (Ont. S.C.J.) — considered T. (P.O.) v. M. (B.E.) (2010), 2010 ABCA 22, 2010 CarswellAlta 107, [2010] A.J. No. 49 (Alta. C.A.) — considered Thie v. Thie (2014), 2014 ABCA 249, 2014 CarswellAlta 1257, 47 R.F.L. (7th) 311, 577 A.R. 239, 613 W.A.C. 239 (Alta. C.A.) — considered Statutes considered: Family Law Act, S.A. 2003, c. F-4.5 Generally — referred to s. 18(1) — considered s. 18(2) — considered Treaties considered: Hague Convention on the Civil Aspects of International Child Abduction, 1980, C.T.S. 1983/35; 19 I.L.M. 1501 Generally — referred to 80 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

Regulations considered: Family Law Act, S.A. 2003, c. F-4.5 Alberta Child Support Guidelines, Alta. Reg. 147/2005 s. 2(1)(f) “parent” — referred to

APPLICATION by mother for permission to move with parties’ son to Spain.

Rhyannon L. O’Heron, Gordon Zwaenepoel, for Plaintiff Douglas N. Skovberg, Skovberg Hinz, for Defendant

Robert A. Graesser J.: Introduction 1 This is a mobility application. BRH seeks permission to take the parties’ son, AS, to Spain to live there with her husband. AS’s father, RPS, opposes the application and proposes that AS live with him after BRH leaves for Spain. 2 BRH is currently pregnant with her child with her husband, PTB. PTB is Spanish, and was in Canada for some years on a working visa. His working visa has expired and he has been unable to extend that status. He is currently on visitor status, and is required to leave Canada in the near future. 3 The baby is due shortly, and BRH’s plans are to leave Canada during the summer. She and PTB intend to reside in Figueres, Spain, where PTB has a large extended family.

Background 4 BRH and RPS had a relationship that produced AS. AS was born in Edmonton in 2010. BRH and RPS did not live together until after AS’s birth. They were together for approximately sixteen months, at which time they separated. RPS maintains that he was the primary caregiver for AS during that initial period, as BRH returned to work to supplement the parties’ incomes. BRH minimizes RPS’s role during that period, and describes it more as occasional babysitting while she worked on a part-time basis. 5 AS has, since separation, primarily resided with BRH. RPS has had reasonable and generous access. There are three court orders regarding AS. A consent parenting order was granted by Judge S.C. Miller on July 9, 2013. In that order, RPS had access on Friday to Sunday for the first week of the rotation, and Wednesday to Friday the second week. A child H. (B.R.) v. S. (R.P.) Robert A. Graesser J. 81

support order was granted by Judge S.C. Miller on July 9, 2013, based on the parties’ then incomes. 6 A consent order was granted by Justice D.C. Read on July 7, 2015 dealing with travel outside the Edmonton area. 7 This application was commenced as a Family Law Act claim filed June 29, 2015. The application sought permission to relocate effective December, 2015 on the basis that “the applicant ... has the opportunity to advance her career and business by working for a higher level professional soccer team in Spain. In addition, the Applicant can make use of her Business Management Diploma in employment as an Administrative Assistant”. 8 She also sought in that application to review child support based on the parties’ current incomes. RPS testified that he voluntarily increased his child support payments to reflect his 2014 income in May, 2015. 9 On December 2, 2015, BRH brought an application for permission to take AS to Spain over the Christmas school break. That application did not proceed, and the trip to Spain did not happen. 10 An order was granted by Justice S.J. Greckol on September 2, 2015 adjourning a previously arranged special chambers application to deal with BRH’s mobility application at a two-day trial. The parties exchanged affidavits in relation to the application. They were cross-examined, and also provided updated affidavits shortly before the trial. 11 The trial occupied four days, instead of the initially planned two. 12 Not surprisingly, the parties differ as to what has transpired over the years since AS’s birth. 13 BRH emphasized in her evidence that RPS had not wanted her to give birth. She also emphasized that RPS had not been present when AS was born. She painted the picture of an initially disinterested father. 14 RPS did not dispute his initial opposition to BRH carrying their child, but explained that when BRH was in the late stages of her pregnancy, he was in Kelowna. He tried to get to Edmonton to be present at the birth, but the plane was delayed and he was some forty-five minutes late. 15 BRH also described RPS as being lazy, and not working at anything but as an employee in a marijuana grow operation. RPS did not give evidence as to his occupation in the early years of their relationship, but noted that while he and BRH lived together, he stayed home and looked after AS while BRH worked as a massage therapist. 82 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

16 After the parties separated, RPS looked after AS to accommodate BRH’s massage therapy business. She has built that business into a stable operation that provides her with income from her own treatments as well as revenues from other employees in the business. 17 RPS has for the last several years worked in the funeral industry and has recently been promoted to a managerial position. He no longer works shift work and his hours are now regular hours that would enable him to look after AS’s needs on a daily basis, with the help of family. 18 BRH notes that RPS has not always paid child support on time and that he was several months behind starting in particular in late 2015 and continuing until shortly before the trial of this matter. BRH also points out that RPS did not increase his child support payments despite significant increases in his income. 19 RPS counters that the costs of these proceedings put him into some financial difficulties, and testified that he had caught up with his payments before trial. He also points out that BRH did not provide him with financial information, nor did she make any applications for increased child support until recently. 20 BRH also painted the picture of RPS as an abusive and controlling person and someone who was jealous of her and any relationships following their breakup. In her affidavit sworn September 9, 2015, she swore that RPS had been controlling and “emotionally and psychologi- cally abusive” after they separated. She stated that she had sought help through Today’s Family Violence Centre. The Centre’s records were sought to be put in evidence at the trial but were objected to by RPS. Those attendances took place shortly before BRH applied for child support in 2013, and then again in 2015, shortly before the current application for mobility was made. 21 No evidence was provided as to any similar problems while the parties were together, or for some eighteen months after they separated. 22 RPS argues that BRH has not been honest with him with respect to her plans to go to Spain with AS, and argues that BRH has not been candid with the Court as to her motivations for wanting to move. He suggests that the real reason for her wanting to move has always been to further her relationship with PTB. 23 From the evidence of the parties and the previous court proceedings (which were put into evidence), it appears that the parties were generally able to agree on matters involving AS until BRH brought this application H. (B.R.) v. S. (R.P.) Robert A. Graesser J. 83

to move AS to Spain with her. BRH looked after most of the day-to-day issues involving health, education and extracurricular activities. By all accounts, she is a good, caring and loving mother and is closely bonded with AS. 24 RPS could be described as an “access parent” but that would minimize his role in AS’s life. He has been available to pick up AS from school or day care when BRH was unable to do so, and he has had AS for holiday times. 25 While BRH describes him as an uninvolved parent, she acknowledges that AS is closely bonded with his father. 26 While these proceedings have put the parties in significant conflict, I am satisfied from the evidence that AS will be competently and lovingly cared for by whichever parent charged with his primary care. 27 BRH has always suggested that RPS have almost all of the “holiday” time with AS if AS is allowed to move to Spain. BRH testified as to the school year in Spain, and believes that AS will have approximately three months off in the summer months, and will have a lengthy Christmas break and an extended spring break as well. 28 BRH testified that she would bring AS to Edmonton for the summer months and that AS could be in RPS’s care during most of that time. She proposes that she bring AS to Edmonton for the Christmas holidays, and in lieu of child support, RPS could come to Spain during the spring break. 29 I will deal with the evidence more fully in my analysis of the factors to be considered under Gordon v. Goertz, [1996] 2 S.C.R. 27 (S.C.C.). 30 I note that I have reviewed the previous affidavits and court proceedings involving these parties. A binder of these materials was provided to me at the outset of the trial.

Case law 31 The parties submitted a number of cases in support of their respective positions. BRH: a) Gordon v. Goertz, [1996] 2 S.C.R. 27 (S.C.C.); b) Thie v. Thie, 2014 ABCA 249 (Alta. C.A.); c) F. (R.J.) v. F. (C.M.), 2014 ABCA 165 (Alta. C.A.); d) MacPhail v. Karasek, 2006 ABCA 238 (Alta. C.A.); e) R. (G.) v. M. (C.), 2003 ABCA 268 (Alta. C.A.); 84 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

f) Milton v. Letch, 2013 ABCA 248 (Alta. C.A.); g) Singer v. Davila-Singer, 2002 CarswellOnt 4473 (Ont. S.C.J.), aff’d 2003 CanLII 48471 [2003 CarswellOnt 3113 (Ont. C.A.)]; and h) Sangha v. Sandhar, 2013 ABCA 259 (Alta. C.A.). RPS: a) T. (P.O.) v. M. (B.E.), 2010 ABCA 22 (Alta. C.A.); b) R. (C.C.) v. V. (M.A.), 2010 ABQB 237 (Alta. Q.B.); and c) S. (L.M.) v. A. (R.), 2014 ABQB 507 (Alta. Q.B.). 32 The relationship of the parties is governed by the Family Law Act, SA 2003, c F-4.5. In that Act, “best interests of the child” is defined in para 18: 18(1) In all proceedings under this Part except proceedings under section 20, the court shall take into consideration only the best interests of the child. (2) In determining what is in the best interests of a child, the court shall (a) ensure the greatest possible protection of the child’s physical, psychological and emotional safety, and (b) consider all the child’s needs and circumstances, including (i) the child’s physical, psychological and emotional needs, including the child’s need for stability, taking into consideration the child’s age and stage of development, (ii) the history of care for the child, (iii) the child’s cultural, linguistic, religious and spiritual upbringing and heritage, (iv) the child’s views and preferences, to the extent that it is appropriate to ascertain them, (v) any plans proposed for the child’s care and upbringing, (vi) any family violence, including its impact on (A) the safety of the child and other family and household members, (B) the child’s general well being, H. (B.R.) v. S. (R.P.) Robert A. Graesser J. 85

(C) the ability of the person who engaged in the family violence to care for and meet the needs of the child, and (D) the appropriateness of making an order that would require the guardians to cooperate on issues affecting the child, (vii) the nature, strength and stability of the relationship (A) between the child and each person residing in the child’s household and any other significant person in the child’s life, and (B) between the child and each person in respect of whom an order under this Part would apply, (viii) the ability and willingness of each person in respect of whom an order under this Part would apply (A) to care for and meet the needs of the child, and (B) to communicate and cooperate on issues affecting the child, (ix) taking into consideration the views of the child’s current guardians, the benefit to the child of developing and maintaining meaningful relationships with each guardian or proposed guardian, (x) the ability and willingness of each guardian or proposed guardian to exercise the powers, responsibilities and entitlements of guardianship, and (xi) any civil or criminal proceedings that are relevant to the safety or well being of the child. 33 These are similar to the factors required to be considered under Gordon v. Goertz, and I will deal with the Gordon v. Goertz factors specifically, rather than each of the Family Law Act factors. Many of the Family Law Act factors (cultural, linguistic and religious, safety of the child, other court proceedings, for example) are not relevant to this application. 34 I observe at the outset that this is a highly fact-specific area of the law, and while a review of relevant case law is helpful to see how various Courts have approached the required analysis, there are no legal presumptions applicable to the analysis. 35 It always bears repeating paras 49 and 50 of Gordon v. Goertz, which sets out the factors the Court is required to consider: 49 The law can be summarized as follows: 86 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

1. The parent applying for a change in the custody or access order must meet the threshold requirement of demonstrating a material change in the circumstances affecting the child. 2. If the threshold is met, the judge on the application must em- bark on a fresh inquiry into what is in the best interests of the child, having regard to all the relevant circumstances relating to the child’s needs and the ability of the respective parents to satisfy them. 3. This inquiry is based on the findings of the judge who made the previous order and evidence of the new circumstances. 4. The inquiry does not begin with a legal presumption in favour of the custodial parent, although the custodial parent’s views are entitled to great respect. 5. Each case turns on its own unique circumstances. The only issue is the best interest of the child in the particular circumstances of the case. 6. The focus is on the best interests of the child, not the interests and rights of the parents. 7. More particularly the judge should consider, inter alia: (a) the existing custody arrangement and relationship between the child and the custodial parent; (b) the existing access arrangement and the relationship between the child and the access parent; (c) the desirability of maximizing contact between the child and both parents; (d) the views of the child; (e) the custodial parent’s reason for moving, only in the exceptional case where it is relevant to that parent’s ability to meet the needs of the child; (f) disruption to the child of a change in custody; (g) disruption to the child consequent on removal from family, schools, and the community he or she has come to know. 50 In the end, the importance of the child remaining with the parent to whose custody it has become accustomed in the new location must be weighed against the continuance of full contact with the child’s access parent, its extended family and its community. The ultimate question in every case is this: what is in the best interests of the child in all the circumstances, old as well as new? H. (B.R.) v. S. (R.P.) Robert A. Graesser J. 87

36 Thie v. Thie, 2014 ABCA 249 (Alta. C.A.), emphasizes the importance of following the with the Gordon v. Goertz factors factors. 37 In Cavanaugh v. Balkaron, 2008 ABCA 423 (Alta. C.A.), the Court of Appeal recognized that there are no longer any legal presumptions that apply to the Courts’ consideration of the best interests of the trial. It stated at para 12: [12] To be clear, there are no longer any presumptions or default positions that regulate decisions as to custody and access. The sole determinant is the best interests of the child. While other principles may be considered, particularly where both parents are equally suitable, they must be viewed and determined from the standpoint of the best interests of the child. For instance, see A. v. A., 2005 ABQB 607 (CanLII), [2005] A.J. No.1049, where the court refused to authorize a custodial arrangement that would have the children move between the parents up to four times per week in a highly conflicted separation, because it suited the parents. 38 That position was reaffirmed in T. (P.O.) v. M. (B.E.), 2010 ABCA 22 (Alta. C.A.). 39 Sangha v. Sandhar, 2013 ABCA 259 (Alta. C.A.), appears to acknowledge a similar approach. The Court of Appeal stated at para 2: [2] In determining whether to allow the child to go with his mother, the court must find whether it would be in the best interests of the child to go with his mother, or to remain behind in the care of the father, without the mother being in Alberta. All parties recognize that the court does not have the power to order a parent to remain or leave a particular locale. Nor should it. The court must determine what is in the best interests of the child assuming the mother leaves. That is the question before the court. 40 The importance of this factor can be seen from the trial decision in Singer v. Davila-Singer, 2002 CarswellOnt 4473 (Ont. S.C.J.), where the Court permitted a move to Germany. The Court of Appeal at 2003 Can- LII 48471 [2003 CarswellOnt 3113 (Ont. C.A.)] noted the significance of the new country being a signatory to the Hague Convention. 41 I note here that Spain is also a signatory, so RPS can take some com- fort from that in the event there are difficulties enforcing Alberta court orders in Spain. 42 From a review of the cases cited by counsel, it is fair to say that there are some factors that have been given more emphasis than others. That is not to say that the others do not need to be considered. However, it ap- 88 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

pears that more careful consideration needs to be given to several of the factors. 43 MacPhail v. Karasek, 2006 ABCA 238 (Alta. C.A.), emphasizes the rights parents have to make choices in their lives, including the location of their residence. At paras 44 and 45 the Court of Appeal stated: [44] According to this logic, parents cannot move unless the move is calculated to further the best interests of their children. Custodial parents cannot be limited in this way. Canadians are mobile and the courts are not the arbiters of the reasonableness of every decision a custodial parent makes. Custodial parents cannot be held hostage to the place the access parent lives. Certainly access parents are not. Moreover, it is not an option to conclude that a child’s best interests are best served by both parties living in the same place any more than it is an option to consider that it is in a child’s best interest that their parents remain together. [45] Canadians have the right to choose to separate and divorce, and they have the right to relocate, and it is not for the courts to determine whether they like or agree with the reason for separating or moving. Custodial parents should not be faced with a potential loss of custody simply because they choose to move. Nor should a decision to move be seen automatically as a negative factor in the ability to parent. 44 Milton v. Letch, 2013 ABCA 248 (Alta. C.A.), notes the importance of a careful analysis as to the impact of removing a child from a long- standing primary caregiver: [13] Section 18(2)(b) mandates the court to consider: (i) the child’s physical, psychological and emotional needs, including the child’s need for stability, taking into consideration the child’s age and stage of development; and (ii) the history of care for the child. Although the chambers judge listed these factors in his recitation of the governing law, he never considered them. This is a young child for whom the mother has been the primary care giver throughout her life. The chambers judge did not discuss the effect that the removal of the child from her mother would have on the child or on her relationship with the mother. [14] The chambers judge’s decision was based primarily on the desirability of increasing the child’s contact with the father without considering the effect of removing the child from the mother’s care. H. (B.R.) v. S. (R.P.) Robert A. Graesser J. 89

[15] This was not just a failure to weigh a factor, this was an error in principle: MacPhail v Karasek, 2006 ABCA 238 (CanLII), 273 DLR (4th) 151 at para 54. The chambers judge distinguished MacPhail on the basis that the mother in that case had been the sole custodial parent since birth whereas here, although the child had been in the primary care of the mother, the father and the maternal grandparents had also been care givers. This is an artificial distinction as in both cases the mother was the only parent who had a continuous care relationship with the child since birth. As this court said in MacPhail at para 33: “The trial judge should have addressed the extent to which the child had bonded with the Mother, and the effect that separation might have upon the child as a result of the Mother becoming simply an access parent.” 45 The nature of the bond between the child and the primary parent was also key in F. (R.J.) v. F. (C.M.), 2014 ABCA 165 (Alta. C.A.), where the Court of Appeal held at paras 28 and 42: [28] In coming to the conclusion highlighted above, the court applied this court’s earlier decision in Christmas v Christmas, 2005 ABCA 213 (CanLII), 367 AR 172, as well as decisions by the Saskatchewan Court of Appeal in HS v CS, 2006 SKCA 45 (CanLII), [2006] SJ No 247, and the Ontario Court of Appeal in Rushinko v Rushinko, 2002 CanLII 42032 (ON CA), 161 OAC 85, [2002] OJ No 2477. In HS, the Saskatchewan Court of Appeal pointed out that the assessment of the effect of separating the child from the bonded parent was not a process which could be done dismissively. The court noted the following deficiencies in the trial judge’s reasons at para 24: He did not consider the particular role of the primary parent in the lives of the children: the bonding between the children and their mother; the importance of maintaining the relationship with the psychological parent; and the desirability of maintaining the link. He did not consider the importance of maintaining stability in the relationships between the primary parent and the children. [42] In summary, the trial judge erred in failing to take account, or give weight, to the child’s long-term relationship, and bond, with his primary caregiver — his mother. It is impossible, in my view, to consider the best interests of the child without considering the effect of removing the child from the parent who, up until this point, has had primary care. This was compounded by his errors in framing the question before him, and by considering the short-term, interim, shared parenting order rather than the corollary relief order in effect 90 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

at the time of the proposed move. I would allow the appeal on this ground alone. 46 McAlpine v. Leason, 2016 ABCA 153 (Alta. C.A.) is to the same effect. There, the Court of Appeal stated: [6] The main error here is a variant of the analytical problem identified by this Court in Christmas v Christmas, 2005 ABCA 213 (Can- LII), 367 AR 172, Spencer v Spencer, 2005 ABCA 262 (CanLII), 257 DLR (4th) 115 and RJF v CMF, 2014 ABCA 165 (CanLII), 575 AR 125. This Court has repeatedly cautioned against approaching the best interest test by comparing the effect on children if they are permitted to relocate with the custodial parent versus maintaining the status quo (i.e. the children remaining with the custodial parent in their current location). Approaching the issue in that manner ignores a key component of the Gordon v Goertz, 1996 CanLII 191 (SCC), [1996] 2 SCR 27, 134 DLR (4th) 321, test — the effect of removing the child from the care of his or her primary caregiver after that parent moves. 47 From these cases, it would appear that at least in Alberta, the effect of removing a child from the care of the primary caregiver is a “super” factor. 48 It would also appear that the Supreme Court’s caution in Gordon v. Goertz to rarely consider the moving parent’s reason for moving has been observed more in the breach than by following it. That may well be because it is difficult to ignore situations where the parent’s motivation has little if anything to do with the needs of the child and might be viewed as being in the parent’s sole interests. It also may be that most of the cases that come to court fall within the “exceptional” category, as proposed moves that are child-motivated or clearly take the child’s needs into consideration as a significant concern are not as controversial and less likely to go to court at all, let alone to the Court of Appeal. 49 It seems to me that it is frequently fair to argue that the parent’s motive for moving may reflect adversely on the parent’s “perception of the needs of the child or the parent’s judgment about how they may be ful- filled.” (from para 23 of Gordon v. Goertz.)

Analysis 50 Once it has been determined that there is a change in circumstances, or that permitting a requested move would amount to a change in circumstances, the Court must determine what custody and access regime is in the best interests of the child. H. (B.R.) v. S. (R.P.) Robert A. Graesser J. 91

51 I would observe that these types of cases are among the most difficult matters brought before the Courts, and that the solutions almost invaria- bly result in a win-lose result. One parent’s relationship with the child is likely to be significantly affected if the mobility application succeeds. 52 While MacPhail v. Karasek emphasizes mobility rights and the ability of parents to move, it must also be recognized that children are not the chattels of the primary caregiver and the bond between the child and the primary caregiver is only one of a number of factors that must be considered.

Evidence of the parties 53 As noted above, the parties were challenged by opposing counsel in a number of areas. With RPS, cross-examination focused on two main areas: his lack of involvement with AS’s schooling and extracurricular activities, and his credibility. 54 On credibility, RPS was challenged about his failure to obey court orders, namely his failure to disclose his income in accordance with the initial child support order, his having greater income without increasing his child support, and his falling into arrears in child support. 55 Neither party disclosed their incomes to the other until BRH indicated that she wanted an increase in child support. When that was made clear, RPS voluntarily increased his support payments without the necessity of a court application. 56 Undoubtedly, parents should be aware of their support obligations and should pay careful attention to court orders. Voluntary disclosure should have been made in accordance with the order. However, I do not view RPS’s failure to disclose without any request being made of him as a wilful or deliberate breach of the order. Nor do I view it as any indication that he is unwilling or unable to comply with court orders. 57 As for his falling into arrears, I have less sympathy for that. Support is a fundamental obligation of parenting, and I found RPS’s explanation as to being burdened with other expenses somewhat hollow. Child support payments should not be withheld as a tactic, and RPS’s falling behind suggests some improper motive. However, he has apparently cured his default. 58 He was cross-examined to some degree on trying to take advantage of BRH’s estrangement with various of her family members, but it appears 92 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

from his evidence that he has been respectful of BRH’s wishes that he not expose AS to some of her family members. 59 RPS denied attempting to interfere with relationships between BRH and others, although I have no reason to doubt that RPS may have been critical of some of BRH’s boyfriends. I cannot conclude whether that was as a result of jealousy or concerns for AS, or both. In any event, there was nothing in RPS’s post-separation conduct that gave me concern about his ability to parent AS or to keep AS’s best interests high in his priorities. 60 From his cross-examination, I am satisfied that RPS has to date played a lesser role in AS’s education and his extracurricular activities. His own activities with AS have generally involved family activities, as the extended S family appears to be close. Only recently has RPS enrolled AS in any extracurricular activities. 61 RPS has not had a significant role with AS’s schooling, although he has met with teachers and specialists involved in AS’s education. My overall conclusion is that RPS has been content to leave most of the education issues and extracurricular activities to BRH. 62 That is for two reasons: opportunity and confidence in BRH’s abilities to care for AS. BRH is obviously a capable parent and since she has AS for most of the weekdays, school and extracurricular activities fall mainly on her time. 63 As I observed during argument, it seems to me that RPS needs to step up to the plate more when it comes to the hard work of parenting and to take more responsibility himself for educational issues and extracurricular activities. 64 I had the impression that RPS’s evidence was somewhat strategic as he tended to maximize AS’s needs for special assistance at school, and he appears to have exaggerated to some degree the extent of his involvement with AS’s schooling and extracurricular activities. I did not, however, have an unfavourable impression of RPS. 65 BRH was cross-examined extensively on a wide range of topics. The cross-examination was successful in raising a number of concerns about BRH’s credibility. 66 BRH is presently estranged from her mother and one of her brothers. She attributed that to her mother’s alcoholism and her brother’s treatment of his wife, amongst other issues she has with him. She has a number of siblings. One appears to visit regularly, and she speaks to another (resi- H. (B.R.) v. S. (R.P.) Robert A. Graesser J. 93

dent in Florida) on a regular basis. Her father lives in the basement of her residence. 67 Yet she swore that she had little by way of supports in Edmonton. It seems that her relationship with her mother broke down more so over her mother’s refusal to support her move to Spain than any real concerns over her mother’s drinking. BRH’s denial of family supports was curious, and in my view was a strategic decision on her part to minimize connections with Edmonton. 68 BRH seems far more interested in her husband’s family in Figueres than her own, even though she has only visited them on one occasion and cannot easily communicate with them because of her lack of fluency in Spanish and their difficulties with English. She is undoubtedly excited about the prospect of a new life in a new country with new people in her life. 69 That being said, it is of some concern that she has a poor relationship with her own family and appears to be in the process of pushing them away. I found her evidence of the supposed faults with her family members to be exaggerated. 70 BRH minimized if not denied any learning problems with AS. In my view, that again was a tactical move on her part. She was not forthright in her evidence concerning AS’s involvement with educational specialists. She denied that AS had specialists and testified that the services provided to AS were part of services given to all of the students in his class. 71 The school records were put into evidence for the proof of their contents by agreement, avoiding the necessity of calling school personnel. The school records tell a very different story about AS’s schooling to date and the services he has been receiving. While it may be true that the services accessed by AS were available to all of the students in his class, AS was only one of a few who actually used the services. 72 Conferences attended by AS, BRH and RPS were only for the few students who needed the services. Ultimately, BRH’s evidence about the level of AS’s progress and the absence of any ongoing needs was not credible. 73 Indeed, her testimony cannot be reconciled with the school records, including emails or text messages between her and AS’s teachers. 74 The contrast between her evidence that AS’s teachers were supportive of her proposed move to Spain and the school records (which have been admitted in evidence for proof of the truth of their contents) is troubling. 94 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

75 BRH has been less than forthcoming with RPS about her reasons for wanting to move to Spain. The relationship with her husband was only disclosed to RPS about a year before the trial. BRH had known PTB since sometime in early 2014, and their relationship became serious by the fall of 2014 when they moved in together. 76 BRH’s application for permission to move AS to Spain was initially based on job opportunities and furthering her career as a sports massage therapist. She appears to have exaggerated the opportunities and instead of having a job lined up with FC Barcelona as was implied from her affidavit evidence, she only had a letter of introduction to that team, and there was no evidence that she had actually made contact with the team. 77 The career-advancing position as an administrative assistant appears now to be some unspecified work with PTB’s father’s company in Figueres. The lease for an apartment in Figueres put into evidence is a lease with PTB’s mother. 78 BRH had approached RPS in 2014 about the possibility of spending a year in Spain with AS, with no mention of PTB or his family. He was not necessarily opposed, but that was on the basis that it was temporary. 79 In December, 2014, BRH deceived RPS about her travel plans. She represented to him that she had an opportunity to go to Thailand and pursue a kick-boxing opportunity there. This was to persuade RPS to look after AS for the whole Christmas vacation. In fact, her plan was to go to Figueres with PTB and to meet his family. 80 BRH’s explanation was not apologetic, but rather that she feared that if she told RPS the truth, he would not have agreed to look after AS while she took the trip. 81 I am less concerned about her communications with RPS about Fa- ther’s Day contact with AS in June, 2015. BRH did not disclose that she and PTB were travelling to Montana for visa purposes. RPS felt deceived; BRH feared that RPS would do something to interfere with PTB’s immigration status. Nevertheless, there was some element of de- ceit in her communications with RPS. 82 What I take from these incidents is that getting her way is more important to BRH than is being candid and fully truthful. 83 That assessment is also supported by Mr. Skovberg’s cross-examination of BRH relating to her visits to Today’s Family Violence Centre. There were few specifics of RPS’s allegedly controlling behaviour other than her concerns over RPS’s reaction to her relationships with other H. (B.R.) v. S. (R.P.) Robert A. Graesser J. 95

men and financial issues. Those visits, their timing and the attempt to introduce them at trial as evidence that RPS was controlling and abusive, appear very strategic and without any real foundation. 84 BRH also exaggerated AS’s ability to speak and understand Spanish. She does not speak Spanish herself. She has enrolled AS in a Spanish class on Saturday mornings. He does not go to that class on the Saturday mornings when AS is with his father. While he has learned some words and can communicate to some extent with PTB, the actual words he has learned are few in number. 85 BRH’s evidence on this application has not been fully credible, and I have serious concerns about these aspects of her testimony. That does not mean that she is not a good parent, and it does not diminish AS’s strong relationship with her. It does tell me that I need to treat her evidence with great care in assessing the relevant factors. 86 PTB testified briefly about his relationship with BRH and with AS. My impression of him was very favourable. He struck me as a sincere person, wanting to do the right thing. He was forthright in his answers, and I did not get the impression that he was being anything other than truthful. 87 I was impressed by his approach to RPS to try to meet with him, knowing that they were sharing at least time with AS. PTB appears respectful of RPS’s role as AS’s father and that he does not want to interfere with that role or usurp it, recognizing the reality that he lives with AS’s mother who is AS’s primary caregiver. It was not lost on me that PTB seems to have played a greater role in AS’s extracurricular activities than has RPS.

Gordon v Goertz factors 88 I do not think I need to spend time discussing whether a move to Spain is a change in circumstances. AS is Canadian; born and raised in Edmonton. He has lived in Edmonton his whole life. He has lived with both parents together, and then in circumstances where his parents lived in the same city the rest of the time. His father has always exercised reasonable access to him. 89 It is being proposed that he move to a country where he does not speak the language and attend school in Spanish. He will live in a residence not with his maternal grandfather present but rather with his step- father’s extended family. 96 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

90 I cannot imagine an argument that there is no change of circumstances here. 91 Thus I move to the assessment of the best interests of AS.

Existing custody relationship and relationship between the child and the custodial parent 92 BRH is by the agreement of the parties and confirmed by court orders the custodial parent; the parent with day-to-day care and control of AS. 93 RPS acknowledges the close relationship between AS and his mother, and also acknowledges BRH’s skills as a parent. Her role as parent must be emphasized. It appears from the evidence that she has been the parent primarily involved in AS’s schooling and other activities. She is the one who has generally taken AS to and from school and to and from extracurricular activities. But for the swimming classes arranged recently by RPS, all of AS’s organized activities have been planned and arranged by BRH. She has played the primary role with AS’s school, although RPS has been involved to a lesser degree with parent-teacher meetings. 94 There appear to be no difficulties in their relationship. 95 This factor clearly favours BRH as the custodial parent.

Existing access relationship and relationship between the child and the access parent 96 RPS has, since the parties’ separation, always been an “access” parent. His access is not “typical” if there is any such thing anymore. He alternates between Friday to Sunday access one week and then Wednes- day to Friday access the next. 97 The parties have shared holidays and special occasions cooperatively. 98 BRH acknowledges that AS is well bonded with his father. He loves his father and enjoys his time with him. The relationship appears to be one characterized more by fun. That is not surprising because of the extent of the time RPS has with AS, although it is certainly clear to me that RPS could have become more involved with AS’s schooling and activities than he has to date. 99 There appear to be no difficulties in the relationship between RPS and AS. 100 This factor, however, does not detract from the strength of BRH’s role as custodial parent, and demonstrates that RPS’s role as access par- H. (B.R.) v. S. (R.P.) Robert A. Graesser J. 97

ent is something that appears to have worked and would continue to work, but for the new reality of mobility.

Desirability of maximizing contact between the child and both parents 101 Many parents keep track of the number of days per week or year with their child. That may be for financial purposes because of the effects of shared parenting as defined in the Child Support Guidelines. 102 One of the unique factors in this case is BRH’s proposal regarding access by RPS if AS is allowed to move to Spain. She offers virtually all of the school holiday time to RPS. If BRH’s information as to the Span- ish school system is correct, AS would be in Edmonton for approximately three months in the summer; RPS would have approximately three weeks at Christmas and would be able to visit AS (in lieu of child support) in Spain for at least a week at spring break time. That suggests perhaps 120 full days per year, which may (if one calculates the number of hours involved) exceed the access time RPS has at present. 103 From his perspective, RPS is able to have meaningful time with AS on six of every fourteen days, although if measured on an hourly basis, has four full days every two weeks. That would equate to some 104 full days. 104 RPS offers BRH the same access: She can have AS for the Edmonton school summer break, as well as most of Christmas and spring break. 105 Essentially, these parties are arguing over who will do the heavy lifting as a parent, looking after AS’s day-to-day needs, his education and his activities. They are willing to let the other parent enjoy the holiday times. 106 Some parents might leap at the opportunity to have virtually all of the holidays or “fun” times if fun is equated with holidays. Not BRH and RPS. It is to both their credit that they seek to play meaningful roles in their child’s life. 107 Technology will undoubtedly play a role. With technology, the absent parent can have daily face-to-face time with their child via Skype or Facetime, such that communications during non-parenting periods are not limited to one-dimensional telephone calls or written communications. 108 This case does not turn on maximization of contact between the parties. 98 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

109 I do have some concerns about the use of child support as a way of funding access. Access costs will be very significant. BRH will have limited income in Spain. She suggests that she may not have to work because of supports from PTB’s family. PTB is not expected to earn a significant income from his new business venture in Figueres. BRH’s income will be modest if she works in Spain. While their expenses may be lower because of inexpensive rent paid to PTB’s mother, there is no obvious financial advantage to AS being in Spain and having all of the child support spent on travel.

Views of the child 110 For a child of AS’s age, this is not a significant consideration. While AS is undoubtedly excited at the prospect of a different country with different people to meet, there is no independent evidence as to the strength or basis of AS’s views. This is not a factor in this case.

Custodial parent’s reason for moving where it is relevant to the parent’s ability to meet the needs of the child 111 It is clear that BRH’s move is not in any way tied to any benefit for AS. She is moving because she wants to be with her husband. PTB cannot live in Canada because of his immigration status. BRH is pregnant with their child and obviously wants her family with PTB to remain in- tact. Those are perfectly natural and understandable reasons for wanting to move to Spain. She is not moving to Spain to limit RPS’s role in AS’s life. 112 Where I have concerns is in terms of what the move may show about BRH’s abilities to consider AS’s best interests and to act on them. As I have said above, BRH’s credibility is an issue in this trial. I am satisfied that she has tailored her evidence to suit her purpose: being allowed to move to Spain with AS. 113 I am concerned that she has not thought out in any meaningful way what impact the move may have on AS. He is a six-year-old boy who has struggled with learning issues. The school file shows many consultations relating to speech therapy and occupational therapy. 114 School “progress notes” contain an entry for September 15, 2015 that “mom thought perhaps (AS) may no longer need speech/lg supports.” A kinder screening assessment that day noted “significant concerns re receptive language, social language.” H. (B.R.) v. S. (R.P.) Robert A. Graesser J. 99

115 An assessment dated October 23, 2015 concluded that AS was “experiencing some difficulty” with social skills and approaches to learning, cognitive skills and language and communication. He was “experiencing significant difficulty” with physical development. He was found to show “appropriate development” only with respect to awareness of self and environment. 116 A meeting among AS’s teacher, the speech language pathologist, the occupational therapist and the emotional behavioural specialist on No- vember 7, 2015 states that “AS has concerns in the areas of receptive and expressive language and social communication skills ... Due to AS’s language difficulties he struggles with understanding that it is not his turn or that the item is being used by someone else and that he needs to use his words to ask for what he wants ... he gets frustrated at structured activities.” 117 The conclusion of this assessment was that AS be coded “Code 47 — Severe Delay Involving Language.” 118 As at December 3, 2015, the records indicate that “mom has concerns re speech, have talked about reading to help AS settle, build his language.” 119 A consultation report dated January 16, 2016 describes AS as a child “who (has) difficulty understanding spoken language.” Specific plans to assist AS with expressive communication, ability to follow directions, and to stay on task were implemented for the period January, 2016 to April, 2016. 120 AS has, since he entered pre-school, been enrolled in educational pro- grams and has been provided with educational supports tailored to help his learning needs. He has issues, as identified by the school records. This is not a situation where he “had” issues, as testified by BRH. 121 I am concerned about BRH’s evidence concerning the support she claims to have had from AS’s teacher relating to transitioning to Spain. There is no evidence in the detailed notes from the school that any support was provided. Rather, BRH made inquiries concerning AS’s ability to learn another language. I can only conclude from comparing BRH’s evidence at the trial, her evidence on questioning and her affidavit evidence that she has not been entirely truthful about her interactions with the school. 122 It appears that AS has made considerable progress, and I also find that RPS has perhaps exaggerated the extent of AS’s needs. However, 100 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

the needs identified by the school are neither imaginary nor trivial. The school system here has brought significant resources to assist AS in achieving his potential. Indeed, he may have limitless potential, but there are still challenges, at least as identified by the school. 123 BRH has obtained information to the effect that there are some educational supports at the school in which she intends to enrol AS in Figueres. The information on these supports was sketchy, and pales in contrast with the supports AS has been receiving in Edmonton, and which he might expect to continue if he does not relocate. 124 On the evidence before me, I conclude that BRH has downplayed AS’s needs as identified by his teachers and consultants. It would have been helpful to me to have expert evidence on AS’s needs and what is needed to meet them. In the absence of such evidence I conclude that AS’s educational needs will be better met for the time being by staying in the school he has attended for the last four years with access to the resources he has benefitted from over that period and by continuing to learn in his native language, English. AS’s needs and abilities may change, but there is no credible evidence that he no longer needs the supports he has been receiving. 125 It seems to me that a child who has been assessed as having “severe delay involving language” and who has been receiving professional services from speech language, occupational therapy and emotional behaviour consultants for the past four years may have significant difficulties being educated in a language that he presently has a vocabulary of some twenty to fifty words. 126 I have serious concerns that BRH is putting her own interests in moving to Spain with her husband ahead of AS’s demonstrated educational needs. 127 She has not demonstrated that there is a reasonable plan in place to meet AS’s education needs. Indeed, the evidence shows that she has minimized AS’s needs in her own mind. 128 BRH’s attitude to these, and her minimization of AS’s needs to try to fulfill her goal of being able to move to Spain, reflect poorly on her ability to recognize and meet AS’s needs. 129 A challenge in this area is that RPS has unproven skills in being significantly involved in AS’s education. He has let BRH do most of the parenting in that area. He has mainly left BRH to determine AS’s extra- H. (B.R.) v. S. (R.P.) Robert A. Graesser J. 101

curricular activities. Indeed, it appears from the evidence that PTB has been more involved in these activities than has RPS. 130 RPS has had some involvement with the school, and has demonstrated an understanding of AS’s needs and the benefits of continuity in his educational development. I hope this interest is sincere and sustaina- ble, and not just strategic or tactical in the context of this current dispute. 131 On the evidence before me, this is a factor that strongly opposes a move at this stage of AS’s development.

Disruption to the child of a change in custody 132 There will undoubtedly be significant disruption to AS if he is placed in his father’s primary care. He has since separation been in BRH’s care. RPS has been the access parent. He has also bonded with PTB, and may well be excited about the arrival of a sibling. 133 If in Spain, AS will have the support of his mother and step-father, and will become part of PTB’s extended family there. AS does not know any of the family members, and will have difficulty communicating, at least until he becomes more fluent in Spanish. 134 RPS has been actively involved as an access parent, and AS is bonded to him and RPS’s extended family here. He has cousins here. His mother’s extended family is largely here, including the grandfather who has lived in the same home for some time and an aunt who apparently visits regularly. 135 In the absence of any specific evidence, and in particular any objective evidence on the point, I conclude that AS would certainly be impacted by a change in primary parenting from his mother to his father. This would be partly mitigated by generous access arrangements, including the use of technology. 136 While decisions from the Court of Appeal require that this factor be given strong consideration, the cases go short of finding that there is a presumption in favour of maintaining the role of the primary parent. Gordon v. Goertz requires a fresh analysis. 137 Here, this is undoubtedly a factor that favours BRH, but the evidence does not indicate to me that there would be a major disruption to AS. 102 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

Disruption to the child consequent on the removal from family, schools and the community he has come to know 138 There will undoubtedly be disruption if AS is removed from Edmonton. He would essentially be raised in Spain. That would involve significant changes in language and culture, as well as an inevitable dis- tancing from his father, his father’s family and to some extent his mother’s family (to the extent that they have not already been distanced by BRH’s apparent estrangement from most of her family members). 139 There was no evidence of particular attachments to friends or activities, and having regard to AS’s age, it is likely that the significant attachments in his life are to his parents. 140 I have already remarked on educational concerns. In this area, I conclude on the evidence before me that AS would be significantly disrupted in his education. He has demonstrated needs. I am not satisfied that BRH adequately recognizes these needs, or has put any realistic plan in place to deal with those needs in Spain. 141 I have no reason to doubt the quality of education in Spain, but I cannot see that a child coded with severe language deficits would be well served by being educated in a language he presently cannot speak or understand, but for a few words. 142 This factor strongly favours AS remaining in Edmonton, at least until it can be shown that his educational needs can be adequately met elsewhere. Much has been invested in getting AS to where he presently is; it would in my view be risky to have him educated elsewhere, in a different language, and without the supports he has received for four years in Edmonton. 143 Educational issues featured strongly in R. (C.C.) v. V. (M.A.), 2010 ABQB 237 (Alta. Q.B.). Justice Strekaf observed at para 21: 8. M. has some speech and other developmental delays that are in the process of being assessed. A preliminary speech/language assessment at the Drumheller Health Centre was conducted in January 2010 and the report made available in March as a result of steps taken by Mr. V. in November. A follow-up appointment is expected for April and an assessment of M. at the Child Development Centre is also being arranged. If M. was to move to British Columbia, new arrangements would have to be made for her to access diagnostic and treatment services there. There was no evidence provided with respect to the length of waiting lists or availability for such services. The importance of early intervention and treatment cannot be overstated. H. (B.R.) v. S. (R.P.) Robert A. Graesser J. 103

144 I see the continuity of AS’s specialized programming in Edmonton as being very important at this stage of his development. Disruption to the education he has been receiving seems to me to pose a great risk at this time.

Conclusion 145 It is obvious from the above analysis that two factors are key to my conclusion. My unfavourable view of much of BRH’s evidence reflects adversely on her parenting skills. She is, in my view, minimizing AS’s difficulties and exaggerating supports for her moving to Spain with AS to further her own interest in moving to Spain. 146 If AS did not have the educational and developmental difficulties identified by the teachers and professionals who have worked with him over the past four years, his relationship with his mother and the stronger role she has played in his development to date might well have tipped the relevant factors in favour of the move. On the evidence, and in particular the evidence from the school records, I cannot conclude that a move is in AS’s best interests. 147 The risk to his education if he moves is, in my view, greater than the risk of having AS primarily parented by his father, who has an unproven record in regard to the heavy lifting of parenting: being responsible for the day-to-day care, upbringing and nurturing. 148 RPS emerged from the trial mainly unscathed as to his credibility. He appears to be sincere, and I have no reason to doubt his capabilities. His parenting plan, while not detailed, shows that he is able to spend most of the after-school time with AS as he no longer works shift work or on weekends. He has family supports to supplement his own availability. 149 RPS needs to become more active as a parent, and he needs to get past his unwillingness to cooperate with PTB. The reality is that PTB has been in AS’s life for some time, and will continue to be in AS’s life as an active step-father. 150 At the end of the analysis, BRH has failed to satisfy me that she should be allowed to take AS to Spain. In that regard, AS should be enrolled in Grade 1 in Edmonton for this September. Until BRH leaves for Spain, the existing parenting arrangements should continue. 151 Once she leaves, RPS will have primary care of AS. BRH should have very generous access to AS, including most of the summer school break and Christmas. Since she will continue to have business interests in 104 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

Edmonton and has family here, she was proposing that she would bring AS to Edmonton for the Christmas break. 152 She should be able to do so, and have all but a few days of the break with AS. RPS should facilitate AS’s travel to Spain for all but the last two weeks of the summer holidays, or if BRH prefers to come to Edmonton, she should have AS for that portion of the summer. 153 Whenever BRH can come to Edmonton, she should have most of that time with AS. Extensive telephone and Skype-type access should be arranged. 154 I leave it to the parties, in the first instance, to agree on a schedule for access consistent with the Edmonton school calendar. I will retain jurisdiction to finalize the access schedule for the first year. 155 I also leave it to the parties to determine the child support payments BRH is to pay to RPS on her relocation to Spain. Application dismissed. ENMAX PSA Corp. v. Alberta 105

[Indexed as: ENMAX PSA Corp. v. Alberta] ENMAX PSA Corporation, Plaintiff and Her Majesty the Queen In Right of Alberta, Defendant ENMAX Energy Corporation, Plaintiff and Her Majesty the Queen In Right of Alberta, Defendant Alberta Court of Queen’s Bench Docket: Calgary 1001-17672, 1101-05515, 1301-08510, 1301- 08511 2016 ABQB 334 G.H. Poelman J. Heard: December 7-11, 14-17, 2015; March 1-2, 2016 Judgment: June 17, 2016* Tax –––– Provincial taxation — Alberta — Miscellaneous –––– Interest deduction in calculating payments in lieu of tax for government-owned entities — Province deregulated electrical utility industry and established system to address inequality that would result from fact that tax-exempt government-owned entities were competing with taxable corporations — Payment in Lieu of Tax Regu- lation made pursuant to Electric Utilities Act requires payments in lieu of tax (PILOT) to balancing pool equal to what would have been payable under In- come Tax Act and Alberta Corporate Tax Act if company was not exempt from taxation — Parent company E Corp. advanced intercompany loans to appellant government-owned electrical entities, EE Corp. and EP Corp. — Appellants deducted interest payments in their PILOT tax returns — Minister of Finance reassessed PILOT tax returns and concluded that amounts of interest deducted were too large to be reasonable — Appellants appealed — Appeals allowed — De- ductions of interest payable pursuant to intercompany notes were allowed as being reasonable amount — Section 20(1)(c) of Income Tax Act has same meaning when applied under Electric Utilities Act as when construed in context of taxable private entities — Reasonableness of interest was to be determined by comparing what arm’s length purchaser of appellants’ bonds would pay in interest, based on credit ratings, with adjustment for saved costs of bond issuance and fundamental factors — Differences between arm’s length rates and rates under intercompany notes were not so great as to bring rates outside what any

* A corrigendum issued by the court on June 22, 2016 has been incorporated herein. 106 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

business would have contracted to pay in circumstances of these subsidiaries, under notes with these conditions. Tax –––– Income tax — Business and property income — Expenses — In- terest expenses — Borrowed money –––– Payments in lieu of tax for government-owned entities — Payment in Lieu of Tax Regulation made pursuant to Electric Utilities Act requires payments in lieu of tax (PILOT) to balancing pool equal to what would have been payable under Income Tax Act and Alberta Cor- porate Tax Act if government-owned business was not tax-exempt — Parent company E Corp. advanced intercompany loans to appellant government-owned electrical entities, EE Corp. and EP Corp., at annual rates of 11.5 per cent in 2004, 10.3 per cent in 2006 and 9.9 per cent in 2007 — Appellants deducted interest payments in their PILOT tax returns — Minister of Finance reassessed PILOT tax returns and concluded that amounts of interest deducted were too large to be reasonable, setting reasonable rates at 5.42 per cent for 2004 note, 5.26 per cent for 2006 note and 5.24 per cent for 2007 note — Appellants appealed — Appeals allowed — Interest paid by appellants was “reasonable amount” such that it was deductible pursuant to s. 20(1)(c) of Income Tax Act — Section 20(1)(c) of Income Tax Act has same meaning when applied under Electric Utilities Act as when construed in context of taxable private entities — Section 20(1)(c) of Income Tax Act requires reasonable amount, but taxpayer’s process and explanations cannot be disregarded — Reasonableness of interest was to be determined by comparing what arm’s length purchaser of appellants’ bonds would pay in interest, based on credit ratings, with adjustment for saved costs of bond issuance and fundamental factors — Difference between rates in intercompany notes and high points in arm’s length ranges were 11.5 per cent versus 8.77 per cent in 2004, 10.3 per cent versus 9.21 per cent in 2006, and 9.9 per cent versus 9.08 per cent in 2007 — These differences were not so great as to bring rates outside what any business would have contracted to pay in circumstances of these subsidiaries, under notes with these conditions. Public law –––– Public utilities — Miscellaneous –––– Payments in lieu of tax for government-owned entities — Province deregulated electrical utility industry and established system to address inequality that would result from fact that tax- exempt government-owned entities were competing with taxable corporations — Payment in Lieu of Tax Regulation made pursuant to Electric Utilities Act requires payments in lieu of tax (PILOT) to balancing pool equal to what would have been payable under Income Tax Act and Alberta Corporate Tax Act if company was not exempt from taxation — Parent company E Corp. advanced intercompany loans to appellant government-owned electrical entities, EE Corp. and EP Corp. — Appellants deducted interest payments in their PILOT tax returns — Minister of Finance reassessed PILOT tax returns and concluded that amounts of interest deducted were too large to be reasonable — Appellants appealed — Appeals allowed — Deductions of interest payable pursuant to in- ENMAX PSA Corp. v. Alberta 107

tercompany notes were allowed as being reasonable amount — Transactions under which legal obligation to pay interest were incurred were intercompany loans by wholly-owned subsidiaries from their parent — Reasonableness of interest was to be determined by comparing what arm’s length purchaser of appellants’ bonds would pay in interest — Fact that range of arm’s length rates may fall below rates in intercompany notes was not fatal to appellants’ position — Differences were not so great as to bring rates outside what any business would have contracted to pay in circumstances of these subsidiaries, under notes with these conditions. Cases considered by G.H. Poelman J.: Bayridge Estates Ltd. v. Minister of National Revenue (1959), [1959] Ex. C.R. 248, [1959] C.T.C. 158, 59 D.T.C. 1098, 1959 CarswellNat 272 (Can. Ex. Ct.) — referred to Canada Trustco Mortgage Co. v. R. (2005), 2005 SCC 54, 2005 CarswellNat 3212, 2005 CarswellNat 3213, (sub nom. Canada Trustco Mortgage Co. v. Canada) 2005 D.T.C. 5523 (Eng.), (sub nom. Hypoth`eques Trustco Canada v. Canada) 2005 D.T.C. 5547 (Fr.), [2005] 5 C.T.C. 215, (sub nom. Minister of National Revenue v. Canada Trustco Mortgage Co.) 340 N.R. 1, 259 D.L.R. (4th) 193, [2005] S.C.J. No. 56, [2005] 2 S.C.R. 601 (S.C.C.) — considered Entreprises Ludco lt´ee c. Canada (2001), 2001 SCC 62, 2001 CarswellNat 2017, 2001 CarswellNat 2018, (sub nom. Ludco Enterprises Ltd. v. R.) 2001 D.T.C. 5505 (Eng.), (sub nom. Ludco Enterprises Ltd. v. R.) 2001 D.T.C. 5518 (Fr.), [2001] S.C.J. No. 58, (sub nom. Ludco Enterprises Ltd. v. Can- ada) 204 D.L.R. (4th) 590, (sub nom. Ludco Enterprises Ltd. v. Minister of National Revenue) 275 N.R. 90, [2002] 1 C.T.C. 95, (sub nom. Ludco Enterprises Ltd. v. Canada) [2001] 2 S.C.R. 1082, REJB 2001-25873, 2001 CSC 62 (S.C.C.) — considered Gabco Ltd. v. Minister of National Revenue (1968), [1968] 2 Ex. C.R. 511, 68 D.T.C. 5210, [1968] C.T.C. 313, 1968 CarswellNat 285 (Can. Ex. Ct.) — followed GlaxoSmithKline Inc. v. R. (2012), 2012 SCC 52, 2012 CarswellNat 3880, 2012 CarswellNat 3881, 351 D.L.R. (4th) 197, [2013] 1 C.T.C. 99, (sub nom. GlaxoSmithKline Inc. v. Minister of National Revenue) 435 N.R. 82, [2012] S.C.J. No. 52, (sub nom. Canada v. GlaxoSmithKline Inc.) [2012] 3 S.C.R. 3, (sub nom. R. v. GlaxoSmithKline Inc.) 2012 D.T.C. 5147 (Eng.), (sub nom. R. v. GlaxoSmithKline Inc.) 2012 D.T.C. 5148 (Fr.) (S.C.C.) — referred to Hickman Motors Ltd. v. R. (1997), 148 D.L.R. (4th) 1, (sub nom. Hickman Motors Ltd. v. Minister of National Revenue) 213 N.R. 81, [1997] 2 S.C.R. 336, (sub nom. Hickman Motors Ltd. v. Minister of National Revenue) 131 F.T.R. 317 (note), [1998] 1 C.T.C. 213, 97 D.T.C. 5363, 1997 CarswellNat 3046, 1997 CarswellNat 3047, [1997] S.C.J. No. 62 (S.C.C.) — followed 108 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

Husky Energy Inc. v. Alberta (2012), 2012 ABCA 231, 2012 CarswellAlta 1337, [2012] 6 C.T.C. 202, [2012] 11 W.W.R. 282, 66 Alta. L.R. (5th) 279, 352 D.L.R. (4th) 545, 533 A.R. 385, 577 W.A.C. 385, 2012 D.T.C. 5132 (Eng.) (Alta. C.A.) — referred to Johnston v. Minister of National Revenue (1948), [1948] S.C.R. 486, 3 D.T.C. 1182, [1948] C.T.C. 195, [1948] 4 D.L.R. 321, 1948 CarswellNat 26, [1948] S.C.J. No. 33, [1948] 4 W.L.R. 321 (S.C.C.) — referred to Morgan v. R. (2007), 2007 TCC 475, 2007 CarswellNat 2567, 2007 D.T.C. 1360 (Eng.), [2008] 1 C.T.C. 2516, 2007 CCI 475, 2007 CarswellNat 6065, [2007] T.C.J. No. 307 (T.C.C. [General Procedure]) — considered Petro-Canada v. R. (2004), 2004 FCA 158, 2004 CarswellNat 1163, 2004 D.T.C. 6329, (sub nom. Petro-Canada v. Minister of National Revenue) 319 N.R. 261, [2004] 3 C.T.C. 156, 2004 CAF 158, 2004 CarswellNat 4267, [2004] F.C.J. No. 734 (F.C.A.) — followed Shell Canada Ltd. v. R. (1999), 1999 CarswellNat 1808, 1999 CarswellNat 1809, (sub nom. Shell Canada Ltd. v. Canada) 178 D.L.R. (4th) 26, [1999] S.C.J. No. 30, 99 D.T.C. 5669 (Eng.), 99 D.T.C. 5682 (Fr.), (sub nom. Minister of National Revenue v. Shell Canada Ltd.) 247 N.R. 19, [1999] 4 C.T.C. 313, (sub nom. Shell Canada Ltd. v. Canada) [1999] 3 S.C.R. 622 (S.C.C.) — followed Singleton v. R. (2001), 2001 SCC 61, 2001 CarswellNat 2019, 2001 CarswellNat 2020, 2001 D.T.C. 5533 (Eng.), 2001 D.T.C. 5545 (Fr.), [2001] S.C.J. No. 59, (sub nom. Singleton v. Canada) 204 D.L.R. (4th) 564, (sub nom. Singleton v. Minister of National Revenue) 275 N.R. 133, [2002] 1 C.T.C. 121, (sub nom. Singleton v. Canada) [2001] 2 S.C.R. 1046, REJB 2001- 25874, 2001 CSC 61, [2001] 3 F.C. ix (S.C.C.) — considered TDL Group Co. v. R. (2016), 2016 FCA 67, 2016 CarswellNat 503, (sub nom. TDL Group Co. v. Minister of National Revenue) 482 N.R. 321 (F.C.A.) — followed Trac v. British Columbia (2007), 2007 BCCA 60, 2007 CarswellBC 204, 61 B.C.L.R. (4th) 359, 235 B.C.A.C. 303, 388 W.A.C. 303, [2007] B.C.J. No. 173 (B.C. C.A.) — referred to Transalta Corp. v. R. (2012), 2012 FCA 20, 2012 CarswellNat 124, (sub nom. Transalta Corp. v. Minister of National Revenue) 426 N.R. 27, 2012 D.T.C. 5041 (Eng.), 2012 CAF 20, 2012 CarswellNat 3782 (F.C.A.) — considered Statutes considered: Alberta Corporate Tax Act, R.S.A. 2000, c. A-15 Generally — referred to s. 1(2)(c) “court” — considered s. 48 — considered s. 50 — considered s. 52(1) — considered ENMAX PSA Corp. v. Alberta 109

Electric Utilities Act, R.S.A. 2000, c. E-5 s. 6(c) — considered Electric Utilities Act, S.A. 2003, c. E-5.1 Generally — referred to Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) Generally — referred to s. 8(1)(i) — considered s. 20(1)(c) — considered s. 20(1)(c)(i) — considered s. 247(2) — considered Regulations considered: Electric Utilities Act, S.A. 2003, c. E-5.1 Payment in Liey of Tax Regulation, Alta. Reg. 112/2003 Generally — referred to s. 2 — referred to s. 12(1) — referred to s. 12(2) — referred to s. 12(3) — considered Words and phrases considered: credit rating A credit rating is an independent opinion, published by one of these agencies [credit rating agencies recognized by securities exchange commissions], regarding the credit worthiness of a debtor business, put into a relative scale for comparative purposes. They are forward-looking estimates of risk reflecting the likelihood of a debtor not being able to meet its obligations as they become due, as well as the expected degree of recovery in the event of default. distribution Distribution is the transport of electricity between main transmission wires and residential houses or commercial and industrial businesses. Distribution uses distribution wires, which are smaller and not as high voltage as transmission wires, the electricity to be distributed having had its voltage lowered by transformers in substations between the transmission wires and distribution wires. generation Generation is the production of electricity. retailing Retailing is the sale of electric power to consumers (the electricity having been generated in generation and transported in transmission and distribution). 110 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

transmission Transmission is the transport of generated electricity over high voltage wires known as transmission wires covering long distances.

APPEALS by government-owned entities from reassessments of calculation of payments in lieu of tax.

Al Meghji, Alex Cobb, Melanie Gaston, Gerald Grenon, for Plaintiffs Marta Burns, Kim Palichuk, Sarah Dolgoy, for Defendant

G.H. Poelman J.: I Introduction 1 As a result of deregulation of the electrical utility industry in Alberta, a number of government-owned utilities became competitors of commercial corporations. One of these was ENMAX Corporation (“ENMAX Corp.”), owned by the City of Calgary and providing services formerly offered by the City of Calgary’s Electric System. ENMAX Corp. operates through a number of subsidiaries, including the two appellants in this case, ENMAX Energy Corporation (“ENMAX Energy”) and EN- MAX PSA Corporation (“ENMAX PSA”). (For convenience, the group of ENMAX corporations will sometimes be referred to as “ENMAX,” and ENMAX Energy and ENMAX PSA will sometimes be referred to as “the appellants.”) 2 The Government of Alberta needed to address the inequity that would result from the fact that government-owned entities are usually exempt from provincial and federal tax statutes, while privately-owned and pub- licly-traded corporations are taxable. The government established a system that required government-owned businesses such as the appellants to make payments into a “balancing pool”; these “payments in lieu of tax” or “PILOT” payments are calculated in accordance with the tax statutes. One of the deductions available when calculating federal taxes is a “reasonable amount” of interest on borrowed money used for the purpose of earning income. 3 ENMAX Corp. advanced a series of intercompany loans to its subsidiaries, ENMAX Energy and ENMAX PSA. Those companies then deducted the interest payments on those loans when calculating their payments in lieu of tax. 4 Alberta’s Minister of Finance reassessed the PILOT tax returns pursuant to his authority under the legislation and regulations and concluded ENMAX PSA Corp. v. Alberta G.H. Poelman J. 111

that the amounts of interest deducted were too large to be reasonable. The interest deducted was at a rate of about 10% annually, while the Minister said that about 5% was reasonable. The appellants challenge the reassessment, leading to a trial in this court (the procedure by which appeals from reassessments are conducted). 5 The parties presented extensive evidence, much of it through expert testimony. There were also many exhibits and extensive written and oral argument. Central to the parties’ competing positions is what test should be used to determine what is meant by a reasonable amount of interest and how to determine today what would have been reasonable under loans advanced in 2004, 2006 and 2007. That, in turn, involved expert construction of notional credit ratings that formed the primary underpin- ning for determining reasonable rates of interest.

II Basic Facts and Issues A. Introduction 6 Many of the facts are not disputed. The issues primarily concern how to interpret and apply those facts to the question of whether the amounts of interest sought to be deducted are reasonable. 7 I will thus begin by outlining the main facts underlying the dispute. Many of these were covered by an Agreed Statement of Partial Facts. Where that is the case, I will select from, summarize and paraphrase that lengthy document. 8 I will also draw from the evidence of Mr. John Mulligan, acting chief financial officer and vice-president and treasurer of ENMAX Corp., who gave evidence in a fair, straightforward manner. He joined the ENMAX organization in 2012 and holds the same offices with the subsidiary companies, ENMAX Energy and ENMAX PSA. 9 Neither Mr. Mulligan nor any other ENMAX Corp. finance department employees were employed by ENMAX Corp. during the relevant period of approximately 2004 through 2009. He had the unenviable task of repeating facts from the plaintiffs’ documents, although he has no reason to think any of them are inaccurate. Both parties questioned him extensively on matters in which he had no personal involvement, without objections to the obvious limitations of this type of evidence. Mr. Mulli- gan acquitted his role as credibly and reliably as could be expected given his lack of personal knowledge of the issues pre-dating his time at ENMAX. 112 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

B. The Electric Utilities Industry and ENMAX 10 The main components of the electricity industry are generation, transmission, distribution and retailing. 11 Generation is the production of electricity. Electricity is generated at a large number of plants in Alberta using a variety of fuel sources and technologies, including coal, natural gas, co-generation, hydro and wind. Generally speaking, the bulk of generation is in the northern part of the province, while the largest demand is in the south, so a substantial transmission infrastructure is required to move electricity to the cities and larger “loads” or consumers. 12 Transmission is the transport of generated electricity over high voltage wires known as transmission wires covering long distances. Because of the physical properties of electricity, transmission is performed mainly by a single firm in any area of the province. After transmission to a city or municipality, a local distributor delivers the power to homes and businesses along distribution wires. 13 Under the Electric Utilities Act, S.A. 2003, c E-5.1, first enacted in 1995, owners of the provincial transmission grid, including ENMAX Corp., retained ownership of their respective components of the grid, but access to the grid was dedicated exclusively to an independent, government appointed transmission administrator (now the Alberta Electric System Operator, “AESO”). 14 Distribution is the transport of electricity between main transmission wires and residential houses or commercial and industrial businesses. Distribution uses distribution wires, which are smaller and not as high voltage as transmission wires, the electricity to be distributed having had its voltage lowered by transformers in substations between the transmission wires and distribution wires. 15 Retailing is the sale of electric power to consumers (the electricity having been generated in generation and transported in transmission and distribution). 16 The process of deregulation started in 1990, when the Province began a policy review of the Alberta power industry. Prior to 1996, the entire electricity system in Alberta was regulated pursuant to provincial legislation. 17 The power industry in Alberta features privately-owned and munici- pally-owned enterprises and has done so for many years. Prior to deregulation, substantially all of the provincial generation was supplied by three ENMAX PSA Corp. v. Alberta G.H. Poelman J. 113

regulated generating companies (ATCO Electric, EPCOR and TransAlta Utilities). 18 Commencing January 1, 1996, under the Electric Utilities Act, the Province took significant steps towards deregulation. The Province passed legislation and undertook certain steps intended to cause a transition from a power industry dominated by vertically integrated, regulated utilities to one where customer choice and competition would determine new generation capacity, the price of electric energy, and retail suppliers. Alberta was the first Canadian jurisdiction to implement a restructured electrical power market. 19 Mr. Mulligan explained that electricity generation and the retail sale of electricity to end-user customers was, with small exceptions, deregulated. The intervening links in the system, transmission of electricity (through substations and high voltage lines) and distribution (transport- ing electricity between main transmission wires and local users through lower voltage distribution systems) remain regulated. 20 The deregulation process sought to balance the need to provide fair returns on investments made by the regulated utilities under the previous regulatory environment. A number of generation plants had been built and funded by ratepayers before deregulation and continued to produce electricity at the time of deregulation. The power generated by those plants was auctioned off in a power purchase arrangement or “PPA” auction in August 2000 (followed by a second auction for power that did not sell initially). The Province determined the form and content of the PPAs and issued a regulation. 21 PPA owners acquired the right to purchase electricity from a specified generating unit for amounts determined in the PPA, designed to reflect costs. Terms range from three to twenty years, based on the lesser of the deemed remaining useful life of the generating unit or twenty years. 22 PPA owners have the right to dispatch the associated generating unit or units and sell the electric energy generated, including determining how much electricity to offer to sell into the power pool and the price at which to offer that electricity. In exchange, the PPA owner must make payments to the owner of the generating unit, based on formulas intended to compensate for variable and fixed costs. New generating capacity developed after January 1, 1996 was subject to market forces rather than rate regulation and independent power producers were allowed into the marketplace. 114 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

23 With respect to transmission, access to the provincial transmission grid was opened to allow all eligible persons to trade energy through the power pool. Power has been traded through the power pool since 1996. The power pool is a clearing house or exchange for buyers and sellers of electricity in the province. Virtually all electricity transactions are done through the power pool. 24 The power pool is currently operated by AESO. AESO directs which plants are to produce electricity at any given point in time to match supply with demand perfectly. Power is dispatched in accordance with a merit order determined by AESO based upon offers by suppliers of power and bids from purchasers of power. (Lower offers are accepted first, until sufficient offers to meet demand have been accepted.) Thus, generators sell into the power pool and retailers purchase power through the power pool and arrange for distribution and the sale of electricity and other services to their customers. 25 Transmission and distribution services are paid through tariffs set by the Alberta Energy and Utilities Board (the “AEUB”, since replaced by the Alberta Utilities Commission, the “AUC”). All persons eligible to trade power through the power pool were given open access to the grid. The grid remains a natural monopoly and continues to be regulated by the AUC. 26 Deregulation of the retail sale of electricity came into effect on Janu- ary 1, 2001, affecting all of Alberta except Medicine Hat, which opted out. Smaller consumers (residential, farm, irrigation and small commercial and industrial customers) had access to transitional rates for a period up to five years. The transitional scheme was designed so consumers could see how the electricity marketplace developed before signing a competitive offer with a retailer. Further regulations were implemented for transitional rates beginning July 1, 2006. These transition rates were determined through a combination of monthly and long-term energy pricing. 27 Before deregulation, the City of Calgary purchased electricity from generators and then sold it to consumers, with a markup for distribution and billing costs. It provided so-called “wire services” — transmission and distribution in the Calgary area through a City department. ENMAX Corp. was incorporated in July 1997 to carry on the electric utility transmission, distribution and retail operations previously provided by the City. It was designed to facilitate the City’s participation in the competitive electricity market then undergoing restructuring. It is wholly owned ENMAX PSA Corp. v. Alberta G.H. Poelman J. 115

by the City of Calgary and it is governed by an independent board of directors. 28 ENMAX Corp. carries out most of its business through ENMAX Power Corporation (“ENMAX Power”), which operates the transmission and distribution systems. It owns, operates and maintains distribution networks and part of the transmission network providing power to the Calgary area. It is known a “wires services provider.” ENMAX Power operates in a regulated environment. The AUC regulates the prices it can charge to ensure a reasonable return. 29 ENMAX Energy is a wholly-owned subsidiary of ENMAX Corp. established to carry out the energy supply and retail service functions; it arranges for the supply of electricity into the power pool and the sale from the power pool of electricity to its customers. It offers these services to residential and business customers across Alberta. It manages a supply portfolio (including its subsidiary, ENMAX PSA) to ensure a secure and stable supply of electricity. 30 ENMAX Energy has been the default supplier of electricity for the Calgary area and the provider of transitional regulated rates for the Cal- gary area. As permitted under the Electric Utilities Act, ENMAX Power contracted with ENMAX Energy to fulfill these quasi-regulated roles for customers in the Calgary area. 31 ENMAX Energy is also (by contract with ENMAX Power) the “supplier of last resort” for customers in the Calgary area unable to obtain regular electricity services from any other retailer. Further, it has signed agreements with a number of other municipalities in southern Alberta to provide transitional rate electricity and to act as default supplier. 32 In 2004, 2006 and 2007, ENMAX Energy had three classes of customers. Some customers purchased electricity by contract with the retailer, typically at fixed prices. Others paid a regulated rate, at a price established by the AEUB during the transition period to allow customers to purchase electricity at a regulated rate while evaluating competitive alternatives. Finally, some customers paid the default rates available to those in the service providers’ area who were not party to a contract, or eligible for a regulated rate, or consumed more than a certain quantity of electricity (the rates were based on the spot rate of the power pool). The default rate was filed with the AEUB, but not approved by it. 33 ENMAX Energy’s supply portfolio includes the Keephills PPA, which came into effect January 1, 2001 for a twenty year term, and until 2003, the Wabamun PPA. ENMAX PSA was incorporated on May 5, 116 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

2006, to acquire the Battle River PPA. It is wholly owned by ENMAX Energy, and thus indirectly by ENMAX Corp. To facilitate the purchase of the Battle River PPA, ENMAX Corp. provided a guarantee to EPCOR and to Alberta Power. The Battle River PPA is the only revenue-generating asset acquired by ENMAX PSA. 34 As explained earlier, PPAs give buyers the right to purchase electricity from a particular generating unit from the owner of the unit, for amounts determined on a cost-based formula, intended to compensate the owner for variable and fixed costs. 35 The subsidiaries, particularly ENMAX Energy, make significant contributions to ENMAX Corp.’s bottom line. Vertical integration is one of the means by which the ENMAX group minimizes risk and addresses differences in volatilities among the various aspects of the business. If ENMAX Corp. were to consider divesting its unregulated operations, it would have to consider a broad range of factors, such as corporate reputation and contractual obligations. 36 ENMAX Corp. has $100 million in credit facilities available to its subsidiaries for counterparties who request a letter of credit to support a transaction. ENMAX Corp. provided letters of credit and guarantees regarding the obligations undertaken by ENMAX Energy when it purchased its PPAs, and similar obligations undertaken by ENMAX PSA in acquiring the Battle River PPA. 37 In 2004, ENMAX Energy had 37% of the residential and small commercial market by volume and 22% of the commercial and industrial market. The largest other electricity retailer was EPCOR, not really a competitor because of its concentration on the Edmonton area market. Direct Energy, in Mr. Mulligan’s view, would have been ENMAX En- ergy’s only significant competitor in 2004. That year, ENMAX Energy’s revenues were 73% of ENMAX Corp.’s revenues; the comparable figure for net earnings is 72%. 38 In September 2004, ENMAX Corp.’s Treasury Group conducted an analysis and made recommendations regarding the capital structure of ENMAX Corp. and its subsidiaries. After considering a number of factors, such as the peer group of Canadian and American utilities and guidelines issued by credit rating agencies, it recommended that EN- MAX Energy have a structure of 45% debt and 55% equity. Ultimately, ENMAX Corp. determined that ENMAX Energy should take on a $497 million debt to ENMAX Corp. ENMAX PSA Corp. v. Alberta G.H. Poelman J. 117

39 ENMAX Energy borrowed $497 million from ENMAX Corp. pursuant to an intercompany unsecured subordinated note dated December 1, 2004, due December 1, 2014, at an interest rate of 11.5% per annum. The interest rate was established at 11.5% for reasons given in an “Intercom- pany Debt Pricing Memorandum” dated January 31, 2005. As a result of the amount and interest rate of the debt, ENMAX Energy took on a 91% debt to equity ratio. In its PILOT tax returns for each of the years at issue, the 11.5% interest payments were deducted. 40 The Electric Utilities Act applied the PILOT concept to entities that were not subject to tax pursuant to the federal or provincial tax statutes. In general terms, the PILOT payments were equal to the tax that would be imposed if those entities were not tax exempt. 41 Mr. Mulligan confirmed that, as the Treasury Group had noted, this resulted in a significant tax shield; thin capitalization rules that would apply to cross-border parent-subsidiary arrangements did not apply. Fur- ther, he acknowledged that he was unaware of any reason the debt to equity ratio would have been changed, other than tax considerations. Fur- ther, he acknowledged that the interest rate on this intercompany loan compared with an interest rate of 5.777% ENMAX Energy had used in an application to the AEUB for carrying costs approval. 42 One of the consequences of the intercompany debt arrangements was that ENMAX Corp.’s interest costs went down drastically in its 2005 financial reports. 43 Subsequent intercompany debt was arranged between ENMAX Corp. and ENMAX PSA: $309 million at 10.3% per annum under an unsecured subordinated note dated June 5, 2006, due June 30, 2016. The proceeds were used to acquire the initial portion of ENMAX PSA’s interest in the Battle River PPA. In its PILOT tax returns, ENMAX PSA deducted the 10.3% interest payments. 44 ENMAX PSA later borrowed an additional $58.8 million at an interest rate of 9.9% per annum, under an unsecured subordinated note dated January 15, 2007, due December 31, 2017. The proceeds were used to acquire additional ownership in the Battle River PPA. ENMAX PSA deducted the 9.9% interest payments in its PILOT tax return for the year at issue. 45 When the first of the ENMAX PSA unsecured subordinated notes was arranged, it was recognized that the effect of the arrangement would require a second loan shortly thereafter. When that became necessary sooner than expected, ENMAX Corp. had to waive the financial cove- 118 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

nants it had in place to do the refinancing. This 2007 borrowing caused ENMAX PSA to violate its debt coverage covenants under the 2006 note. Thus, ENMAX Corp. provided ENMAX PSA with a waiver notice, increasing its debt coverage ratio limits. 46 The ENMAX group prepares its financial statements on a consolidated basis. Thus, everything flows up from the subsidiaries to ENMAX Corp. The practice was for ENMAX Corp. to sweep all excess cash from the subsidiaries into itself, which would impact liquidity in the subsidiaries. It could also push cash down to subsidiaries to acquire assets, if it chose. As Mr. Mulligan said, it was entirely up to ENMAX Corp. to decide what to do with any excess cash anywhere in the ENMAX Group.

C. Credit Ratings and the Pricing of Debt 47 The internal processes followed by ENMAX in determining an interest rate for intercompany debt and the analysis undertaken and opinions given by experts for ENMAX and the Crown all depended heavily on establishing credit ratings and, based upon those credit ratings, “pricing” (or setting the interest rate for) the debt. Thus, a brief overview of credit ratings and debt pricing processes is important background for the issues in this case. 48 There are a number of credit rating agencies recognized by securities exchange commissions. A credit rating is an independent opinion, published by one of these agencies, regarding the credit worthiness of a debtor business, put into a relative scale for comparative purposes. They are forward-looking estimates of risk reflecting the likelihood of a debtor not being able to meet its obligations as they become due, as well as the expected degree of recovery in the event of default. 49 Agencies assign credit ratings to issuers (the company issuing the bond, that is, the borrower) and the issue (the specific loan or bond being used to raise funds). 50 The Standard and Poor’s rating scale was most commonly used in this trial, although the parties made frequent reference to the Moody’s scale as well. (Levels on these two scales are identical, for present purposes, although the letter designations are different.) 51 The following is Standard & Poor’s rating scale, ranging from the most credit worthy at the top, to the least credit worthy at the bottom: AAA AA+ ENMAX PSA Corp. v. Alberta G.H. Poelman J. 119

AA A+ A A- BBB+ BBB Investment Grade BBB- Non-Investment Grade, High BB+ Yield or Speculative Grade BB BB- B+ B B- CCC+ CCC CCC- CC 52 Rating agencies do not categorize ratings as investment or speculative grade, but it has been common in the market place to use these designations. For example, some investment portfolios are restricted to investment grade bonds, while others strictly limit the amount of speculative grade bonds that may be held in a portfolio. 53 Credit ratings are a significant determinant of a bond’s interest rate. In general, the “face value” of a bond is the amount lent by the bond holders to the issuer (the loan principal). The annual “coupon” amount, in dollars, is the coupon rate in percentage times the face value of the bond. 54 The value of a bond is the present value of its expected coupon and principal payments, discounted using interest rates reflecting the perceived risks associated with the bond. Often, at issuance the coupon rate is equal to market interest rates, thus the selling price of the bond will be equal to its face value. Over time, a bond will sell at a premium to its face value (the market interest rate then being lower than the coupon 120 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

rate), or at a discount to its face value (the market interest rate then being higher than the coupon rate). 55 Bonds often trade on the secondary market after initial issuance. The level at which a bond is trading reflects a variety of factors, including the general level of interest rates or changes in the issuer’s credit rating. When a bond’s price is no longer equal to its face value, the coupon rate no longer accurately reflects the return earned by a bond investor. In- stead, the relevant measure of the bond’s return is “yield to maturity,” which combines the coupon rate and the difference between the face value of the bond and its market value as the measure of the annual return that an investor would get by buying the bond. 56 To estimate the market interest rate for a new bond, consideration will be given to market yields to maturity and coupon rates for comparable outstanding bonds, as well as coupon rates on recent newly-issued bonds. In determining comparables, it is important to find finding credit ratings similar to the bond for which a rate is being estimated.

D. ENMAX Pricing Documents 1. Introduction 57 Each of the intercompany notes has a corresponding “Inter-Company Debt Pricing Memorandum” that sets out the borrower’s explanation and justification for the reasonableness of the interest payable under each note. While the memoranda do not say so expressly, I infer that these documents were prepared to defend the interest deductions to the Crown. No other purpose has been suggested. 58 Mr. Mulligan was not involved in the process leading up to the debt transactions or the preparation of the pricing memoranda, but he testified that the memoranda memorialized the process and conclusions regarding ENMAX’s process. Further, as ENMAX’s witness he explained the process that was followed and also was questioned on these matters by the Crown. Experts for ENMAX and the Crown based part of their analysis and took some assumptions from these memoranda. It is therefore useful to briefly review the processes these documents describe.

2. 2004 Intercompany Note 59 The pricing memorandum for the 2004 note records that the recapital- ization of subsidiary companies and the introduction of intercompany long term debt financing “is part of a strategy to establish the parent EN- MAX Corporation as the source of internal funding and external financ- ENMAX PSA Corp. v. Alberta G.H. Poelman J. 121

ing (the investment vehicle for its subsidiaries), to align the corporate structure with the focus of the organization and to better utilize surplus funds.” It refers to the debt to equity ratio put into place and explains that “this memorandum deals primarily with the reasonable rate of interest for this debt issue and includes details of the research and analysis that was performed to determine this rate.” 60 The memorandum sets out an analysis of the subordination and conditions of the debt, in particular identifying important financial covenants regarding the relationship between debt and interest obligations to various measures of the company’s earnings. 61 Next, the memorandum contains detailed financial forecasts for the next five years and analysis based on key financial ratios. Both parties’ experts adopted these financial forecasts in developing their opinions. A range of interest rates from 8% to 13% were used as sensitivity tests, to ensure a reasonable expectation of earning cumulative profits in future years. The memorandum then calculates key financial ratios used by Standard & Poor’s in determining debt ratings. 62 Based on its own assessment of comparables and fundamentals and on conversations with ENMAX Corp.’s analyst at Standard & Poor’s, ENMAX Energy determined its business profile to be 7 (on a scale of 1, strong, to 10, weak). With this in hand, Standard & Poor’s methodology was used to establish a credit rating, based on a range of factors such as debt coverage ratios. Then, after considering Standard & Poor’s methodology in notching down credit ratings for subordinated debt and other market evidence, the memorandum concluded that “EEC’s notional debt rating using S & P criteria is in a range of from ‘CCC’ to ‘B’.” 63 The pricing memorandum also addressed the total amount of the debt. ENMAX Energy analysed various debt coverage multiples and compared the amount of debt to industry comparables, in conjunction with CIBC World Markets, Debt Capital Markets. It concluded that “by all measures of debt capacity analysed by ENMAX the $497 million level of debt .... is less than industry comparables for companies with credit ratings, financial ratios and multiples similar to those of EEC. The overall average of these measures is $613 million. On that basis, ENMAX has concluded that debt sized at $497 million is reasonable by financial industry standards.” 64 In determining the interest rate, ENMAX Energy looked at other companies that issued intercompany debt and companies that issued non- investment grade debt in private markets and public debt capital financial 122 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

markets for non-investment grade debt. Due to lack of adequate data for non-investment grade trades in Canada, Canadian comparables were primarily based on intercompany borrowings made by EPCOR (another government-owned utility) and by energy and business trusts. 65 The various forms of analysis generated comparables in a range from 10.5% to 13.5%. Having regard to the fact that 11.5% would provide a reasonable expectation of profit (based on the earlier financial projections), ENMAX Energy concluded that 11.5% would be a reasonable interest rate for the 2004 note.

3. 2006 Intercompany Note 66 The pricing memorandum for the 2006 note explains that ENMAX PSA was incorporated to acquire the Battle River PPA, with the 2006 intercompany loan of $309 million funding about 90% of the purchase price. The balance would be partly funded from an expected strong cash flow generated by ENMAX PSA, but it was anticipated there would be a need for additional financing from ENMAX Corp. 67 The memorandum sets out an analysis similar to that for the 2004 intercompany note, but briefer in detail. It explains the preparation of a financial analysis, with cash flows predicted to be strong over the first five years but then declining. (Both parties’ experts accepted and relied upon this forecast as well.) A number of ratios were used. The result of the financial analysis was a notional debt rating of CCC. 68 The amount of debt was considered to be well within the maximum range of the various debt coverage ratios obtained from internal research and RBC Capital Markets. The memorandum then analysed data available from public debt markets, combined with advice from CIBC. In the result, based on methodology adopted from Standard & Poor’s, its internal research and data, and advice from CIBC, the memorandum concluded that the debt should be priced at an interest rate of 10.3% per annum.

4. 2007 Intercompany Note 69 For the January 4, 2007 intercompany note, the pricing memorandum referred again to the background of ENMAX PSA’s incorporation as a vehicle to acquire the Battle River PPA. 70 The memorandum stated that the 2006 financial results showed weaker debt coverage than expected but a current forecast showed im- proving cash flow over the next five years, partly due to forecasted price ENMAX PSA Corp. v. Alberta G.H. Poelman J. 123

increases. The memorandum anticipated longer term deterioration in cash flow (after five years), since prices were expected to decline and units would be decommissioned. It was noted that the debt/capitalization ratio would, in the near future, result in an increase beyond the level permitted under the 2006 intercompany note covenants, but “robust” cash flow was expected to bring the ratio back into line by the end of fiscal 2007. On that basis, the additional debt of $58.8 million to be assumed on January 15, 2007 was considered acceptable. 71 As with the forecasts in the earlier pricing memoranda, the Crown’s expert accepted this optimistic financial forecast, but ENMAX’s expert rejected it as unfounded. 72 With the application of Standard & Poor’s metrics, ENMAX PSA considered it appropriate to maintain the notional credit rating of CCC. Market comparables were used to establish an appropriate interest rate, with data surveyed through Bloomberg. It was determined that 9.9% was an appropriate interest rate.

E. Questions for Determination 73 The fundamental issue to be resolved is whether the interest paid by ENMAX Energy and ENMAX PSA on the three intercompany notes is a “reasonable amount” such that it is deductible pursuant to section 20(1)(c) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.). 74 Importantly, the Crown says this question must be resolved in the context of the regulatory scheme established under the Electric Utilities Act by which the provisions of the Income Tax Act are adopted. In other words, it submits that application of the Income Tax Act may have a different result in this case than it would if the dispute were to be determined solely as a matter of federal income tax law. 75 ENMAX Energy and ENMAX PSA, however, submit that the question must be determined solely on the basis of federal income tax legislative provisions and cases considering them. The fact that these provisions have been incorporated into a provincial regulatory scheme should not affect their interpretation and application. 124 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

III Principles of Law A. Statutory Framework 76 ENMAX Energy and ENMAX PSA are government-owned participants in the Alberta electric industry, because their parent is owned by the City of Calgary. Thus, they are not taxpayers. 77 The Payment in Lieu of Tax Regulation, Alta. Reg. 112/2003, as amended (“PILOT Reg.”) made pursuant to the Electric Utilities Act, requires payments to the balancing pool equal to what would have been payable under the Income Tax Act and the Alberta Corporate Tax Act, R.S.A. 2000, c. A-15, as if the company was not exempt from taxation under those statutes: PILOT Reg., section 2. 78 Section 12 of the PILOT Reg. provides that Alberta’s Minister of Fi- nance may take the actions authorized by and is subject to the obligations imposed by the federal and provincial tax statutes. Also, the entities subject to the PILOT Reg. are entitled to the rights, processes, procedures and remedies available to taxpayers and are subject to the obligations of taxpayers under the same statutes. Section 12(3) states that a decision of the minister that would be subject to appeal to a court under the tax statutes may be appealed to the Court of Queen’s Bench of Alberta.

B. The Assessments and Appeals 79 The Crown reassessed the PILOT tax returns for the years in issue on the basis that the rates and amounts of interest payable under the intercompany notes were unreasonable. The reassessments set the reasonable rates of interest at 5.42% for the 2004 note, 5.26% for the 2006 intercompany note and 5.24% for the 2007 note. 80 Pursuant to section 48 of the Alberta Corporate Tax Act, ENMAX Energy and ENMAX PSA served notices of objection to the assessments. They subsequently commenced an appeal under section 50 of that statute which, by sections 52 (1) and 1(2)(c), is deemed to be an action in the Court of Queen’s Bench. 81 This appeal involves one issue under the Income Tax Act, namely whether ENMAX Energy and ENMAX PSA are entitled to deduct the interest paid to ENMAX Corporation under the three intercompany ENMAX PSA Corp. v. Alberta G.H. Poelman J. 125

notes. The availability of that deduction is governed by section 20(1)(c), which provides in its relevant parts as follows: 20(1) ....[In] computing a taxpayer’s income for a taxation year from a business or property, there may be deducted such of the following amounts ...... (c) interest — an amount paid in the year or payable in respect of 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 reasonable amount in respect thereof, whichever is the lesser[.] 82 In simpler form, McLachlin J (now C.J.C.) paraphrased the section as providing that “the taxpayer is entitled to deduct the lesser of, (1) the actual amount paid, or (2) a reasonable amount in respect of ‘an amount paid .... pursuant to a legal obligation to pay interest on .... borrowed money used for the purpose of earning income from a business or property’”: Shell Canada Ltd. v. R., [1999] 3 S.C.R. 622 (S.C.C.) at para 34, (1999), 178 D.L.R. (4th) 26 (S.C.C.).

C. Statutory Interpretation 83 The modern rule of statutory interpretation is that “the words an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament”: Entreprises Ludco lt´ee c. Canada, 2001 SCC 62 (S.C.C.) at para 36, [2001] 2 S.C.R. 1082 (S.C.C.), quoting Driedger, Construction of Statutes (2nd ed., 1983) at 87. 84 The Supreme Court of Canada has also set out clear guidelines for the interpretation of the Income Tax Act. As applicable to this appeal, I paraphrase them as follows: a) The overall policy of Parliament that should inform construction of the Income Tax Act is that tax law be certain, predictable and fair so that taxpayers can intelligently order their affairs: Canada Trustco Mortgage Co. v. R., 2005 SCC 54 (S.C.C.) at paras 31, 42 & 50, [2005] 2 S.C.R. 601 (S.C.C.). 126 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

b) Courts should not look for unexpressed legislative intentions or overriding policies not anchored in a textual, contextual and pur- posive interpretation of specific provisions: Ludco, para 38; Shell, para 43; Canada Trustco, para 42. Doing so risks upsetting the balance established by Parliament in a complex statute that en- compasses a broad range of principles. c) In particular, courts should not interpret the substantive provisions of the Income Tax Act based on concerns about tax avoidance, because taxpayers are fully entitled to structure their transactions in a manner that reduces taxes: Singleton v. R., 2001 SCC 61 (S.C.C.) at para 28, [2001] 2 S.C.R. 1046 (S.C.C.); Ludco, para 39; Shell, para 44 to 46; and Canada Trustco, para 31. Achieving the various policies promoted in the Income Tax Act depends on taxpayers taking full advantage of its provisions: Canada Trustco, para 31: TDL Group Co. v. R., 2016 FCA 67 (F.C.A.) at para 22.

D. Effect of PILOT Reg. 85 The Crown submits that government policy in deregulating the electrical power market must inform the interpretation of section 20(1)(c) of the Income Tax Act, as it is applied within the PILOT Reg. It relies on one of the purposes of the Electric Utilities Act as being “to establish 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”: section 6(c). Thus, the Crown submits that a “reasonable amount” must take into account whether the interest deduction creates an unfair advantage to ENMAX Energy and ENMAX PSA. In oral submissions, the Crown acknowledged that its position meant that the same transaction could give rise to different results under section 20(1)(c) of the Income Tax Act, depending on whether it was being applied by a government-owned entity or an entity taxable in the usual course. 86 The Crown particularly emphasized “leveling the playing field” among the various types of entities in the electricity industry. It referred to the following passage from the legislative debates: ....[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.... ENMAX PSA Corp. v. Alberta G.H. Poelman J. 127

... 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.... [Alberta, Legislative As- sembly, Hansard, 24th Leg, 2nd Sess (31 March 1998) at 1265 (Dr. West.] 87 I am not persuaded by the Crown’s argument. In my view, section 20(1)(c) of the Income Tax Act has the same meaning when applied under the Electric Utilities Act as when construed in the context of taxable private entities. It may be that government policy, particularly in the PILOT scheme, is to level the playing field. The legislature has implemented that policy by requiring government-owned entities to make payment in lieu of taxes. That point comes out clearly in the speech from Dr. West in the Hansard passage on which the Crown relies (although such references are of doubtful guidance in statutory interpretations). 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, as set out earlier. Those principles, in my view, apply to the PILOT Reg. as well. It is clearly intended to be a form of taxing statute, and expressly gives the minister and the municipal entity the same entitlements and obligations they would have under the Income Tax Act: PILOT Reg., sections 12(1) and (2). 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. 89 Nor does Transalta Corp. v. R., 2012 FCA 20, 426 N.R. 27 (F.C.A.), assist the Crown. In applying the “Gabco test” (to which I will turn later) the court notes that in construing what a reasonable business person would do, “long-standing regulatory and industry practices, as well as auditing and valuation standards and practices, are relevant” (para 75). This merely means that the taxpayer’s “business considerations”, on which the Gabco test focuses, must be the context for determining what is reasonable. That is, the type of business in which the taxpayer operates, including its regulatory, commercial and fiscal aspects, is important context for any reasonableness assessment. What would be reasonable for a business in the retail industry to pay may not be the same as for a business in the electrical utilities sector. 128 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

E. ENMAX’s Pricing Process 90 The evidence shows that the PILOT tax considerations were primary considerations in structuring the intercompany debts, particularly since the amount of debt significantly increased the debt to equity ratio beyond the recommendations made by ENMAX Corp.’s Treasury Group in Sep- tember 2004. 91 The Treasury Group recognized that, all other things being equal, greater debt gave a larger tax shield and from that perspective it made sense to “lever the taxable organizations up,” while recognizing that all tax planning is subject to reasonability tests. The same considerations applied to the interest rate, although that issue was not addressed by the Treasury Group in its recommendations on capital structure. Mr. Mulli- gan acknowledged that he was unaware of any reason the debt to equity ratio would have changed from the Treasury Group’s recommendations, other than tax considerations. 92 Neither the Income Tax Act nor the PILOT Reg. gives taxpayers a detailed test against which to measure their transactions for reasonableness. Thus, management must make its own decisions, recognizing that the Crown may challenge these choices. 93 The parties differ on how much weight should be given to ENMAX’s pricing of the debt, as set out in the pricing memoranda. ENMAX argues that the court should defer to the exercise of management’s business judgment unless it concludes that the rate chosen is unreasonable. It argues that an important part of the analysis should be whether management’s process was reasonable in all of the circumstances. If the decision was made in a considered way, asking the appropriate questions and taking reasonable steps to answer them, then a high degree of deference should be shown to the decisions resulting from the process. 94 The Crown, on the other hand, effectively says that ENMAX’s “due diligence” is irrelevant. There can be no deference. If a taxpayer deducts an amount, the Crown is entitled to question whether the amount is reasonable, and if it is not, determine what a reasonable amount would be. The steps taken to justify the amount are immaterial. 95 It overstates the law to suggest that the borrowers’ explanations and justifications in this case (contained in the pricing memoranda) have no value. The Supreme Court of Canada has emphasized that making transactions and structuring them to avoid or minimize tax is not against tax policy. Further, given that the test for reasonableness must be measured with reference to the legal obligation under which interest is paid (Shell, ENMAX PSA Corp. v. Alberta G.H. Poelman J. 129

para 28, for example) and having only the taxpayers business considerations in mind (Gabco, para 52) a taxpayer’s explanation for the amount of interest it seeks to deduct is of great import. 96 I agree that section 20(1)(c) of the Income Tax Act requires a reasonable amount, not a reasonable process. But the process followed by the taxpayer and its explanations cannot be disregarded. They inform the Crown and the court of the transaction to be measured and the taxpayer’s business considerations. To disregard this information would be an error in applying section 20(1)(c).

F. “Reasonable” Amount of Interest Deduction 1. General Principles 97 Under section 20(1)(c), a taxpayer is entitled to deduct only a reasonable amount of interest paid pursuant to a legal obligation on borrowed money used to earn income. The court in Shell identified four elements at para 28: The provision has four elements: (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. The Crown agrees that the first three elements are satisfied. Thus, the only dispute is whether the amounted deducted by the ENMAX companies was reasonable. 98 For the purposes of this case, I derive from the authorities three broad considerations that govern the determination of what is reasonable.

2. Transaction to be Assessed 99 Reasonableness must be measured with reference to the legal transaction to which the borrower was a party, not other contracts it might have made. The four-element test itself makes this clear by requiring that reasonableness be assessed by reference to the first three elements of the test, one of which is that the interest must be paid pursuant to a legal obligation. Thus, that legal obligation, not another possible one, is the reference point. 100 The need to focus on the borrower’s actual legal transaction is also clear from how the court dealt with the facts in Shell. The taxpayer 130 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

wanted US dollar financing, which it could have borrowed directly at market rates of 9.1% interest. Instead, it borrowed New Zealand dollars at 15.4% interest and exchanged those funds for US funds, and made a number of ancillary arrangements as part of these transactions. The effect of these transactions was to increase the deductible interest expense and ultimately obtain a lower after-tax cost of financing than if it had borrowed US funds directly. 101 The Federal Court of Appeal reduced the interest deduction to 9.1%, holding, among other things, that 15.4% interest was not reasonable when US funds could have been borrowed directly at 9.1%. 102 The Supreme Court of Canada rejected that conclusion and the minister’s arguments to the same effect. McLachlin J. (now C.J.C.), writing for the court, was concerned about a wide examination into the economic realities of the taxpayer’s situation, holding that “recharacterization is only permissible if the label attached by the taxpayer to the particular transaction does not properly reflect its actual legal effect”: paras 38 and 39. She held that Shell’s legal relationship with the foreign lenders came within the criteria of deducting a reasonable amount of interest on borrowed money used for the purpose of earning eligible income, and it was therefore entitled to the deduction based on the higher interest rate. 103 The Crown relies upon Shell for a different purpose. It argues that the amount paid for the New Zealand funds was deductible because “where an interest rate is established in a market of lenders and borrowers acting at arm’s length from each other, it is generally a reasonable rate” (Shell, para 34). It suggests, based on business management theory that (in the Crown’s words) “the appropriate price for an intercompany loan is the market price — the price that unrelated third parties would charge.” 104 There are two problems with this argument. First, Shell does not hold that an arm’s length market price determines what is reasonable, but (especially when it is higher than the taxing authority proposes) it is a strong indication of reasonableness. Second, Shell does not support holding one transaction to a market standard derived from another transaction. Its finding on the facts indicates that such an approach is an error of law. 105 The importance of focusing on the borrower’s actual transaction is also evident, although less analogous on the facts, in Singleton . The taxpayer was a partner in a law firm. He used funds paid to him from his capital account with the firm to purchase a home registered in his spouse’s name. On the same day, he borrowed money from a bank and ENMAX PSA Corp. v. Alberta G.H. Poelman J. 131

paid the funds back into his capital account. He then deducted the interest payments made on the bank loan against the income he earned from the firm. 106 The issue in that case was whether the third element of the Shell test, namely that the borrowed money must be used for the purpose of earning income, was satisfied. The tax court found that the purpose of the money was to purchase a house and this could not be altered by the “shuffle of cheques”: Singleton, para 32. 107 At the Supreme Court of Canada, Major J., for the majority, agreed with the taxpayer’s position. “It is this ‘shuffle of cheques,’” he wrote, “that defines the legal relationship which must be given effect”: para 32. It was an error to treat the arrangements as one transaction, when the taxpayer used the borrowed funds for the purpose of refinancing his partnership capital account with debt — the legal transaction to which the court must give effect: para 34. The Federal Court of Appeal recently applied these principles in TDL Group at para 25, reaffirming that “the reasonableness must be assessed by reference to the terms upon which the monies were lent and the purpose for which the borrower used the money”.

3. Arm’s Length Comparators 108 The interest that would have been paid in an arm’s length transaction may be a relevant factor, but it does not define what is reasonable. The question is whether the amount paid was reasonable from the borrower’s perspective in the subject transaction: Husky Energy Inc. v. Alberta, 2012 ABCA 231 (Alta. C.A.) at paras 44 and 46, (2012), 533 A.R. 385 (Alta. C.A.). 109 In Shell, the taxpayer needed access to US funds that it could have obtained directly at 9.1%. Nonetheless, it was reasonable for deductibility purposes to acquire those funds through a New Zealand lender at 15.4%. 110 The Federal Court of Appeal acknowledged when considering whether deductions were reasonable for purposes of another section of the Income Tax Act that paying fair market value for something is prima facie reasonable, but it does not necessarily follow that paying more than fair market value is unreasonable. “There may be circumstances in which a decision to pay more than fair market value for something is a reasonable decision”: Petro-Canada v. R., 2004 FCA 158 (F.C.A.) at para 64, (2004), 319 N.R. 261 (F.C.A.). 132 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

111 The Crown has submitted that the test should include an arm’s length criterion, referring to Morgan v. R., 2007 TCC 475, 2007 CCI 475 (T.C.C. [General Procedure]). In considering a deduction under section 8(1)(i) for “amounts as may reasonably be regarded as applicable .... to salary” under a contract of employment, in this case the wife of the taxpayer, the court approvingly quoted the Gabco test. In applying the test to the facts, Bowie J. held “I am of the view that no reasonable business person in an arm’s length relationship would have agreed to the billings that Mr. Morgan paid”: para 14. 112 At best, the case is weak authority for adopting such a significant qualification to the Gabco test. It contains no explanation for why the test was modified when it was applied to the facts, although perhaps only an arm’s length benchmark could establish reasonableness in that case. 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. 113 It is noteworthy that the Income Tax Act expressly imposes an arm’s length standard, rather than a simple reasonableness standard, in other contexts. For example, section 247(2) (formerly section 69(2)) applies to transfers of property or services between related corporations across national boundaries. This “transfer pricing” provision limits deductions to amounts that would have been reasonable if the parties had been dealing at arm’s length: see, for example, GlaxoSmithKline Inc. v. R., 2012 SCC 52 (S.C.C.), at paras 1, 19 and 35, [2012] 3 S.C.R. 3 (S.C.C.). This rein- forces the conclusion that reasonableness is not defined based on arm’s length comparators alone.

4. Range of Reasonableness 114 The standard of reasonableness does not require that a taxpayer’s deduction be ascertainable as a precise, correct amount. Rather, it allows a range of amounts to be considered reasonable. 115 A general description of how to determine reasonableness was given in Gabco Ltd. v. Minister of National Revenue, [1968] 2 Ex. C.R. 511, 68 D.T.C. 5210 (Can. Ex. Ct.). Gabco considered whether a family business’ payments to a family member and shareholder were reasonable. “It is not a question of the Minister or this Court substituting its judgment for what is a reasonable amount to pay,” said Cattanach J., “but rather a case of the Minister or the Court coming to the conclusion that no rea- ENMAX PSA Corp. v. Alberta G.H. Poelman J. 133

sonable business man would have contracted to pay such an amount having only the business consideration of the appellant in mind”: para 52. 116 This test has been adopted and applied by the Tax Court of Canada and the Federal Court of Appeal (the latter in Petro-Canada ), although not by any authorities binding on this court. In my view, it is a helpful statement of what is meant by “reasonable” in section 20(1)(c). 117 The Gabco test adopts the perspective of the borrower’s business considerations, which is consistent with the other principles I identified earlier. Thus, it refers to a particular set of circumstances, including the actual legal arrangement establishing the interest obligation. It does not make it impossible for taxing authorities to challenge a deduction, because it limits deductibility to the amounts reasonable business persons would contract to pay. Its phraseology infers, however, that there will usually be a range.

G. Burdens of Proof 118 For reasons set out earlier, the PILOT regime is intended to operate as a tax regime. Unless expressly stated in the legislation and regulations, it should be treated as such by the Crown and the courts. It is the mecha- nism the legislature chose to level the playing field between government and non-government entities in the electrical utilities sector. 119 There are particular rules regarding the burden or onus of proof in tax cases. They were established as a matter of the substantive law of taxation, without reference to rules of court: Johnston v. Minister of National Revenue, [1948] S.C.R. 486 (S.C.C.) at paras 7 to 9, [1948] 4 W.L.R. 321 (S.C.C.); Bayridge Estates Ltd. v. Minister of National Revenue, [1959] Ex. C.R. 248 (Can. Ex. Ct.) at para 7, (1959), 59 D.T.C. 1098 (Can. Ex. Ct.). They are codified in some statutes, but that does not change the fact that they are based on the substantive law of their subject matter, a common occurrence with many burdens of proof found throughout our legal system: Sopinka, Lederman and Bryant, The Law of Evidence in Canada, 4th ed. (Markham, Ont: LexisNexis, 2014) at para 3.1. 120 The burden of proof, summarized in Hickman Motors Ltd. v. R., [1997] 2 S.C.R. 336 (S.C.C.) at paras 92-95, Hickman Motors Ltd. v. R. (1997), 148 D.L.R. (4th) 1 (S.C.C.), is the civil balance of probabilities, borne by the taxpayer, as appellant from an assessment: Johnston, para 9; Trac v. British Columbia, 2007 BCCA 60 (B.C. C.A.) at paras 25 & 32, (2007), 61 B.C.L.R. (4th) 359 (B.C. C.A.). 134 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

121 The taxpayer also has an initial onus of adducing a prima facie case disproving the facts assumed by the Crown in determining the tax said to be owing. This burden applies only to the exact assumptions made by the minister: Hickman Motors, para 92. The taxpayer bears the burden because it has first-hand knowledge of its affairs and is in the best position to adduce relevant evidence to prove the material facts: Trac, para 25. The taxpayer can challenge the minister’s assumed facts, showing that one or more of the assumptions was wrong, or contend that even if proved, the assumptions do not support the assessment: para 27. 122 If the taxpayer meets this primary burden of proof, the onus and standard of proof revert to the normal rules of civil procedure, with the taxpayer having the onus to prove the material facts on a balance of probabilities, and the minister of having the onus to establish material facts to support a defence to the same civil standard, and the court weighing both parties’ evidence: para 32. 123 The burden of proof is important mainly in cases where either party fails to adduce evidence on a central point. This case does not turn on the application of the burdens of proof. Both parties addressed the issues fully through agreed facts, exhibits and examinations of witnesses.

IV Evidence A. Expert Witnesses 1. Introduction 124 Both sides presented extensive expert evidence related to corporate credit ratings and the issuance and pricing of corporate debt. ENMAX put forward two expert witnesses, while the Crown presented four.

2. ENMAX witnesses a. Robert Weiss 125 ENMAX presented Mr. Robert Weiss, who was qualified as an expert on corporate credit ratings. He has extensive experience with credit ratings, primarily at Standard & Poor’s, a prominent global ratings agency, and Global Capital Advisors, a consulting firm that advises and assists clients on obtaining credit ratings or having credit ratings reviewed by credit rating agencies. 126 Mr. Weiss was retained by the plaintiffs to establish an “implied credit rating” for each of ENMAX Energy and ENMAX PSA and the intercompany notes reflecting their respective debts to ENMAX Corp. ENMAX PSA Corp. v. Alberta G.H. Poelman J. 135

He followed as closely as possible the approach a credit rating agency would have taken to establish credit ratings, had they been applied for, as of the dates of the three notes. 127 Mr. Weiss gave his testimony in a clear, straightforward manner. He did not avoid difficult questions and gave simple answers where required, regardless of whether the point tended to support his overall conclusions. Nevertheless, in my view, key points of his analysis are based on arbitrary assumptions and choices. The clearest and most important of these are his use of the interest rate in the intercompany notes for his financial risk analysis, his inconsistent approach to relying or not relying on company assumptions (the interest rates, the 2007 financial forecast), and his refusal to give any degree of effect to implicit parental support. These will be discussed in more detail below.

b. Gregory Johnson 128 Mr. Mark Nichols, the managing director and founder of Global Cap- ital Advisors, prepared ENMAX’s expert reports on pricing the issuance of debt by ENMAX Energy and ENMAX PSA. Mr. Gregory Johnson joined Global Capital Advisors as a managing director in 2013. He was previously with Bank of America for 23 years, working primarily in debt capital markets. 129 Mr. Johnson worked with Mr. Nichols (and Mr. Weiss) in the preparation of the expert reports. Mr. Nichols could not testify due to serious illness, so with the consent of the Crown, Mr. Johnson testified on the issues addressed in Mr. Nichols’ reports. He was qualified as an expert in the issuance and pricing of corporate debt, and thus entitled to give opinion evidence on the pricing of debt as it related to the affairs of ENMAX. 130 Mr. Johnson was an impressive witness who testified in a clear, fair and straightforward manner throughout. Further, he fairly acknowledged a number of weaknesses in Mr. Nichols’ reports and readily acknowledged when he thought Mr. Nichols had wrongly criticized Dr. Gol- dreich, or when his approach seemed unsupportable.

3. Crown witnesses a. David Levey 131 Mr. David Levey taught in universities after obtaining undergraduate and graduate degrees in economics and then began working in the financial sector. From 1985 to 2004, he worked at Moody’s Investors Service as part of its credit ratings team. His specialty was in the ratings of na- 136 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

tional governments (including Canada), sub-sovereign entities (states, provinces, regions and cities) and government-owned companies, such as Crown corporations and government-owned utility companies. 132 He was qualified as an expert on credit ratings, credit rating analysis and the credit rating process, entitled to give opinion evidence on those matters as they pertain to ENMAX. The Crown asked Mr. Levey to prepare an expert report setting out the credit ratings he would have assigned to the three notes at issue, as of their respective dates. 133 Mr. Levey’s testimony was given with conviction and obviously based on extensive experience and knowledge of the credit rating industry. Apart from the first part of his cross-examination (which occurred near the end of his first day of testimony), he was confident and committed to his opinions throughout. Mr. Weiss and Mr. Johnson appeared, at times, as undertaking the responsibility of explaining and justifying certain opinions, and advocating positions. That is not to detract from their integrity — each of them fairly gave ground as occasion required. On the other hand, Mr. Levey testified to an analysis and conclusions to which he remained committed throughout. He is obviously convinced of the correctness of his analysis and conclusions. 134 Furthermore, Mr. Levey’s approach is more convincing on some key points. His method of selecting the interest rate to use for financial projections is much more convincing than Mr. Weiss’s approach, which as Mr. Weiss fairly acknowledged, has an element of circularity to it. 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.

b. David Goldreich 135 Dr. David Goldreich was qualified as an expert for the Crown in the areas of corporate finance, capital markets, and the analysis of pricing of fixed income securities. 136 He is currently a professor at the Rotman School of Management, University of Toronto. He has published extensively in peer-reviewed journals, given numerous presentations, and conducted extensive research in his fields. However, he has not worked in investment banking or on trading desks. His experience is limited to academic teaching, pub- lishing and research. ENMAX PSA Corp. v. Alberta G.H. Poelman J. 137

137 In his first report, he set out to estimate the market rate of interest for the three intercompany notes had they been offered in the Canadian market place in the form of a bond between their issuers and third party buyers on their stated dates. His analysis proceeded on the assumption that each offering had a BBB or equivalent credit rating. His general approach was to look at other bonds with similar dates and interest rates, average the results, and then make necessary statistical adjustments. 138 Dr. Goldreich was a confident, articulate witness, thoroughly grounded in his field. While his only experience is as a scholar, his evidence disclosed no weakness attributable to lack of experience working in the field.

c. Bradley Wendt 139 Mr. Bradley Wendt, another Crown witness, was qualified as an expert in the areas of bond underwriting and fixed income security pricing. He has significant industry experience in the field of investment banking. He explained that his role is often to assist clients as they follow the credit rating process, working with them in conjunction with the rating agency at every stage as necessary to obtain a credit rating. Typically, he would work with a client to obtain two independent credit ratings, and sometimes three. 140 Ratings on bonds are crucially important, because they provide an independent opinion of the credit quality of the debt instrument. It affects the cost of capital. 141 He explained the very extensive process involved in obtaining a credit rating. An investment banker is always attempting to get the highest credit rating. There is also a natural delineation between investment grade ratings and non-investment grade ratings. This is primarily because there is a significant number of potential buyers, particularly retail buyers, who can only buy bonds classified as investment grade. Investment grade categories are considered relatively risk free as compared to the categories below the notional line. 142 He agreed that institutional investors do their own independent research, comparing their opinion with the opinion of two or three rating agencies. However, they all work from the same source documents, and rarely is there a wide divergence. If an investor grossly disagrees with a rating service, they just do not buy the bond. 138 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

143 Mr. Wendt presented and spoke with impressive demeanor, consistent with his background. He was confident and well-spoken but concise. I found him to be a fair and credible witness.

d. Eric Powers 144 Dr. Eric Powers was qualified as a Crown expert in the areas of fixed income securities, including make-whole call provisions. He is Associate Professor of Finance at the Moore School of Business, University of South Carolina. 145 He has extensive teaching and research experience. He has published a number of peer reviewed papers relating to make-whole call provisions and his research has required him to review hundreds of bonds with make-whole provisions. He has then analyzed, from market data, the effect make-whole provisions have on the yield-to-maturity that would be demanded by arm’s length investors.

B. Expert Evidence 1. Credit rating a. Business risk and financial risk 146 Mr. Weiss and Mr. Levey each adopted a broadly similar approach to establishing credit ratings. They first assessed the issuer’s business risk, which requires a qualitative analysis of the company and its business. Business risk analysis requires assessing the predictability of the company generating adequate cash flow to meet its obligations. Determining a rating requires looking at volatility in the company and its industry, over an entire business cycle — both good and bad times. 147 They then assessed financial risk, a quantitative analysis of the company’s financial performance, both past and as forecast. The analysis takes into account the industry within which an issuer operates and the regulatory framework governing its business. They then considered whether implicit support could be found based on its relationship to a parent owning 100% of its shares, and finally, made adjustments for the nature of the debt, such as whether it was secured, unsecured, or subordinated. 148 Mr. Weiss considered a number of comparable companies in the course of his analysis. For the most part, he looked at the same comparable companies for ENMAX Energy and ENMAX PSA, as he considered them both to be unregulated companies in the electricity industry. He ENMAX PSA Corp. v. Alberta G.H. Poelman J. 139

chose all unregulated companies for comparison, notwithstanding that ENMAX Corp.’s Treasury Group used regulated companies as comparables when making recommendations on the appropriate capital structure. 149 Mr. Weiss found both issuers to have heightened business risks, with ENMAX PSA’s risk to be even higher than ENMAX Energy’s (for both 2006 and 2007). For ENMAX Energy, he noted uncertainty and turmoil in the electric utility industry going through a period of deregulation. 150 He acknowledged, however, that the regulated rates that remained available to a large portion of customers reduced the business risk. This aspect of the business was about 42% in 2004 and projected to increase to nearly 60% by 2009. In addition, about 20% of ENMAX Energy’s revenues in 2004 came from the default rate, although it was not a rate approved by the regulator. 151 Mr. Weiss also believed the likelihood of margin erosion, an out- growth of deregulation, presented significant risks for ENMAX Energy. The erosion would occur as existing contracts came up for renewal in an increasingly competitive market. 152 Mr. Weiss also considered senior management turnover, lack of geo- graphic diversification and the heavy concentration of ENMAX’s market in the Calgary area, which itself is exposed to significant economic disruption because of the dominance of the oil and gas sector. 153 Mr. Weiss rated ENMAX Energy’s business risk as “weak” on a numeric scale, or mid-to-low in the BB category. This compared to Stan- dard & Poor’s rating of ENMAX Corp.’s business risk as average, and the fact that some of Moody’s risk factors might tend to indicate a medium risk for ENMAX Energy. 154 For ENMAX PSA, he emphasized the single asset nature of its business and its exposure to market risk by selling into a spot market. 155 By contrast, Mr. Levey found both entities to be a medium business risk (ENMAX Energy being in the lower-risk part of the range). He viewed ENMAX Energy as having a mix of regulated and unregulated business, holding the view that roughly 60% of its sales were covered by some form of regulation, which tends to moderate risk. ENMAX Energy had a very strong position in the Calgary area and its own forecast was that it would grow along with the market. He recognized the ENMAX experts’ reference to the likelihood of some margin erosion, but he did not see that as a big concern. The goal of an industrial company, he said, 140 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

is to maximize profits, not profit margins. He noted references to some management changes, but did not see them as being an unusual or significant factor. 156 The main difference between the experts in assessing financial risk was the interest rate they used to drive the financial analysis. In analyzing ENMAX Energy’s financial prospects, Mr. Weiss used 11.5% as the interest rate for payments on the $497 million debt. He considered this acceptable practice: when a company comes in with a financial position, the rating agency should use the company’s suggested rate. He acknowledged an element of circularity in the analysis: using an 11.5% interest rate to calculate key financial metrics, which played a role in determining the credit rating, which played a large role in determining an interest rate the markets would have determined for a debt issuance. 157 In his analysis, Mr. Weiss did not review ENMAX Corp.’s 2004- 2008 Base Strategic Plan, in which projections assumed an unregulated interest rate for ENMAX Energy of 6.8%. Likewise, he was not aware that in its application to the AEUB, ENMAX Energy requested carrying costs for 2005 based on an assumed interest rate of 5.777%. 158 Further, Mr. Weiss confirmed that he used interest charges for all of 2004 in his financial analysis, even though the debt was not incurred until December 2004. By using the rates set in the intercompany notes for his financial projections, Mr. Weiss obtained worse results than Mr. Levey, who used a much lower rate derived from data based on the type of business risk he assumed. 159 In assessing ENMAX Energy’s financial risk, Mr. Weiss noted its projected profitability was weakening by margins falling off over time. The company was very highly leveraged; because of the $497 million in debt the cash flow position would be tight, in large part because of the required interest payments on the intercompany note. 160 Mr. Levey prepared a set of pro forma financial projections representing the anticipated effects of the debt transaction. He used ENMAX’s financial projections, but considered it necessary to arrive at his own assumption of an interest rate. He assumed a 5.8% interest rate, finding this to be a typical rate for a utility company with a medium business risk. 161 He strongly disagreed with Mr. Weiss’s use of the intercompany note interest rate of 11.5% when analyzing financial risk. This approach, he said, was arbitrary and circular. Putting a very high interest rate into the financial projections would lead to a very poor financial risk, notwithstanding a better business risk, and generate a poor credit rating, and thus ENMAX PSA Corp. v. Alberta G.H. Poelman J. 141

a high interest rate. Mr. Levey stated that it is standard rating agency practice to begin the quantitative portion of a rating analysis by utilizing an interest rate consistent with the company’s business risk. 162 To test his analysis, he also did projections using Mr. Weiss’s BB business risk rating, which lead to an assumed interest rate of 6.25%, using the same data that generated his 5.8%. He also did projections based upon interest rates of 6.8% and 7.8%. None of these calculations affected his ultimate credit rating. 163 Mr. Levey acknowledged that in Standard & Poor’s analysis of EN- MAX on a consolidated basis, it added a $240 million capital adequacy charge (“CAC”) to total debt, which represents a debt-like obligation to account for swings in capital requirements associated with trading operations. Mr. Weiss used the same approach. Mr. Levey argued the practice was not established and he declined to add the CAC. Rather, he treated it as an operating cost. His approach reduced the company’s profit margin and had the effect of reducing total debt load, as compared to Mr. Weiss’s approach.

b. Implied credit profile and parental support 164 After completing the business risk and financial risk analyses, Mr. Weiss assigned an implied credit profile of B to ENMAX Energy. This was his credit rating for ENMAX Energy as the issuer, on a stand-alone basis. The rating put ENMAX Energy well below the line commonly used by investors (although not formally by credit rating agencies) dividing investment grade credit ratings and non-investment, high yield or speculative grades. By contrast, Mr. Levey concluded that the stand- alone credit profile for ENMAX Energy was in the BB rating category. 165 As part of his credit ratings for ENMAX Energy and ENMAX PSA as issuers, Mr. Weiss addressed whether their ratings might be improved by implicit support from their parent, ENMAX Corp. His opinion was that there must be a compelling reason to expect a parent to provide support to a subsidiary in order for the credit rating to be boosted. He found no compelling reason (even for support for one missed payment). Fur- ther, because ENMAX Corp. was 8 and 9 notches, respectively, above ENMAX Energy and PSA, the gap was too great for any form of “credit lift.” In his view, the greater the gap, the more need for evidence of likely parental support. 166 He acknowledged that ENMAX Corp. provided guarantees to both subsidiaries as required for their participation in various aspects of their 142 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

markets. There were potential economic incentives for ENMAX Corp. to support the subsidiaries in the event of difficulty, but it did not persuade him to improve their ratings. 167 He was presented with examples of ratings in which he had been involved at Standard & Poor’s, where subsidiaries of Amoco were given credit ratings better than their stand-alone profiles would justify, because of implicit parental support. He did not view these as comparable. Fur- ther, he was not persuaded by the fact that ENMAX Corp. waived covenants and accelerated the date of its second loan to ENMAX PSA as indications that parental support would be given in financial difficulty. 168 Central to his considerations was that ENMAX Corp. could not use regulated assets to support its subsidiaries and that the regulated business (transmission and distribution) could survive even if the unregulated activities of ENMAX PSA and ENMAX Energy did not. Simply put, he believed that if the subsidiaries encountered financial difficulties, there was no compelling reason to believe that their parent would come to their aid. 169 Mr. Levey, on the other hand, considered the willingness and ability of ENMAX Corp. to support ENMAX Energy during times of financial stress. He concluded that many of the stand-alone risks associated with ENMAX Energy would have been mitigated by a strong likelihood of parental support. 170 Willingness would be motivated by business considerations, mainly the strong integration within the ENMAX group. There would be a financial impact on ENMAX Corp. if support was not forthcoming, because of guarantees it had given and the significant portion of its revenues being generated by ENMAX Energy. Finally, ENMAX Corp.’s reputation would be damaged if it did not support ENMAX Energy, likely leading to a down grade of its own credit rating, and a damaged reputation with suppliers and creditors, staff, regulators and the credit standing of the City of Calgary as sole shareholder. 171 He disagreed with Mr. Weiss’s argument that recognizing implied support of ENMAX Energy with respect to third party debt would add the debt to ENMAX Corp.’s consolidated financial statements and reduce its credit ratings. Mr. Levey observed that the debt was not required for operations and would have gone directly into cash. In other words, there would be no increase in “net debt.” 172 In his view, ENMAX Corp.’s management was running a large integrated company and had significant responsibilities to its shareholder. It ENMAX PSA Corp. v. Alberta G.H. Poelman J. 143

was unlikely to turn back on a key part of the overall business of the family group. 173 Mr. Levey increased the credit rating of ENMAX Energy from BB to BBB+, an increase of four steps in the credit rating scale for the 2004 and 2006 notes. He acknowledged this was a large step, but said that is typical where, as here, there is a strong likelihood of parental support. He acknowledged he could not say what investors would do, but believed his approach was consistent with rating agency practice. In conclusion, he observed that it was an artificial bond to begin with — creating a 91% debt to capital ratio, with all of the cash being swept out of the subsidiary. It would be very difficult to take this type of bond to market; it would need a lot of implicit parental support. 174 For the 2007 note, the increase was only one notch. (The improved forecast was driving a much higher credit rating, so that a four-notch increase would have put ENMAX PSA’s credit rating above that of its parent, a very anomalous result.)

c. Nature of the debt 175 Finally, Mr. Weiss reduced the credit rating of each note by 2 notches, to reflect what he referred to as deeply subordinated debt. In his view, because the debt was subordinated to other obligations, accepted practice justified the further downgrade. Accordingly, the rating he believed would be applicable if ENMAX Energy issued its $497 million debt to the capital markets in December 2004 would be CCC+. 176 Mr. Levey agreed that a decrease was necessary, but did not see the debt as deeply subordinated. There is no such notion, he said, as “deeply subordinated debt” in rating practice. Further, he said that in fact there was no subordination to existing debt in the note itself. All of the subordination was to regular course-of-business, ongoing obligations behind which any debtor would rank. No creditor would want to rank ahead of these obligations, as it would bring the business to a halt and everyone would go into bankruptcy right away. 177 Mr. Levey followed Moody’s practice of reducing the rating by one step for subordinated debt, if the rating was in the investment grade category. Thus, Mr. Levey’s final credit rating for the 2004 note was BBB.

d. 2006 and 2007 notes 178 Mr. Weiss also addressed the implied credit profile for ENMAX PSA’s June 30, 2006 debt of $309 million. 144 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

179 As a single-asset entity, it had zero financial flexibility. There were no other sources of cash flow or assets if the company got into trouble. It was exposed to market risk, because it sold electricity from the Battle River PPA into the spot market. He concluded that the business risk profile for PSA was “vulnerable”, translating to a B — rating. 180 Its financial risk profile was affected by negative ratios, calculated by using the 10.3% interest rate set by the intercompany note. Other negative factors were that some of the volumes from the Battle River PPA would decline significantly after 2013 and prices were expected to decline by 2012. 181 Mr. Weiss found ENMAX PSA’s credit rating as an issuer to be B — . Because the debt was subordinated, the overall rating for ENMAX PSA’s debt issuance was reduced by 2 notches, to CCC. 182 Mr. Weiss also rated ENMAX PSA’s $58.8 million debt of January 15, 2007. This debt was incurred earlier than had been anticipated when the June 5, 2006 debt was incurred. Thus, ENMAX Corp. advanced the timing of the anticipated second loan and had to waive covenants because ENMAX PSA was unable to meet its debt coverage ratios. 183 The parties took significantly different approaches to the financial projections for ENMAX PSA’s 2007 note. The pricing memorandum contained a positive, improved forecast. Mr. Weiss was suspicious of this change and on his analysis of projected prices and other economic information he adopted a less optimistic forecast. Further, he added a PPA contingent liability in his 2007 analysis that had not been applied for the 2006 analysis. (He had also not used a PPA contingent liability for EN- MAX Energy’s 2004 rating.) In the result, Mr. Weiss gave ENMAX PSA an issuer credit rating of B — and a rating for the debt of CCC. 184 Mr. Levey adopted the more optimistic forecast of the pricing memorandum, giving much better financial projections, although he acknowledged that in actual practice some independent examination of the improved forecast would have been necessary. 185 Mr. Levey followed the same methodology in establishing credit ratings for the 2006 and 2007 debts of ENMAX PSA as he did for ENMAX Energy’s 2004 debt. He found the same business risk in both years, mainly a medium business risk (but in the higher-risk end of this range). His conclusion was based on the relative riskiness of ENMAX PSA’s unregulated activities, as its business was more exposed to commodity and price fluctuations. He found the same business risk for both 2006 and 2007. ENMAX PSA Corp. v. Alberta G.H. Poelman J. 145

186 He used higher interest rates in assessing financial risk, because the business risks for ENMAX PSA were somewhat higher than for EN- MAX Energy. His comparables were primarily power and energy trading companies, considered riskier businesses. He used an interest rate of 6.7% for the 2006 note and 6.3% for the 2007 note, the change resulting from the fact that the underlying treasury interest rate had fallen between the two notes. 187 The financial risk for 2007 was also affected by improved financial projections generated by ENMAX. He assumed the company had reasons to improve its forecast and found no reason to doubt it. 188 The results of the stand-alone analyses were that ENMAX PSA was given a rating of BB for 2006 and BBB for 2007 — the latter an increase of three steps in the credit rating scale. 189 Mr. Levey then considered the willingness and ability of ENMAX Corp. to provide support to ENMAX PSA in times of financial stress. As with ENMAX Energy, he found there to be strong likelihood of parental support. He took into account many of the factors he considered with respect to parental support of ENMAX Energy. In addition, he observed that ENMAX PSA was created as a special purpose entity, not an operating subsidiary, to acquire the Battle River PPA and sell its power into the power pool. It was not an independent business and the Battle River PPA was a significant strategic asset as a main source of power for ENMAX Corp. 190 Thus, on the basis of parental support, the 2006 credit rating was increased 4 notches, to BBB+; and the 2007 rating was increased by 1 notch, to BBB+ (the lesser increase for 2007 being because an increase of 4 notches would have given it a higher rating than ENMAX Corp.). 191 Mr. Levey used the same analysis regarding subordinated debt for ENMAX PSA in 2006 and 2007 as he used for ENMAX Energy. Thus, there was a one notch reduction in each of 2006 and 2007, leading to final ratings of BBB for 2006 and BBB for 2007. 192 Mr. Levey then conducted credibility checks, based on historic default statistics and an economic equivalent “thought experiment” to confirm that his credit rating determinations were plausible.

e. Summary 193 In sum, Mr. Weiss gave the 2004, 2006 and 2007 notes the following credit ratings, respectively: CCC+, CCC, and CCC. By contrast, Mr. Levey’s final credit rating was BBB for all three notes. 146 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

2. Pricing a. Benchmarks 194 Mr. Johnson was asked to give an opinion on whether the interest rate on each intercompany note was reasonable, assuming the terms set out in the agreements and pricing memoranda, and using the credit rating determined by Mr. Weiss. In each case, he found the rates were reasonable. The standard of reasonableness was based on what the chief financial officer of the issuing company would apply in evaluating the debt opportunity. 195 Mr. Johnson explained that although Mr. Nichols would have preferred to base his opinion on the Canadian bond market, since the issuing corporations are Canadian, there was not a large enough market for high yield bonds in Canada so Mr. Nichols turned to US data. 196 Mr. Johnson explained the difference between high yield, non-investment grade or speculative markets on the one hand, and investment grade bond markets on the other hand. The high yield market is more volatile over time, partly because it has a more limited number of investors. Fur- ther, many institutional investors such as pension funds and mutual funds can only invest limited amounts in high yield securities. He pointed out that as a general rule, the lower the credit rating the higher the interest rate — but there are anomalies, showing that the relationship is not linear. 197 Mr. Johnson explained that he looked for two benchmarks, one from the secondary market (trading of bonds after their issuance) and the other from new issues. For each of the notes, Mr. Johnson began by looking at secondary trading data, selected in a band around the credit rating assigned by Mr. Weiss and delineated by industry segmentation. The secondary trading data would establish a benchmark, which in the case of the ENMAX Energy note was 8.30% (10.28% and 9.80% for the EN- MAX PSA 2006 and 2007 notes, respectively). 198 According to Messrs. Nichols and Johnson, however, the secondary trading levels suffer from distortion because the pricing levels represent hundreds of willing buyers and sellers trading relatively small amounts, a different environment than newly issued bonds. He considered data from newly issued bonds to be more valuable because, in his and Mr. Nich- ols’s opinion, yields are generally higher on newly issued bonds than on comparable bonds trading in the secondary market. ENMAX PSA Corp. v. Alberta G.H. Poelman J. 147

199 Thus, the next step was to examine data from newly issued bonds. This data is much thinner, and because Mr. Nichols limited his analysis to the utility sector, he obtained a very small data sample. Mr. Johnson acknowledged that this could easily lead to distortions if there were idio- syncrasies and the data showed a fairly large range among yield-to-maturity values. The new issue data was adjusted for date (based on changes in treasury yields between the comparable and the issuance date of the note under consideration) and credit rating levels (estimating, from statistics, the yield differences between similar bonds issued by companies at different credit ratings). 200 The benchmarks generated from the secondary market and new issue comparators were 10.01% for the 2004 ENMAX Energy note, and 10.95% and 9.75% for the 2006 and 2007 notes, respectively. 201 Dr. Goldreich, for the Crown, took a similar approach and looked at yields for comparable bonds trading in the secondary market on the date of valuation, as well as coupon rates of comparable bonds issued close to the date of valuation. He explained that each approach has advantages and disadvantages. The secondary market allows examination of data from trades on an exact date, but the disadvantage is that the bonds may be less comparable in terms of remaining maturity and coupon and thus require adjustment for these features. Using data from newly issued bonds enables better comparisons, but requires using bonds issued before the date of valuation. Thus, adjustments must be made for the time of issuance. 202 The general statistical data and comparables on which he relied went outside what Mr. Nichols considered the relevant industry sector. It was necessary for Dr. Goldreich to refer to US data for some purposes, particularly in his rebuttal report when determining interest rates if poorer credit ratings, as determined by Mr. Weiss, were assumed. Dr. Goldreich explained that he took this approach because, in general, investors care about risk and return. The competitors for a bond being issued or traded are not limited to a particular industrial sector. If bonds have similar ratings, they have similar risks, and should give a similar return. This is what investors expect. 203 Dr. Goldreich was asked to respond to criticisms about a number of his statistical analyses and adjustments. He explained that the methods are standard, well-accepted forms of analysis, commonly used by everyone analysing this type of data. Every MBA student learns these tech- niques and the investment community applies them as well. 148 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

204 He was asked to respond to the suggestion that his approach is highly theoretical, whereas in “actual life” a transaction would involve dialogue and feedback between a number of players. Dr. Goldreich explained that he is not introducing theoretical elements, but making adjustments to improve the comparison. Further, he said that no one is in a position to express an opinion based on telephone conversations and meetings between the relevant parties. The only method available is to look at the data that even in “actual life” would be behind those conversations. 205 After doing his analysis for both secondary trading data and new issues, Dr. Goldreich did numerous checks, concluding that both approaches were valid. He was comforted to see that the results were similar. He averaged the results and developed a range based on his main approaches. 206 In conclusion, assuming BBB credit ratings, Dr. Goldreich’s opinion was that the respective market rates of interest for the three intercompany notes would have been as follows: a) 2004, between 5.19% and 5.66%, with a central estimate of 5.43%; b) 2006, between 5.00% and 5.62%, with a central estimate of 5.31%; and c) 2007, between 4.99% and 5.49%, with a central estimate of 5.24%. 207 If assuming the credit ratings determined by Mr. Weiss rather than those of his fellow Crown expert Mr. Levey, Dr. Goldreich’s ranges would be as follows: a) 2004, between 8.58% to 9.38%; b) 2006, between 9.38% and 10.18%; c) 2007, between 8.94% and 9.74%

b. Fundamental factors 208 Messrs. Nichols and Johnson then added basis points for “fundamental factors impacting pricing.” These non-empirical factors included industry risks, management changes, structural and subordination issues, a first-time issuer premium, covenant protection, and pre-payment and make-whole provisions. Mr. Johnson argued that even though these factors are considered by a credit rating agency in establishing a credit rating, as was done by Mr. Weiss, they could be considered again when pricing the debt. In his view, it would not double count these factors, ENMAX PSA Corp. v. Alberta G.H. Poelman J. 149

because there can be wide ranges in yields between bonds in the same credit rating categories. He did not quantify the effect of each factor, but rather assumed that the aggregate effect would add 75 to 150 basis points to the interest rate. 209 One of the fundamental factors was a “substantially altered investor risk perception” regarding the stability of the utility industry. This resulted from wide-spread deregulation and accompanying growth of unregulated ventures and competition. 210 Mr. Johnson acknowledged that there was some increased maturity in the deregulated utilities environment over the years from the first note, 2004, to the second and third notes of 2006 and 2007. Further, he acknowledged that investor concern about changes in the utility industry was much more of an American than Canadian problem, given serious difficulties in some states. Nevertheless, the same increase in basis point ranges was used in all three opinions, and the commentary regarding utility industry risk was largely unchanged. 211 Another fundamental factor was the fact that the three bonds were subordinated to other debt obligations of the issuers. Mr. Johnson acknowledged that this factor was specifically addressed in the credit rating assigned by Mr. Weiss. However, he said the debts under consideration were “deeply subordinated” and this justified a further increase in the yield. Among other things, they were subordinated in the sense that the company had unrestricted ability to take on additional debt, which would be senior to the debt in the intercompany notes. 212 For similar reasons, the covenants (imposing restrictions on collat- eral, payment terms and level of income of the issuer) were considered in the credit rating, and again in the debt pricing. Mr. Johnson justified this by expressing the view that the covenants in the three notes were “light” as compared to many types of covenants undertaken by issuers. 213 Likewise, he believed a higher yield was necessary because of the prepayment rights and make-whole provisions in the notes. Again, the fact that this was considered in the credit rating did not preclude it from being considered again at the pricing stage. 214 He acknowledged that the concerns about management turnover at ENMAX Corp. and its subsidiaries, as one of the fundamental factors, was probably overstated by Mr. Nichols, and in any event should not have been considered an ongoing factor in the 2006 and 2007 notes. 150 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

215 He agreed that the reports contained no reference to fundamental factors that would be positive from the issuers’ perspective and tend to lower the necessary yield. He testified that positive factors were considered, even though not set out in the report. His explanation was that investors tend to focus on negative factors. Some positive factors might have been significant intercompany linkages, parental guarantees, the percentage of ENMAX Energy’s revenues that had an element of regulation, and the significant market value of the Keep Hills PPA. 216 Mr. Wendt, for the Crown, strongly disagreed with the approach of Mr. Nichols and Mr. Johnson in adding interest rate basis points for eight non empirical risk factors, including new issuer status, Canadian deregulation uncertainties, note subordination, weak financial covenants, off- market prepayment/make whole provisions, management turnover, post- Enron and PG&E implosions, and industry conditions. Mr. Wendt said that, in the very exhaustive credit rating process, all of these factors are carefully considered. Using them to increase the interest rate again when addressing price has the effect of overstating the interest rate on the intercompany notes. He emphasized that his opinion was based not on academic study, but on his own experience in capital markets. Identifying bonds by industry sectors is important in marketing. It is useful to talk to people in a particular area and use comparables that they know. Each investor is a trader, who has a speciality. 217 Mr. Powers, however, agreed that an additional five basis points is typical for a make-whole callable bond. Because of the poorly-drafted provisions in the intercompany notes, the premium might be 10 basis points at most, as compared to the usual 5 basis points. He disagreed with the opinion in Mr. Nichols’ report that a substantial premium spread would be required. The additional yield needed for the intercompany notes is, in his characterization, only a slightly higher amount than for a typical make-whole provision. 218 Dr. Goldreich also was critical of Mr. Nichols’ report. Apart from the fact that they started at different credit ratings, in his opinion Mr. Nichols failed to properly adjust for the presence or absence of embedded options and whether make-whole provisions existed. He found many of the price increases Mr. Nichols added double-counted what had already been addressed in establishing the credit ratings. He also concluded that it was improper to add the saved cost of debt transactions, because that would be of no interest to bond purchasers. In his view, the credit rating is the ENMAX PSA Corp. v. Alberta G.H. Poelman J. 151

biggest determinant of a bond’s yield, but there is some give and take within the credit rating range. 219 After the addition of 75 to 150 basis points for fundamental factors, Messrs. Nichols and Johnson’s next step was to compare the preliminary new issue benchmark against the limited number of comparables in the new issue data. Again, Mr. Johnson acknowledged that it was a small group of comparables, with a large range in yield to maturity values, and included companies with different business risks. This comparison did not result in any adjustments to the interest rate. 220 In their opinions regarding the 2006 and 2007 notes, Messrs. Nichols and Johnson found that the fundamental factors had the same effect of increasing the interest rates by 75 to 150 basis points, even though EN- MAX Energy and ENMAX PSA had different sources of income, and despite the lapse in time between the three notes. Mr. Nichols acknowledged that a new issue premium would probably not be applicable for the 2007 note (as ENMAX PSA had issued debt in 2006), and that there were other changes such as the length of time since management changes and the maturing of the deregulated electricity market in Alberta. Never- theless, no change was made to the necessary increase in yield for the fundamental factors. 221 Further, Mr. Nichols made adjustments to data to account for prepayment and make whole provisions in the data sources for the 2007 note, which had the effect of increasing the interest rate by 17 basis points. Had he used the 2007 note approach for the analysis of the 2006 note, it would have reduced the interest rate by 21 basis points. 222 Mr. Nichols’ report gave no credit, in the form of interest rate reductions, for the possibility of implicit support. In Mr. Johnson’s experience, lenders give minimal if any value to implicit support. If they are to recognize the possibility of parental support, they want to see an express guarantee. 223 After numerous other calculations, including adding basis points for the cost of debt issuance, adding to the 2004 note and subtracting from the 2006 and 2007 notes the costs of a 10-year cross-currency swap, and adjusting the notes to reflect monthly rather than semi-annual payments, Mr. Johnson opined that an interest rate between 11.25% and 12.25% would have been reasonable for the 2004 note; 11% to 12% for the 2006 note and 10% to 11% for the 2007 note. Thus, in his view, the interest rates set in the three notes, namely 11.5%, 10.3% and 9.9% were reasonable. 152 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

c. Comparison of experts 224 In commenting on the expert reports of Dr. Goldreich, given on behalf of the Crown, Mr. Johnson summarized the major issues as the following: a) They started from different credit ratings — Dr. Goldreich assuming investment grade ratings. Dr. Goldreich was therefore able to use data from the Canadian markets, while Messrs. Nichols and Johnson were limited to the American high yield markets. b) Dr. Goldreich used regulated companies in his comparables, while Global Capital Advisors believed the data should be limited to unregulated utilities. c) Dr. Goldreich used data relating to all business sectors, while Global limited themselves to utilities. d) Dr. Goldreich did not consider “fundamental factors” in his calculations. e) Dr. Goldreich relied on secondary trading data averages to establish his benchmark rates, while Global relied primarily on data from new issuances. f) Mr. Johnson testified that he had no real problem with Dr. Gol- dreich’s analysis and calculations. However, in his view Dr. Gol- dreich should not have based his opinion on the averages in the data, but should have gone on to consider the increase in basis points required by fundamental factors. 225 In his testimony, Mr. Johnson explained how one could determine comparable starting points for interest rates from the data used by Global and Dr. Goldreich. Before consideration of fundamental factors and costs for debt issuance and currency swaps, and assuming credit ratings as similar as possible (given limitations in Canadian data used by Dr. Gol- dreich for lower credit ratings), their starting points would be as follows: Date of Global Goldreich Goldreich New Note Secondary Data Issuance Data 2004 10.01 8.91 8.55 (or 10.03) 2006 10.95 10.63 10.08 (or 9.77) 2007 9.75 10.12 9.33 226 The bracketed interest rates indicate Mr. Johnson’s observations that for the small data sample for new issuances used by Dr. Goldreich, there can be significant variations in yield despite only one notch difference in ENMAX PSA Corp. v. Alberta G.H. Poelman J. 153

credit rating — most anomalously, for the year 2004 where a credit rating of CCC+ shows a yield of 8.55, while one notch higher, B-, has a rate of 10.03.

C. Discovery Evidence 227 ENMAX read in evidence from its examination for discovery of James Ackroyd, representative of the Crown. 228 Through the transcripts and exhibits submitted as part of the read-ins, it was shown that the initial audit of ENMAX Energy, conducted by the Minister of Finance’s Tax and Revenue Administration, Audit Branch concluded as follows: Based on TRA Audit Team meeting on April 25, 2008, due to the burden of proof on the Minister to prove the rate is “unreasonable”, due to any further audit or review requiring expert technical knowledge of valuation and the capital markets, and due to the fact that the taxpayer has exhibited due diligence in researching an appropriate rate as evidenced by the documents provided, it was concluded that TRA would not have a strong case to challenge the rate in court. Audit will therefore not challenge interest rate on the $497 million inter-company loan, and conclude the audit without proposing any further adjustments. 229 Subsequently, the Minister retained an expert to conduct an analysis. In arriving at his conclusion on credit ratings, the expert expressed the opinion that “had the $497 million, 11.5% unsecured subordinated notes been sold to the public in 2004, the buyers would have required cross- guarantees from both ENMAX Corp. and ENMAX Power.” The Crown confirmed, during the examinations, that this was the expert’s opinion. However, he was not called at trial, as he is no longer available to consult for the province of Alberta. 230 It was confirmed during the examination that the Crown used the credit ratings established by its expert in developing, through its internal resources, what it considered to be the proper interest rate.

V Findings A. Introduction 231 As noted above at para 97, of the four elements comprising a section 20(1)(c) analysis, only the fourth is at issue. It must be determined, then, whether the amount of interest deducted was reasonable. 154 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

232 To adapt the Gabco test, can it be said that no reasonable business person would have contracted to pay such an amount, having only the business considerations of ENMAX Energy and ENMAX PSA in mind?

B. The Transaction to be Measured 233 For reasons given earlier, the question must be answered based on the transaction pursuant to which the legal obligation to pay interest was incurred. It is of no moment that the borrowed money might have been acquired through another transaction, just as in Shell reasonableness was not based on measuring what Shell would have paid by borrowing US funds directly rather than by exchange after first borrowing New Zealand funds. 234 In this case, the transactions under which the legal obligation to pay interest were incurred were intercompany loans by wholly-owned subsidiaries from their parent. Perhaps the funds could have been borrowed by issuing bonds on public markets, but that is not the transaction to be considered. 235 Affiliated companies, including wholly-owned subsidiaries and their parent, are entitled to have subsidiaries borrow from the parent rather than third parties. The loan instruments here fairly set out the legal terms of the loans, so there is no basis to evaluate the transaction under a different model. As McLachlin C.J.C. said, “recharacterization is only permissible if the label attached by the taxpayer to the particular transaction does not properly reflect its actual legal effect”: Shell, at para 39.

C. Arm’s Length Check on Reasonableness 1. Introduction 236 It must then be determined whether the interest paid pursuant to the intercompany notes was reasonable, in the context of ENMAX Energy and ENMAX PSA borrowing from ENMAX Corp. Reasonableness is a factual inquiry. The factors relevant to its assessment vary according to the case. The parties agree that what would occur in an arm’s length transaction is relevant, although they differ on what arm’s length transaction should be used for comparison purposes and what effect should be given to the results. 237 To select a meaningful comparator, the main features of the actual transactions must be replicated as closely as possible. ENMAX PSA Corp. v. Alberta G.H. Poelman J. 155

2. Credit Rating 238 The evidence demonstrates that there is some rigour to establishing credit ratings, but much depends upon judgment. I find it necessary to make adjustments to the credit ratings for all three notes, although it is not possible on the evidence to “recalculate” ratings by a precise, mathematical method. It is even more problematic having regard to the fact that the experts themselves were challenged in doing a retrospective assessment, lacking much information they would have had at the relevant time, with access to management and members of the professional investment community. 239 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. 240 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 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. The ENMAX experts’ conclusions were based on no implicit support (although in their case, they did not assume this but concluded that no third party purchaser would price the bonds on an expectation of implicit support). They concluded that the interest paid under the intercompany notes was in the range of what would be paid pursuant to bonds issued to arm’s length third parties with no expectation of implicit support. 241 The Crown’s experts concluded that bond purchasers would expect implicit support. This conclusion had a significant impact in raising the credit ratings and thus lowering the interest rates required to sell the bonds. In using the Crown’s experts’ opinions, I find it necessary to remove the effect of implicit support. 242 With those qualifications, my conclusions on the credit ratings are as follows: a) Mr. Weiss’s business risk findings are too pessimistic for both companies and all three notes. Both companies appeared to be performing in an economically stable manner, had strong market 156 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

positions and the benefit of some degree of regulation that moder- ated risk. b) I am persuaded that Mr. Weiss’s use of the intercompany note interest rates in generating his financial projections is indefensible. Mr. Levey’s opinion that it would be usual to select a rate in the range of what the business risk would suggest, based on data, is more compelling. Using a high interest rate in financial calculations intended to determine a credit rating that will determine an interest rate is too circular. Simply deferring to what management presented is not convincing; Mr. Weiss himself refused to accept management’s financial projections for the ENMAX PSA 2007 note. c) Mr. Levey’s credit rating improperly takes into account implicit support, for reasons given above. d) The CAC item, in my view, should have been included as a debt item, consistent with Mr. Weiss’s approach. e) Mr. Levey should not have accepted ENMAX PSA’s very optimistic 2007 forecast, which had a dramatic effect on credit rating and ultimately interest rate. He should have questioned this change and investigated whether the projections were reliable. Mr. Weiss made his own evaluation and was unable to accept the forecast. Furthermore, it seems highly improbable that such optimism would have been convincing to third parties, when ENMAX PSA had been compelled to return to the market for an earlier second loan than originally forecast and had breached some of its covenants under the first loan in the process. As well, the fact that adopting the forecast along with Mr. Levey’s preferred approach of increasing the rating by 4 notches for implicit support would have put ENMAX PSA at a higher rating then its parent indicates that something was wrong with the entire financial analysis. f) There are a number of other differences between Messrs. Weiss and Levey that are questions of judgment, on which I am unable to prefer either position on the evidence. One of a number of possible examples is what degree of reduction in credit rating would be called for by the presence of subordinated debt. 243 There are two changes for which the evidence allows specific adjustments: removal of implicit support from Mr. Levey’s credit rating and keeping the credit rating for ENMAX PSA the same in 2007 as for 2006 (the approach Mr. Weiss used, although at a different rating level, be- ENMAX PSA Corp. v. Alberta G.H. Poelman J. 157

cause the only material difference was the significantly improved financial forecast, upon which I have found he could not reasonably rely). 244 Mr. Levey’s credit ratings for the 2004, 2006 and 2007 notes were BBB for each. Reducing them by 4 notches for the first two notes and 1 notch for the 2007 note (the amount they were increased from implicit support) results in new credit ratings of BB — for each of 2004 and 2006, and BBB — for 2007. With the adjustment to reflect the rejection of the improved forecast, the rating for the 2007 note also becomes BB — . Notably, without the uplift for implicit support and the improved financial forecast for 2007, Mr. Levey’s credit ratings fall from investment grade to non-investment grade for each of the intercompany notes. 245 There is no clear evidentiary basis on which to determine a replace- ment credit rating. However, it is useful to note that with the adjustments just made, the differences between the two positions are as follows: Intercompany Adjusted ENMAX Notches Note Crown Credit Experts’ Credit Differential Rating Rating 2004 BB — CCC+ 4 2006 BB — CCC 5 2007 BB — CCC 5 The halfway point between these credit ratings would be as follows: 2004: B 2006: Midpoint between B and B — (there is no rating between these) 2007: Midpoint between B and B — (there is no rating between these) 246 There is no clear basis on which I can find that a “correct” credit rating would be the midpoint between the adjusted ranges. From my conclusions on the evidence, however, I am satisfied that the credit rating should be somewhere between those ranges and the midpoint is a reasonable basis on which to go forward.

3. Pricing 247 Mr. Johnson demonstrated in his testimony that the differences between the “starting point” interest rates for Mr. Nichols (as testified to by Mr. Johnson) and Dr. Goldreich were not that significant when they used similar credit ratings. The biggest difference between their analyses 158 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

seems to be Mr. Nichols’ addition of basis points for “fundamental factors impacting pricing” and whether to include saved costs of issuance, or transactions costs. 248 The significance of the addition of these fundamental factors can be seen by examining how the range of rates would change if this effect were stripped out: a) For the 2004 note, the ENMAX experts’ range of 11.25% to 12.25% would become 10.50% to 10.75%. b) For the 2006 note, the range of 11.00% to 12.00% would become 10.25% to 10.50%. c) For the 2007 note, the range of 10.00% to 11.00% would become 9.25% to 9.50%. 249 There is no dispute among the witnesses for both parties that all of these fundamental factors were considered and used by Mr. Weiss in de- riving 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. 250 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 — based on my reluctance to accede to any significant double counting of these factors. 251 Mr. Nichols and Mr. Johnson both stated that there are extensive costs in selling bonds on the markets. These include many types of professional fees and the costs of roadshows to promote the bond issue. In their opinion, a borrower who had saved such costs by raising the debt with a single lender would be prepared to pay the saved costs in the form of additional interest. Dr. Goldreich, who has not worked in the investment industry, expressed the opinion that lenders would consider transac- ENMAX PSA Corp. v. Alberta G.H. Poelman J. 159

tion costs to be entirely the business of the borrower and would not be interested in them. 252 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. 253 There are a number of other differences between the pricing experts. Both used the costs of a “currency swap”: if the credit ratings were at the lower levels, funds would have to be raised in the United States, and then converted into Canadian currency. While they used different figures, they agreed that currency swap would increase interest for the 2004 note, but decrease it for the 2006 and 2007 notes. 254 Dr. Goldreich used data from a wide range of companies (regulated and unregulated) and all sectors of the economy. Mr. Nichols used only unregulated utilities. 255 Dr. Goldreich used only Canadian data in his first report, because he was working at investment grade credit rating levels. Mr. Nichols was forced to use non-investment grade data, thus US data, for his analysis. 256 Using the revised credit ratings I set out earlier, it is possible to derive starting point ranges of interest rates. In doing so, I rely on data provided by Dr. Goldreich in his rebuttal report. I also take note of Mr. Johnson’s acknowledgement that he has no serious quarrel with Dr. Goldreich’s choice of data and statistical analysis. 257 From this evidence, the range of interest rates would be as follows: Intercompany Notes Credit Ratings Interest Rates Ranges 2004 B 7.03 to 7.83 2006 B 6.85 to 7.65 2006 B– 7.47 to 8.27 2007 B 6.91 to 7.71 2007 B– 7.34 to 8.14 (I used two ranges for the 2006 and 2007 notes, because no credit rating is halfway between the competing Crown and ENMAX expert ratings.) 258 To these ranges, for reasons given earlier, I find it necessary to add 44 basis points for the saved costs of bond issuance and 50 basis points for 160 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

the so-called fundamental factors, making a total increase of 94 basis points. The adjusted ranges, using only the lowest and highest points for the two ranges I gave above for 2006 and 2007, and showing the intercompany note interest rates for comparison, are as follows: Intercompany Interest Rates Interest in Notes Ranges Intercompany Notes 2004 7.97 to 8.77 11.5 2006 7.79 to 9.21 10.3 2007 7.85 to 9.08 9.9

4. Summary of Arm’s Length Check 259 At its most basic, I find that there are strengths and weaknesses in each party’s submissions on what an arm’s length test demonstrates. This is not surprising given the exercise involves countless judgment-based decisions on selection of data sources; comparables; statistical methods; financial, corporate and industry information; and the factors to be considered at both the credit rating and pricing stages of the analysis. Fur- ther, all of these judgments and calculations must then be applied to a notional market transaction of a decade ago. 260 Where the evidence permitted, I quantified the changes that should be made in my view to the credit ratings and prices, most notably the removal of a lift for implicit support in the Crown’s pricing and most of the increase for fundamental factors in ENMAX’s pricing. Even these changes are at best rough approximations. 261 Where the evidence did not allow specific changes, I made even rougher changes, mainly of a directional nature. The results are very imprecise, particularly when recognizing the imprecise exercise completed by the experts themselves before my adjustments. Given all of this, nothing should be taken as an indication that my process is meant to give precise results. It is only to assist me in determining whether the interest deducted was a reasonable amount. 262 With these qualifications, my conclusions indicate that the interest rate on the intercompany notes was probably above what would have been available under arm’s length transactions approximating the intercompany loans, even though the range is closer than submitted by the Crown. ENMAX PSA Corp. v. Alberta G.H. Poelman J. 161

D. Conclusions 263 It remains to apply the legal principles to the evidence and the findings made from it. 264 It will be recalled that the question is whether the interest deducted by the ENMAX entities was a reasonable amount. The answer to that question requires asking whether no business would have contracted to pay that amount, having only its business considerations in mind and under the form of transaction pursuant to which the obligation was incurred. 265 The test as I have phrased it incorporates the possibility that the assumed circumstances will be a non-arm’s length transaction. In such a case, the interest that would have been paid in a similar transaction at arm’s length may inform the analysis but cannot determine the result. It may be “reasonable”, in such circumstances, as contemplated by section 20(1)(c) of the Income Tax Act, to pay more than what the arm’s length standard may indicate. 266 I conclude that ENMAX has established that the interest rates in the intercompany notes were reasonable and the amounts paid as a result are deductible. They exceed what the evidence shows would probably have been paid under a similar arm’s length transaction, although it was not possible to construct a very close comparable transaction. 267 The interest was paid under an idiosyncratic arrangement specially constructed to meet the business policy objectives of the ENMAX Cor- porate group, which pursued a strategy of establishing a parent as the source of internal funding and external financing. There are many benefits to a borrower in having access to all its capital requirements from its parent, some of which are intangible and difficult to quantify. 268 Further, as the Crown’s expert acknowledged, intercompany debt is not rated — companies simply establish interest rates through a variety of methods. Further, he stated that the intercompany notes were burdened with a number of conditions, such as the level of debt and stripping of cash flow to the parent, which would have made them very difficult to sell on the market without significant changes. These observations rein- force the weakness of putting too much emphasis on artificially constructed arm’s length comparators in this case. Furthermore, none of the Crown’s experts expressed the opinion that bonds comparable to the intercompany notes, without parental support, could have been sold in the market at interest rates less than those set out in the notes. 162 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

269 The fact that the range of arm’s length rates, as well as can be determined, may fall below the rates in the intercompany notes is not fatal to ENMAX’s position. The difference between the rates in the intercompany notes and the high points in the arm’s length ranges I have determined are 11.5% versus 8.77% (2004), 10.3% versus 9.21% (2006), and 9.9% versus 9.08% (2007). In my view, these differences are not 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. 270 I also give some weight to the detailed explanations and justifications given in the pricing memoranda. They provide the business and capital structure context for the loans and explain the metrics and advice used to set the debt levels and interest rates. The notional taxpayer’s justifications are not determinative, but cannot be ignored given the required approach to determining what is reasonable. 271 The Crown has occasionally emphasized that section 20(1)(c) requires that the amount of interest paid be reasonable, which involves consideration of the amount of debt, as well as the interest rate. Yet, the Crown has adduced no evidence on which I can find that the amount of debt fails to meet the reasonableness criteria. Its experts’ opinions go only to the rates of interest. 272 Finally, the Crown has failed to convince me that its approach is well founded in law or on the evidence. It seeks to impose its own opinion on what amount of interest should have been paid. As a matter of law, this offends the principles of statutory interpretation generally and of tax statutes in particular. As a matter of evidence, its experts have not established that no business person would have paid these rates in the circumstances of these notional taxpayers, having only their business considerations in mind.

VI Judgment 273 For the reasons given, I allow the appeals, set aside the Minister of Finance’s reassessments, and allow the deductions of interest payable pursuant to the intercompany notes of 2004, 2006 and 2007. Appeals allowed. R. v. Lowrey 163

[Indexed as: R. v. Lowrey] Her Majesty the Queen, Crown and Daniel Robert Lowrey, Accused Alberta Provincial Court Docket: Wetaskiwin 140231515P1 2016 ABPC 131 B.D. Rosborough Prov. J. Heard: March 30, 2016 Judgment: June 7, 2016 Criminal law –––– Charter of Rights and Freedoms — Unreasonable search and seizure [s. 8] — Reasonable expectation of privacy –––– Person describing her/himself as having accused’s first and last name used “Facebook” to communicate with 14-year-old complainant for purpose of engaging in sexual activity with her — Records of conversation were discovered and printed by complainant’s mother, who took them to police — Acting on that information and with complainant’s consent, police accessed Facebook account and reviewed conversations — Accused was charged with child luring — There was conflicting evidence that person using name of accused was accused in these proceedings — Accused applied for remedy for breach of s. 8 of Canadian Char- ter of Rights and Freedoms — Application dismissed — Action by state or its agents was irrelevant to production of relevant Facebook conversations or their delivery to police — Accordingly, application was restricted to officer’s actions in accessing complainant’s Facebook account and related production — Ac- cused lacked standing to bring application as he failed to establish reasonable expectation of privacy in messages — Accused denied being author of messages — Nature of privacy interest in unknown messages sent by third party using accused’s Facebook account was not obvious — Even if unidentified author had expectation of privacy in messages, that did not translate into equivalent expectation on accused’s part — No proof that impugned messages exposed highly revealing information about accused — Accused did not appear to have taken many practical steps to ensure that no one could view contents of his Facebook account and, in particular, content of text messages. Cases considered by B.D. Rosborough Prov. J.: C. (R.) v. McDougall (2008), 2008 SCC 53, 2008 CarswellBC 2041, 2008 Car- swellBC 2042, 83 B.C.L.R. (4th) 1, [2008] 11 W.W.R. 414, 60 C.C.L.T. (3d) 1, 61 C.P.C. (6th) 1, (sub nom. H. (F.) v. McDougall) 297 D.L.R. (4th) 193, [2008] S.C.J. No. 54, 61 C.R. (6th) 1, (sub nom. F.H. v. McDougall) 380 N.R. 82, (sub nom. F.H. v. McDougall) 260 B.C.A.C. 74, (sub nom. 164 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

F.H. v. McDougall) 439 W.A.C. 74, (sub nom. F.H. v. McDougall) [2008] 3 S.C.R. 41, [2008] A.C.S. No. 54 (S.C.C.) — followed R. v. Borden (1994), 33 C.R. (4th) 147, 24 C.R.R. (2d) 51, 92 C.C.C. (3d) 404, [1994] 3 S.C.R. 145, 171 N.R. 1, 119 D.L.R. (4th) 74, 134 N.S.R. (2d) 321, 383 A.P.R. 321, 1994 CarswellNS 26, 1994 CarswellNS 437, [1994] S.C.J. No. 82, EYB 1994-67410 (S.C.C.) — followed R. v. Buhay (2003), 2003 SCC 30, 2003 CarswellMan 230, 2003 CarswellMan 231, [2003] S.C.J. No. 30, 305 N.R. 158, 225 D.L.R. (4th) 624, 174 C.C.C. (3d) 97, 10 C.R. (6th) 205, 177 Man. R. (2d) 72, 304 W.A.C. 72, 107 C.R.R. (2d) 240, [2003] 1 S.C.R. 631, [2004] 4 W.W.R. 1, REJB 2003-42790, 2003 CSC 30 (S.C.C.) — referred to R. v. Collins (1987), [1987] 3 W.W.R. 699, [1987] 1 S.C.R. 265, (sub nom. Collins v. R.) 38 D.L.R. (4th) 508, 74 N.R. 276, 13 B.C.L.R. (2d) 1, 33 C.C.C. (3d) 1, 56 C.R. (3d) 193, 28 C.R.R. 122, 1987 CarswellBC 94, 1987 CarswellBC 699, [1987] S.C.J. No. 15, EYB 1987-66975 (S.C.C.) — considered R. v. Craig (2013), 2013 BCSC 1562, 2013 CarswellBC 2563, [2013] B.C.J. No. 1869 (B.C. S.C.) — referred to R. v. Craig (2016), 2016 BCCA 154, 2016 CarswellBC 918, [2016] B.C.J. No. 699 (B.C. C.A.) — followed R. v. Dell (2005), 2005 ABCA 246, 2005 CarswellAlta 967, 31 C.R. (6th) 79, 199 C.C.C. (3d) 110, 367 A.R. 279, 346 W.A.C. 279, 256 D.L.R. (4th) 271, 46 Alta. L.R. (4th) 227, [2006] 2 W.W.R. 40, 132 C.R.R. (2d) 297, [2005] A.J. No. 867 (Alta. C.A.) — considered R. v. Drakes (2009), 2009 ONCA 560, 2009 CarswellOnt 3937, [2009] O.J. No. 2886, 252 O.A.C. 200 (Ont. C.A.) — considered R. v. Ebanks (2010), 2010 CarswellOnt 4363, 2010 CarswellOnt 4364, 409 N.R. 394 (note), 276 O.A.C. 397 (note), [2010] S.C.C.A. No. 84, [2010] 1 S.C.R. ix (S.C.C.) — considered R. v. Edwards (1996), 45 C.R. (4th) 307, 192 N.R. 81, 26 O.R. (3d) 736, 104 C.C.C. (3d) 136, 132 D.L.R. (4th) 31, 33 C.R.R. (2d) 226, 88 O.A.C. 321, [1996] 1 S.C.R. 128, 1996 CarswellOnt 2126, [1996] S.C.J. No. 11, 1996 CarswellOnt 1916, EYB 1996-67692 (S.C.C.) — referred to R. v. Gallup (2004), 2004 ABCA 322, 2004 CarswellAlta 1456, 357 A.R. 336, 334 W.A.C. 336, [2004] A.J. No. 1241 (Alta. C.A.) — considered R. v. Golden (2001), 2001 SCC 83, 2001 CarswellOnt 4253, 2001 CarswellOnt 4301, 47 C.R. (5th) 1, [2001] S.C.J. No. 81, 159 C.C.C. (3d) 449, 207 D.L.R. (4th) 18, 279 N.R. 1, 153 O.A.C. 201, 89 C.R.R. (2d) 271, [2001] 3 S.C.R. 679, REJB 2001-27031 (S.C.C.) — referred to R. v. Horyn (2003), 2003 ABPC 197, 2003 CarswellAlta 1685, 344 A.R. 1, [2003] A.J. No. 1450 (Alta. Prov. Ct.) — referred to R. v. Lowrey 165

R. v. Jacobs (2014), 2014 ABCA 172, 2014 CarswellAlta 828, [2014] A.J. No. 544, 312 C.C.C. (3d) 45, 577 A.R. 3, 613 W.A.C. 3 (Alta. C.A.) — considered R. v. King (1993), 114 Nfld. & P.E.I.R. 353, 356 A.P.R. 353, 1993 CarswellNfld 46, [1993] N.J. No. 355 (Nfld. T.D.) — referred to R. v. McInnis (1999), 119 O.A.C. 316, 1999 CarswellOnt 1054, 134 C.C.C. (3d) 515, 44 O.R. (3d) 772 (Ont. C.A.) — considered R. v. Meyers (1987), 52 Alta. L.R. (2d) 156, [1987] 4 W.W.R. 624, 78 A.R. 255, 58 C.R. (3d) 176, 1987 CarswellAlta 104, [1987] A.J. No. 328 (Alta. Q.B.) — referred to R. v. Mills (1999), 1999 CarswellAlta 1055, 1999 CarswellAlta 1056, [1999] S.C.J. No. 68, 139 C.C.C. (3d) 321, 248 N.R. 101, 28 C.R. (5th) 207, 180 D.L.R. (4th) 1, [2000] 2 W.W.R. 180, 244 A.R. 201, 209 W.A.C. 201, 75 Alta. L.R. (3d) 1, 69 C.R.R. (2d) 1, [1999] 3 S.C.R. 668 (S.C.C.) — considered R. v. Nolet (2010), 2010 SCC 24, 2010 CarswellSask 368, 2010 CarswellSask 369, 95 M.V.R. (5th) 1, [2010] 8 W.W.R. 1, 256 C.C.C. (3d) 1, 320 D.L.R. (4th) 1, 76 C.R. (6th) 1, 403 N.R. 1, [2010] 1 S.C.R. 851, 350 Sask. R. 51, 487 W.A.C. 51, [2010] S.C.J. No. 24, [2010] A.C.S. No. 24, EYB 2010- 175730, 213 C.R.R. (2d) 52 (S.C.C.) — referred to R. v. Pazder (2015), 2015 ABQB 493, 2015 CarswellAlta 1440, [2015] A.J. No. 864, 21 Alta. L.R. (6th) 130, 339 C.R.R. (2d) 304 (Alta. Q.B.) — considered R. v. Prosper (1994), 33 C.R. (4th) 85, 118 D.L.R. (4th) 154, 92 C.C.C. (3d) 353, 133 N.S.R. (2d) 321, 380 A.P.R. 321, 172 N.R. 161, 6 M.V.R. (3d) 181, [1994] 3 S.C.R. 236, 23 C.R.R. (2d) 239, 1994 CarswellNS 25, 1994 Car- swellNS 438, [1994] S.C.J. No. 72, EYB 1994-67411 (S.C.C.) — referred to R. v. Sanelli (1987), 60 C.R. (3d) 142, 61 O.R. (2d) 385, 22 O.A.C. 307, 38 C.C.C. (3d) 1, 33 C.R.R. 360, 1987 CarswellOnt 115, [1987] O.J. No. 821 (Ont. C.A.) — considered R. v. Spencer (2014), 2014 SCC 43, 2014 CSC 43, 2014 CarswellSask 342, 2014 CarswellSask 343, [2014] S.C.J. No. 43, [2014] 8 W.W.R. 209, 11 C.R. (7th) 52, 458 N.R. 249, 438 Sask. R. 230, 608 W.A.C. 230, 312 C.C.C. (3d) 215, 375 D.L.R. (4th) 255, [2014] 2 S.C.R. 212, 312 C.R.R. (2d) 349 (S.C.C.) — considered R. v. Squires (2005), 2005 NLCA 51, 2005 CarswellNfld 218, 249 Nfld. & P.E.I.R. 14, 743 A.P.R. 14, 199 C.C.C. (3d) 509, [2005] N.J. No. 253 (N.L. C.A.) — referred to R. v. Wills (1992), 34 M.V.R. (2d) 296, 9 C.R.R. (2d) 360, 12 C.R. (4th) 58, 7 O.R. (3d) 337, 70 C.C.C. (3d) 529, 52 O.A.C. 321, 1992 CarswellOnt 77, [1992] O.J. No. 294 (Ont. C.A.) — followed 166 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

Statutes considered: Canadian Charter of Rights and Freedoms, Part I of the Constitution Act, 1982, being Schedule B to the Canada Act 1982 (U.K.), 1982, c. 11 Generally — referred to s. 8 — considered s. 24 — considered s. 32(1) — considered Criminal Code, R.S.C. 1985, c. C-46 s. 151 — pursuant to s. 152 — pursuant to s. 172.1(1)(b) [en. 2002, c. 13, s. 8] — considered s. 271 — pursuant to

APPLICATION by accused for remedy for breach of s. 8 of Canadian Charter of Rights and Freedoms.

R. Clark, for Applicant K. Nicholls, for Respondent

B.D. Rosborough Prov. J.:

1 A person describing her/himself as ‘Daniel Lowrey’ used ‘Facebook’ to communicate with 14 year old Angela L. for the purpose of engaging in sexual activity with her. Records of that conversation were discovered and printed by Angela L.’s mother. She took them to the police. Acting on that information and with Angela L.’s consent, they accessed her Facebook account and reviewed those conversations. A copy was made, printed and retained as evidence. 2 There is conflicting evidence that the person using the name Daniel Lowrey was the Applicant in these proceedings. Does he nonetheless have a reasonable expectation of privacy in those conversations? Did An- gela L. consent to the police search of her Facebook account in order to ‘seize’ those conversations? Or did police violate the Applicant’s Char- ter, s.8 right by doing so?

Charge & Procedure 3 On February 27th, 2014 an Information was sworn charging Daniel Robert Lowrey (‘Lowrey’) with the offence that he: On or between January 1, 2014 and February 12, 2014, at or near Ponoka in the Province of Alberta, did, by means of telecommunica- tions, communicate with Angela [L.], a person who is under the age R. v. Lowrey B.D. Rosborough Prov. J. 167

of sixteen years, for the purpose of facilitating the commission of an offence under Section 151, Section 152, Section 271, contrary to Section 172.1(b) of the Criminal Code. 4 The prosecution proceeded by indictment and Lowrey elected to be tried by Provincial Court Judge. Following numerous interim appearances, the matter was scheduled for trial commencing March 30th, 2016. It has since been adjourned to June 7th, 2016 for completion.

Charter, s.24 Application 5 On March 7th, 2016 Lowrey filed a ‘Notice of Application’ signalling his intention to engage the remedial provisions of the Canadian Charter of Rights and Freedoms (‘Charter’), s.24. Lowrey submits that police violated the Charter, s.8 when they received or searched for and seized information from a ‘Facebook’ account. In addition, police use of Angela L.’s ‘online presence’ for the purpose of acquiring that information and any ‘third party consents’ to that search or the search of two cell phones are said not to be “constitutionally effective waivers of the Applicant’s section 8 rights”. 6 Were the court to conclude that the Charter, s.8 was violated, Lowrey seeks either of two remedies. He seeks to exclude, ... the cellphones, anything or any data or information within the cellphones or any information from any social media accounts arising from use of the cellphones or any other device .... In the alternative, Lowrey seeks a reduction in any sentence to be imposed. 7 The trial commenced with a voir dire relating to the Charter, s.24 application.

Facts 8 On February 8th, 2014 Arlene L. contacted the R.C.M.P. to report an incident of ‘child luring’. She advised police of her belief that 32 year old Lowrey had contacted Arlene L.’s 14 year old daughter, Angela L., via a social media account on Facebook. Lowrey made arrangements for the two of them to meet and engage in sexual activity. 9 Arlene L. and Angela L. attended an R.C.M.P. detachment on Febru- ary 10th, 2014. They provided Cst. Ethier with a printed copy of the ‘messages’ exchanged between Angela L. and an individual identified on Facebook as Daniel Lowrey. The printed document was over 400 pages in length. See: Exhibit V-A. During the course of her dealings with An- 168 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

gela L., Cst. Ethier explained to her that, “... more than likely we’ll be doing a — um, if I can have access to your laptop from your house, and I’m going to have your mom bring it in, and I need your Facebook password. Okay?” 10 Cst. Ethier’s role in this investigation was largely confined to taking audiotaped statements from various witnesses, including Arlene L. and Angela L. She was advised at some point in her investigation that Angela L. suffered from certain ‘cognitive issues’. These were particularized as ‘ADHD’, ‘anger management issues’ and ‘defiancy disorder’. When Cst. Ethier concluded her involvement, the file and contents were transferred to Cst. Al-Kadri of the Ponoka R.C.M.P. detachment. 11 Given the nature of the investigation, Cst. Al-Kadri contacted the In- tegrated Child Exploitation Unit, (‘ICE’) Unit and spoke to Cpl. Bristow. Cpl. Bristow advised him that she would need to “take over the Facebook account”. This action could not be undertaken without the written consent of Arlene L. and Angela L. 12 On February 12th, 2014 Cst. Al-Kadri attended the L. residence and explained to both Arlene L. and Angela L. that, “In order for our ICE Unit, child exploitation unit, to take over the account and look at these messages, we were going to need a consent form signed by them to go on ...”. Both Arlene L. and Angela L. immediately agreed to do so and, “... signed the paper right away”. When asked about their level of understanding of its contents, Cst. Al-Kadri responded that, “They were committed and they wanted to go ahead with the — with the investigation.” They asked no questions. 13 The ‘consent form’ referenced by Cst. Al-Kadri was in the following terms: I, Angela [L.] hereby voluntarily authorize the Northern Alberta In- ternet Child Exploitation Team and Edmonton Police Service to take over control of and use my “online presence”. This online presence includes the following screen name(s), nick name(s), and or e-mail addresses, as well as the passwords associated with these accounts: Account Name: [redacted] Password: [redacted] I consent to the use of my online presence for any purpose relating to an official investigation by the above law enforcement authority, including (but not limited to) sending and receiving e-mail or conducting any other electronic communications, accessing stored information, and using and disclosing such communications or information. I un- R. v. Lowrey B.D. Rosborough Prov. J. 169

derstand and acknowledge that by signing the consent form, I relinquish all present and future claims to the use of these accounts. I understand that law enforcement authorities will change the password(s) to these accounts so that I will no longer have access. I give this consent freely and voluntarily, without fear, threats, coercion, or promises of any kind. I have been advised of my right to refuse to allow the assumption of my online presence, and hereby voluntarily waive this right. 14 Cst. Al-Kadri read the consent form to Arlene L. and Angela L. ver- batim and also advised them verbally that the ICE Unit would be taking over Angela L.’s Facebook account. He was aware of Angela L’s cognitive issues and satisfied himself that “they wanted to sign the form” and “wanted to go ahead”. The form was then signed by Angela L. and wit- nessed by Arlene L. in the presence of Cst. Al-Kadri. They had no questions. See: Exhibit V-B. Cst. Al-Kadri thereafter contacted Cpl. Bristow to advise that consent had been provided and, “... she can go in and do what she needs to do to the account”. 15 Angela L. had only a vague recollection of events surrounding the consent form. She remembered that both she and the police officer signed the form but did not remember who the police officer was. She was aware that the form had something to do with an offence of “luring a child” and she knew that she could choose to sign it or not. She recalls having been advised that, after signing the consent form, she would no longer have access to her Facebook account. She was “okay with it”. 16 Angela L. was asked specifically about Exhibit V-B. She did not understand the passage preceding the redacted account name and password. However, during cross-examination she read the remainder of Exhibit V- B and was asked what it meant to her. She replied: “It means that I was free willingly to give up my e-mail and my Facebook account.” She was willing to do so. Indeed, she remained willing to have police sign into her Facebook account and exclude her from its continued use even as of the trial date. 17 Lowrey testified that he opened up a Facebook account in his own name shortly after Facebook started its website. It was extant in 2014. He ‘vaguely’ read a legal notice or disclaimer with respect to use of the site 170 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

and electronically agreed to abide by its terms. When asked what he meant when he used the term “vaguely”, he replied: Maybe like the first paragraph, you know, like just saying that it’s — it’s your account, you know, what you do can be monitored, what you post on your wall, you know, about the — and you can set up, like, your own privacy settings, just for people to see who’s — it’s just like the disclaimer for the — your Facebook in general. 18 During the course of cross-examination, Lowrey confirmed that he was aware of the fact that both the public and private ‘spheres’ of his Facebook account could be monitored and that Facebook did, in fact, monitor accounts. Moreover, he frequently accessed Facebook via his cell phone and “never logged off” that cell phone. Anyone with access to his cell phone would have access to his Facebook account. Use of his cell phone was not guarded by password. 19 Lowrey’s Facebook page was password protected and his privacy settings prohibited others from posting comments or photos on his public wall or having private conversations with him via text. Only people he accepted as ‘friends’ were permitted to see what was on his Facebook ‘wall’. It was his view that the Facebook account was his property. Low- rey did not assert or concede authorship of the text messages exchanged with Angela L. at the heart of this application. Moreover, he was aware that at least two other people had obtained his Facebook password, albeit without his consent. One of those was Angela L.’s older sister, Samantha L. 20 Angela L. was a Facebook ‘friend’ of Lowrey. He had ‘conversed’ with her via Facebook in the past. Lowrey knew that Angela L. lived in a residence with a friend and two brothers: Daniel and Robert. In addition, Robert had a girlfriend who would attend the residence from time to time. Lowrey had himself lived at the residence for a period of approximately one month when he was dating Arlene L.’s other daughter, Samantha L. 21 The occupants of the L. residence had a ‘house computer’ that was located in a common area of the residence. Lowrey knew that Angela L. communicated with him via Facebook from that computer. He gave the following evidence during the course of cross-examination: Q. ... “I’m going to suggest to you, Mr. Lowrey, that when you were sending messages specifically to Ms. Angela [L.], you knew there was a very real possibility that they would be seen by someone else in that home; would you agree with that? R. v. Lowrey B.D. Rosborough Prov. J. 171

A. Yeah. Q. Okay. A. Her brother used her account quite a bit. 22 Lowrey was also aware that, at the time of the communications forming the substance of the charge, Angela L. was 14 years of age and had certain cognitive issues. He denied ever having asked her to delete parts of his conversations with her on Facebook or keep parts of their conversations private. He phrased his denial in these words: “I had no reason [to ask her to keep their conversations private].” Exhibits V-A and V-D make reference to requests by the person with whom Angela L. was corresponding to delete their conversations and/or keep them private. 23 Apart from the fact that Lowrey electronically communicated with Angela L. via his Facebook account, there was no evidence of any other information kept by Lowrey on his Facebook page(s). 24 No information was obtained by police from any cell phones.

Issues 25 Has Lowrey proven that he had a reasonable expectation of privacy in the messages exchanged between the person identifying her/himself as ‘Daniel Lowrey’ and Angela L. via Facebook? 26 Has Lowrey proven that his Charter, s.8 right was violated by police when they utilized Angela L.’s Facebook account to view and copy text messages said to have been exchanged between ‘Daniel Lowrey’ and Angela L.? 27 In the event that Lowrey proves a violation of his Charter, s.8 right, has he also proven entitlement to the remedy of ‘exclusion’ or, in the alternative, a reduction of any sentence to be imposed?

Position of the Parties 28 Lowrey submits that he has established the existence of a reasonable expectation of privacy, “... in the private communications said to have originated or are associated with the Facebook account bearing his name.”. He claims that both the account and its contents are his property; that he has a, “... privacy interest in both his name as a Facebook account holder and in the contents of that Facebook account.” In particular, Low- rey notes that there are privacy settings on the account, that the account is password-protected and that he gave no one permission to access it or use it to send messages. Moreover, “... [i]n the messages attributed to the 172 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

account of the Applicant one of the apparent communicators is request- ing that the other delete the conversation.” 29 Lowrey further submits that the search or seizure of messages by Cpl. Bristow is not authorized by common law in the form of Arlene L. and/or Angela L.’s consent. Angela L. suffers from cognitive difficulties and Cst. Al-Kadri did not explain the concept of consent to Angela L. There is also, “... no evidence that Angela [L.] fully understood in any constitutionally meaningful way the consents.” Finally, Lowrey submits that, “... regardless of whether or not Angela [L.] or her mother understood the consents, neither one of them, in law, had authority to waive the section 8 rights of the Applicant.” 30 The Respondent submits that there are competing lines of judicial authority on the question of whether the sender of a message maintains a reasonable expectation of privacy in that message. Lowrey took few steps to preserve the privacy of the messages in this case. The Respon- dent urges the court to find that he had neither a subjective expectation of privacy nor any objective basis for such an expectation. 31 The Respondent further submits that the ‘evidence’ in this case was not sought out by police; it was volunteered by Arlene L. and Angela L. in order for them to address what was believed to be criminal conduct. In addition, “There is nothing in the evidence to suggest that Angela [L.] was unable to give ... permission or unable to understand the nature of the permission.” In short, “It seems illogical that we would expect the police to obtain judicial authorization to reacquire information that was volunteered to them.” 32 Finally, the Respondent submits that the police acted in good faith during the course of this investigation and any breach was not serious. Given that the, “... evidential basis for the Crown’s case is grounded in the printouts provided by the complainant’s mother,” there was little impact on the Applicant’s constitutionally-protected right. The evidence sought to be excluded is important to the truth-seeking function and ought not to be excluded. 33 The Respondent also notes, parenthetically, that, “... the issue of whether or not the accused authored the messages that form the substance of the allegations does not have to be addressed at this juncture.”

Burden of Proof 34 It is well-established in Canadian criminal law that the ultimate burden of proving the violation of a constitutionally-protected right rests R. v. Lowrey B.D. Rosborough Prov. J. 173

with the Applicant. Violation must be proven on a balance of probabilities. In R. v. Collins, [1987] 1 S.C.R. 265 (S.C.C.), Lamer J. (as he then was) stated: The appellant, in my view, bears the burden of persuading the court that her Charter rights or freedoms have been infringed or denied. That appears from the wording of s. 24(1) and (2), .... The appellant also bears the initial burden of presenting evidence. The standard of persuasion required is only the civil standard of the balance of probabilities and, because of this, the allocation of the burden of persuasion means only that, in a case where the evidence does not establish whether or not the appellant’s rights were infringed, the court must conclude that they were not. [citations omitted] 35 The Supreme Court has commented upon the nature of evidence sufficient to discharge the burden of proof on a balance of probabilities. In C. (R.) v. McDougall, 2008 SCC 53 (S.C.C.), the Court was called upon to consider whether there ought to be varying degrees of proof within the ‘balance of probabilities’ burden. That notion was rejected, with Roth- stein J. noting that, “... evidence must always be sufficiently clear, convincing and cogent to satisfy the balance of probabilities test” (at para.46). 36 The Applicant seeks to prove that his right to be free from unreasonable search or seizure (Charter, s.8) was violated by Cpl. Bristow’s seizure of information in the form of Facebook messages. See Exhibits V-A, V-D. In doing so, he bears the burden of proving on a balance of probabilities that he enjoyed a reasonable expectation of privacy in those messages. See: R. v. Edwards, [1996] 1 S.C.R. 128 (S.C.C.), at para.45. 37 Upon proof that he enjoyed a reasonable expectation of privacy in the messages, the burden of proof reverts to the Respondent to otherwise justify state interference with that expectation of privacy. The searches or seizures in this case were undertaken without prior judicial authorization and, for that reason, fall into the category of ‘warrantless searches’. And warrantless searches are presumptively unreasonable. See: R. v. Nolet, [2010] 1 S.C.R. 851 (S.C.C.), at para. 21; R. v. Golden, [2001] 3 S.C.R. 679 (S.C.C.), at para. 84. The prosecution may nevertheless prove on a balance of probabilities that the warrantless searches in this case were authorized by law. See: R. v. Buhay, 2003 SCC 30 (S.C.C.). Lawful authorization is said to arise in this case from Angela L.’s consent (‘third party consent’) to search for or seize the impugned information. 38 Should Lowrey discharge the burden of proving a violation of the Charter, s.8 by evidence that is sufficiently clear, convincing and cogent, 174 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

the Court’s jurisdiction to fashion a remedy under the Charter, s.24 is engaged. The burden of proving entitlement to a remedy rests with Low- rey. It, too, can be discharged on a balance of probabilities.

‘State Action’ 39 On February 10th, 2014 Arlene L. delivered to the police approximately 400 printed pages of messages exchanged between Angela L. and a person identifying her/himself as Daniel Lowrey. This, without any intervention by police. Indeed, there was not even an investigation launched at that time. A preliminary question arises as to whether these printed messages were obtained by police as a result of any ‘state action’. 40 The Charter, s.32(1) provides that: 32.(1) This Charter applies: (a) to the Parliament and government of Canada in respect of all matters within the authority of Parliament including all matters relating to the Yukon Territory and Northwest Territo- ries; and (b) to the legislature and government of each province in respect of all matters within the authority of the legislature of each province. 41 In the context of the criminal law, it is action by the state (most frequently, the police) that attracts Charter scrutiny. Not so, actions taken by private citizens. Ewaschuk summarizes this principle in these terms: The Charter does not apply to conduct of private actors even where the conduct of the private actors is tendered in a public prosecution and would otherwise have contravened the Charter. The Charter applies only to actions “by police officers or other agents of the State”. See: Criminal Pleadings & Practice in Canada, 2nd Ed., Canada Law Book, (‘Ewaschuk’) at 31:3105, (emphasis in original) 42 There are times when police may enlist the assistance of third parties to assist in their investigation. In doing so, the third party, too, becomes an “agent of the state” and his or her actions are subject to Charter scrutiny. Ewaschuk addresses the test to be employed in order to determine when third party assistance translates into state action. He states (at 31:3033): The mere fact that a “third party” cooperates with the police does not mean that the third party thereby becomes a “police agent”. ... R. v. Lowrey B.D. Rosborough Prov. J. 175

However, the third party may become a police agent if the action in issue would not have taken place “but for” the relationship between the third party and the police. ... In other words, the test is whether the third party is acting at the insti- gation or direction of the police or did she act on her own initiative. (case references omitted; emphasis in original) 43 Examples can help illustrate application of this test. In R. v. Jacobs, 2014 ABCA 172 (Alta. C.A.), the trial judge found that a search leading to the finding of drugs involved no state action. The facts surrounding that search were recounted by the appeal court in these terms (at paras.2- 3): At approximately 5:15 p.m. on July 28, 2011, the appellant and her companion approached a security checkpoint at the entrance to the Capital EX Summer Exhibition (“Capital EX”), situated on the Edmonton Northlands (“Northlands”) grounds. Barry Duguid, a security guard employed by Northlands, asked if he could search the appellant’s purse. The appellant consented by placing her purse on the table in front of him. Inside, Mr. Duguid observed a closed cigarette package. When he asked about its contents, the appellant’s voice quivered, her hands shook and she pulled the cigarette package away. Mr. Duguid took it back and opened the package. In it he found a white powder which appeared to him to be “some form of illicit drug”. (Laboratory analysis later confirmed the contents as being 13 individually wrapped packages of soft cocaine weighing 2.4 grams, and 14 individually wrapped packages of hard or crack cocaine weighing 2.3 grams.). Mr. Duguid called over to Constable Da- nielle Smith of the Edmonton Police Service to show her what he had discovered. Constable Smith had not been involved in the search until this point. She pulled the drugs out of the cigarette package, and immediately arrested the appellant and searched her purse to find three bundles of cash. 44 The Alberta Court of Appeal affirmed the trial judge’s finding that Barry Duguid’s search of the accused’s purse was not subject to Charter scrutiny. The court also affirmed use of the test noted above in the context of a search (as opposed to obtaining a confession or grounds for further investigative action). The court stated (at para.29): While the second argument - that Mr. Duguid was acting as an agent of the police - was raised at trial, we are of the view that the trial judge correctly disposed of it by concluding that Mr. Duguid was acting in a private capacity and was not subject to Section 8 of the 176 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

Charter. In R v Broyles, [1991] 3 SCR 595 at 608 [Broyles], the Supreme Court stated that the test for determining whether an informer is a state agent as being: “would the exchange between the accused and the informer have taken place, in the form and manner in which it did take place, but for the intervention of the state or its agents?” While the parallels between an informer and someone conducting a search (both being evidence-gatherers) make this test applicable here, it nonetheless requires some reformulation because Con- stable Smith did not intervene; the evidence shows she did nothing until Mr. Duguid notified her of what he had found. The question is, then, whether Mr. Duguid would have searched the appellant’s purse in the manner he did if police (whether Constable Smith specifically, or the police in general) had not been present. The court concluded that Mr. Duguid would have conducted the search regardless of police presence. As a result, his actions were not subject to Charter scrutiny. 45 In R. v. Dell, 2005 ABCA 246 (Alta. C.A.), the court considered whether the acts of a bouncer at a bar were subject to Charter scrutiny. The bouncer believed the accused to be in possession of drugs in the washroom of the bar. His manager was called to the washroom and searched the accused for weapons and drugs. Drugs were found and the accused was then taken to and detained in the manager’s office pending arrival of the police. Application was made for a Charter remedy based upon the bouncer’s act of ‘investigative detention’. 46 The Alberta Court of Appeal rejected that argument, stating (at para.29, emphasis added): The Charter was instituted, in part, to address situations in which the administration of justice is called into disrepute. For this reason, remedies such as exclusion of evidence were crafted. There is no “administration of justice” involved in the momentary detention of Dell in the washroom. Dell argues that because the consequences of the detention and resulting search are grave (admission of the cocaine evidence), the Charter should apply. But Charter application depends on government action, not the severity of the consequences. Incriminating evidence collected by private persons is routinely admitted at trial without Charter scrutiny. In Shafie, supra, [ (1987), 47 C.C.C. (3d) 27 (Ont.C.A.)] it was argued that although private action may not trigger the application of the Charter, when the state later proposes to use the evidence as part of a prosecution, the earlier Charter breach should engage s. 24(2) of the Charter. The Court rejected this argument, noting at p.34 that the question whether a per- R. v. Lowrey B.D. Rosborough Prov. J. 177

son’s Charter rights were infringed must be tested at the time the alleged detention occurred. 47 In R. v. Gallup, 2004 ABCA 322 (Alta. C.A.) a psychologist who received a confession from the accused without prompting by police was found not to be acting as an agent of the state. In R. v. McInnis (1999), 134 C.C.C. (3d) 515 (Ont. C.A.) the independent actions of a police informer, eliciting information from the accused which he hoped would help him negotiate his release from prison were found not to be state action. And in R. v. Drakes, 2009 ONCA 560 (Ont. C.A.); leave denied [2010] 1 S.C.R. ix (S.C.C.) information provided to police by building superintendents who entered the accused’s residence in response to a complaint of a flood were acting independently in doing so. That is to say, there was no state action involved and the Charter had no application. 48 In this case, Arlene L. (undoubtedly concerned for her daughter’s well-being) utilized Angela L.’s Facebook account to search for and print messages exchanged between her daughter and ‘Daniel Lowrey’. Using the test referenced above, “Would the printing and delivery of Exhibit V- A have taken place, in the form and manner in which it did take place, but for the intervention of the state or its agents?” The answer appears clear. Action by the state or its agents was irrelevant to the production of Exhibit V-A or its delivery to the police. 49 Crown counsel submits that the, “... evidential basis for the Crown’s case is grounded in the printouts provided by the complainant’s mother.” Those printouts (Exhibit V-A) were acquired without state action and are immune from Charter scrutiny. Accordingly, The Charter, s.24 application is restricted to Cpl. Bristow’s actions in accessing Angela L.’s Facebook account and production of Exhibit V-D.

Standing 50 There are significant parallels between the facts in this case and those underlying the recent decision of the court in R. v. Craig, 2016 BCCA 154 (B.C. C.A.) (‘Craig’). The court in Craig summarized the relevant facts of that case as follows (at paras.3-5): Between November 19, 2009, and December 1, 2009, Mr. Craig, aged 22, and the complainant (E.V.), aged 13, came into contact through Nexopia, a social media website used primarily by teenagers. E.V. testified that she met Mr. Craig through “messaging” with him on Nexopia in November 2009. Messaging is a private communication similar to email. Her Nexopia user name was “babygurl,[name]” 178 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

and his was “AaronCraig”. She testified they arranged, via messaging, to meet in person. The first time she met Mr. Craig in person was on November 20 or 21, 2009, at approximately midday. He bought a bottle of liquor. She had a few sips while they talked. She testified she told him at that meeting she was in grade eight and aged 13 years. This first meeting lasted about 10 minutes. They continued to communicate through Nexopia messaging. The content of the messages became increasingly sexual. They agreed to meet on December 1, 2009, at a fast food restaurant around 3:00 p.m. When they met, Mr. Craig asked her where they should go so they could have sexual intercourse. They walked to a secluded area near some bushes and had sexual intercourse. Next, they walked to a liquor store nearby and he bought her a bottle of vodka. E.V. came to believe that Mr. Craig had, through Nexopia, told three or four of her friends about having had sexual intercourse with her. She was angry and eventually all communications between them stopped on December 12, 2009. 51 The complainant, E.V., did not report the matter to police. It was only after others became aware of these events and reported them to a school counsellor that matters came to the attention of the police. E.V. cooper- ated with the ensuing investigation. Police obtained a warrant to search Nexopia’s servers for, “... information relating to the usernames of E.V., several of her friends who were Crown witnesses, and Mr. Craig.” Infor- mation obtained as a result of that search led to the accused being charged with the offences created by ss.151, 172.1(1)(b) and 271 C.C. 52 When the complainant ceased communicating with Mr. Craig via the user name “AaronCraig” he changed his user name to “cuteguylovinlife”. At trial, he denied that he was cuteguylovinlife. Nevertheless, at the end of the day, the trial judge found that the prosecution had proven beyond a reasonable doubt that he was cuteguylovinlife and released separate reasons for making that finding. Of importance was the fact that the ‘IP addresses’ for both AaronCraig and cuteguylovinlife were identical. See: R. v. Craig, 2013 BCSC 1562 (B.C. C.A.). 53 The Court of Appeal noted the effect of the accused’s denial that he was cuteguylovinlife on the issue of standing. It stated (at para.45): The factual matrix is important when determining whether there is an expectation of privacy. When the police interviewed E.V., she printed out some of the “messages” at the police station and showed the officers. The police knew Aaron Craig was the suspect, before they knew his IP address. The only IP address they traced Mr. Craig R. v. Lowrey B.D. Rosborough Prov. J. 179

through was associated with “cuteguylovinlife”, as it was the same IP address for “AaronCraig”. Mr. Craig denied he was “cuteguylovinlife”, and took the position that someone else had used his IP address. He could not then successfully argue he had a reasonable expectation of privacy to challenge the search of “cuteguylovinlife” on this basis: see R v Edwards, [1996] 1 S.C.R. 128 at para. 41. (emphasis added) 54 In this case, it has neither been proven nor conceded that Lowrey was ‘Daniel Lowrey’ - the individual exchanging the messages with Angela L. contained in Exhibit V-D. The evidence alludes to the possibility that an unauthorized individual obtained access to Lowrey’s Facebook account password and engaged in the impugned correspondence. In other words, Applicant submits that the subject-matter of the evidence sought to be excluded is messaging sent by someone using Lowrey’s Facebook account to Angela L. 55 Lowrey describes the privacy interest he seeks to protect in these terms: ... the account in question bears the name of the Applicant. Everyone has an interest in how their name is used, referenced or whether it is used to incriminate themselves (sic). The fact that defamation or slander of one’s name is actionable in civil litigation supports this submission. The reputation one’s name has is of personal significance to the dignity of the person. 56 The interest claimed by Lowrey in the impugned messages is, at best, indirect. He has no interest in keeping the content of the impugned text messages private. Whatever evidence oa authorship of these messages by him there may be, he seeks to distance himself from it. Rather, Lowrey’s interest is in the potential harm that may come about by unwarranted attribution to him of the content of the messages. He asserts a privacy interest in the text messages in order to prevent that attribution. 57 Counsel have submitted that, “ ... the issue of whether or not the accused authored the messages that form the substance of the allegations does not have to be addressed at this juncture.” With respect, I disagree. If the Applicant has not proven on a balance of probabilities that the content of the communications in Exhibit V-D was authored by him, he cannot argue that he had a reasonable expectation of privacy in them. In short, he has no standing to challenge the constitutionality of the search or seizure of those communications. 180 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

58 That having been said, I note that both counsel litigated this application on the basis that this fact need not be proven. For that reason, I will consider whether Lowrey would have had a reasonable expectation of privacy in the contents of Exhibit V-D in the absence of any proof of authorship.

Reasonable Expectation of Privacy 59 I have earlier referred to the case of Craig and its parallels to the facts of this case. In comprehensive reasons and under separate headings, Ben- nett J.A. reviews “The Law on Reasonable Expectation of Privacy” (paras.48-50), “General Principles of Section 8 Analysis” (paras.51-63), “Totality of the Circumstances Analysis” (paras.64-70), “Informational Privacy Cases” (paras.71-89) and “Reasonable Expectation of Privacy Framework” (paras.97-141). I agree with and adopt her analysis. 60 Bennett J.A. accepted the trial judge’s conclusion that the accused had a subjective expectation of privacy on the facts of that case. When considering whether that subjective expectation was objectively justified, she concluded (at para.142): Applying the framework above, and thereby taking into account all of the circumstances, in my view, Mr. Craig’s expectation of privacy in the messages seized by the police was objectively reasonable. Al- though the messages were retrieved from third party accounts, he created the content, and they exposed highly revealing information, were not within public view, and were not expected to be circulated. Accordingly, and applying the correct legal principles, I would find that Mr. Craig has standing under s. 8 to challenge the searches, and the trial judge erred in concluding that he did not. 61 I am satisfied on all the evidence that Lowrey had a subjective privacy interest in the use of his name and/or account relating to the impugned messages. His privacy interest is based upon an apprehension that the messages contained in Exhibit V-D will be attributed to him. His knowledge and use of Facebook’s privacy settings, the existence and safeguarding of a password to gain access to his account and his restric- tion of access to ‘friends’ all support that interest. And, while he was aware that those administering the Facebook site could access his account, this, of itself, does not eliminate any potential for privacy and/or anonymity. 62 Was Lowrey’s expectation of privacy objectively reasonable? It is important to note that the ‘search’ in this case took place utilizing Angela L.’s Facebook account; not Lowrey’s. The person using the name Daniel R. v. Lowrey B.D. Rosborough Prov. J. 181

Lowrey in Exhibit V-D recorded her or his messages in a place accessible by and shared with Angela L. Since Lowrey’s privacy interest is said to rest, at least in part, on his property right in the impugned Facebook messages, it is worth noting that the ‘property’ upon which the search took place was shared. Moreover, police had permission to undertake their search of that property by one of the people sharing it. In that sense, there was no ‘trespass’ to Lowrey’s property by the police. 63 The impugned text messages were not in public view. And, assuming Lowrey was even aware of the messages, he cannot be said to have ‘abandoned’ them. Nevertheless, the nature of a privacy interest in unknown messages sent by a third party using his Facebook account is not obvious. It is safe to conclude, however, that Lowrey’s privacy interest in the contents of Exhibit V-D would be a very different privacy interest than that considered by the court in Craig. 64 There is some evidence that Lowrey was the author of the text messages found in Exhibit V-D. Nevertheless, he has led evidence intended to divorce himself from authorship of those messages. It would be unsafe in that context to conclude that he has proven an authorship he disputes. If it had been proven that he was the author of those messages, it might be argued that he had a reasonable expectation that those messages would be kept private. On the other hand, if he was not the author, it is difficult to accept that Angela L. owed any obligation to Lowrey to keep their contents confidential. In other words, even if the unidentified author of the messages had an expectation of privacy in the messages, that does not translate into an equivalent expectation on Low- rey’s part. 65 In R. v. Spencer, 2014 SCC 43 (S.C.C.) the court considered the nature of ‘informational privacy’ and the interests it seeks to protect. See: paras.38-41. Those interests include privacy as secrecy, privacy as control and privacy as anonymity. Lowrey had no interest in keeping the contents of Exhibit V-D ‘secret’. The communications contained therein have not been attached to him. If there was personal information in the communications, it was not about him. Nor was it necessary for Lowrey to have control over the information in Exhibit V-D because it might otherwise reveal information about him. Finally, the contents of Exhibit V-D do nothing to compromise any anonymity Lowrey enjoyed in his use of social or other electronic media. Put bluntly, it is the Applicant’s position that the contents of Exhibit V-D say nothing about Lowrey at all. 182 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

66 These considerations are relevant to the level of Lowrey’s expectation of privacy in the impugned text messages. That expectation is seldom either all-encompassing or non-existent. As noted by the court in R. v. Mills, [1999] 3 S.C.R. 668 (S.C.C.) (at para.108): “Privacy is not an all or nothing right.” It is more frequently nuanced. Germaine J. made reference to that nuance in R. v. Pazder, 2015 ABQB 493 (Alta. Q.B.) (‘Pazder’) where he commented (at para.128): The issue of standing is an important one in Charter litigation. If an individual has no reasonable expectation of privacy in a thing or record searched, then the individual is said to have no standing to challenge the warrant, authorization or order that led to the search. The right to advance a Charter challenge ends if the litigant is a true third party. These two concepts are heavily intertwined. There are, however, nuances, and even a lightly connected privacy interest may ar- guably give rise to standing. Cases on this subject are very fact specific. Real three-dimensional objects (for example: houses, cars, lockers) usually provide an obvious and objective basis to evaluate who has a privacy interest. Like a switch it either is on or off, but where the object seized, in this case text mail messages and cell phone data, become more informational, the ‘switch’ may become more like a ‘dimmer switch’ which can have the flow of a privacy interest restricted but still allow a trickle of an interest to gain at least ‘standing’ to challenge the production order. 67 Assuming, without accepting, that Lowrey has sufficient interest in the privacy of the impugned text messages to give him standing to bring this application, I am not satisfied that his expectation of privacy was or is reasonable. His interest is missing two key features relied upon by the court in Craig. First, Lowrey has failed, declined or is unable to prove that he created the messages contained in Exhibit V-D. Indeed, he either denies or declines to acknowledge authorship of them. Second, there is no proof that the impugned messages expose highly revealing information about him. At least on the evidence before me, one gains no glimpse into the biographical core of information personal to Lowrey by reading the contents of Exhibit V-D. 68 Lowrey was aware of the fact that Facebook could and would monitor his account in certain circumstances. The nature of those circumstances was not explored in evidence. Nevertheless, it is not unreasonable to assume that they might include tracing authorship of text messages sent by someone hijacking his account for the purpose of committing a crime. R. v. Lowrey B.D. Rosborough Prov. J. 183

69 Lowrey does not appear to have taken many practical steps to ensure that no one could view the contents of his Facebook account and, in particular, the content of text messages. He would leave his Facebook account ‘open’ and accessible on his unlocked cell phone, wherever that happened to be from time-to-time. He knew that those who corresponded with him from the ‘L.’ residence did so from a ‘house computer’ that was accessible to all occupants. He added, without prompting, that he was aware that Angela L.’s brother would use Angela L.’s Facebook account from that computer. Of course, that was the very account used by police to retrieve the contents of Exhibit V-D. 70 Considering the totality of the circumstances, it is my view that Low- rey has failed to prove on a balance of probabilities that he had a reasonable expectation of privacy in the messages forming the content of Ex- hibit V-D. The evidence in this case falls some distance from the clear, convincing and cogent evidence necessary to discharge that burden. I would add, parenthetically, that had it been proven that Lowrey was the individual corresponding with Angela L. in Exhibit V-D, the reasonableness of any expectation of privacy would be materially different. That is not this case, however. And without a reasonable expectation of privacy in the messages forming the content of Exhibit V-D, Lowrey’s Charter, s.8 right is not engaged. For this reason alone, the application should be dismissed.

Authorization by Law 71 In the event that I am in error in my analysis of Lowrey’s expectation of privacy, I will consider whether police had lawful authorization to search for and seize the information contained in Exhibit V-D. Lawful authorization in this case is said to arise from Angela L.’s consent to have police assume her online presence or identity as a Facebook user. Equipped with her user name and password, Cpl. Bristow sought out and printed incriminating messages exchanged between her and a correspon- dent identifying her/himself as Daniel Lowrey. 72 This case is an unusual example of a consent search. The ‘third party’ in this case is a child brought to police by her mother in order to enlist their assistance in protecting that child from an online predator. The child has brought evidence of ‘internet luring’ whereby someone believed to be a much older male has used social media to meet and engage that child in sexual activity. The child’s complaint is substantiated by printed copies of messages exchanged between that person and the child. Those 184 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

materials (Exhibit V-A) unquestionably provide police with reasonable grounds to believe that the offence described in s.172.1(b) C.C. had been perpetrated and that the perpetrator was an individual identifying himself as Daniel Lowrey. 73 Where the victim of a crime engages the police in this fashion, it is somewhat artificial to inquire whether that victim ‘consented’ to the police undertaking an investigation. Not only can Angela L. be said to have consented to Cpl. Bristow’s actions, those actions were undertaken at Angela L.’s request. This is not a case where police seek to have a suspected criminal agree to incriminate himself. And different considerations must apply. 74 Nevertheless, the law governing ‘consent’ to what would otherwise be a search or seizure is well-established. In R. v. Wills, [1992] O.J. No. 294 (Ont. C.A.) (‘Wills’) Doherty J.A. outlined six factors that a court ought to consider when attempting to determine whether a person’s consent can operate as lawful authorization for a warrantless search. I note that these six factors have been approved by the court in R. v. Borden (1994), 92 C.C.C. (3d) 404 (S.C.C.). In Wills, Doherty J.A. introduced and described the factors to be considered in these terms (at para.69): In my opinion, the application of the waiver doctrine to situations where it is said that a person has consented to what would otherwise be an unauthorized search or seizure requires that the Crown establish on the balance of probabilities that: (i) there was a consent, express or implied; (ii) the giver of the consent had the authority to give the consent in question; (iii) the consent was voluntary in the sense that that word is used in Goldman, supra, and was not the product of police oppression, coercion or other external conduct which negated the freedom to choose whether or not to allow the police to pursue the course of conduct requested; (iv) the giver of the consent was aware of the nature of the police conduct to which he or she was being asked to consent; (v) the giver of the consent was aware of his or her right to refuse to permit the police to engage in the conduct requested; and, (vi) the giver of the consent was aware of the potential consequences of giving the consent. 75 Both the viva voce evidence on this voir dire and Exhibit V-B prove the existence of consent by Angela L. for the police to ‘search’ her R. v. Lowrey B.D. Rosborough Prov. J. 185

Facebook account. As previously noted, she wanted them to do so. An- gela L. also had the authority to permit a search of her account. 76 Angela L. was made aware of the contents of Exhibit V-B and was asked if she was prepared to let the police take over her Facebook account. Her evidence was unequivocal; she was “okay with it”. When ‘tested’ in cross-examination as to her understanding of Exhibit V-B she readily acknowledged lack of understanding of that portion of the form referring to her ‘online presence’. However, after reading the lower portion of Exhibit V-B (containing the substance of what she was consenting to), she explained its contents in these terms: “It means that I was free willingly to give up my e-mail and my Facebook account.” 77 Angela L.’s acknowledgement demonstrated that she knew precisely what police were going to undertake (viz. take over her Facebook account). She knew she could refuse and she was aware that one potential consequence was that she would lose access to that account. I infer from the fact that she and her mother reported the contents of Exhibit V-D to police that she knew that there would be a criminal investigation. They wanted that to occur. 78 Consent to search has been referred to as a waiver of one’s privacy interest. See, for example, Criminal Procedure in Canada, Penney, et al, Lexis Nexis Canada Inc., 2001, pp.178-81. And the standard for waiver of a constitutionally-protected right is high. See: R. v. Prosper, [1994] 3 S.C.R. 236 (S.C.C.), at para.50. The standard is no doubt set high in order to ensure that the constitutional rights of those accused or suspected of criminal conduct are adequately safeguarded. This, especially in cases where the accused is detained or otherwise in the power of the state. Quaere whether that same high standard applies to the present circumstances. Here the victim is obviously not detained; she is the victim of a crime. She is seeking police assistance in addressing criminal conduct by consenting to a search of her own property and by permitting them to copy records to which she has a right of access. 79 Even assuming a high standard of proof, however, that standard has been met on the facts of this case. Arlene L. and Angela L. wanted the police to have records of the text messages exchanged between Angela L. and the person describing her/himself as Daniel Lowrey. They knew those records would be used for a criminal investigation and that, as a consequence, Angela L. would thereafter be barred from making use of the Facebook account. Angela L. clearly had an operating mind at the 186 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

time she gave her consent and had the benefit of counsel from her parent before doing so. She knew she could refuse to consent. 80 Apart from any waiver by Angela L., Lowery submits that consent to search for and seize the contents of Exhibit V-D must come from Lowrey himself. In his submission, “... regardless of whether or not Angela [L.] or her mother understood the consents, neither one of them, in law, had authority to waive the section 8 rights of the Applicant.” Phrased in a different fashion, Lowrey asserts that Angela L. has no right to permit anyone to view text message conversations engaged in by someone using his name using her own Facebook account, even though she was a party to those conversations and the person using his name may not be him. 81 This would be a remarkable expansion of what is currently recognized as ‘informational privacy’. The law relating to third party consent to a search was well-summarized by the author of Search and Seizure Law in Canada, Scott Hutchison, et al, looseleaf ed., Toronto: Thomson Canada Limited, 2005 in these terms (at pp.7-12.7 to 7-13 and 7-15 to 7- 16): In order to determine who may consent to a search, the guiding principle must be the ‘reasonable expectation of privacy’ referred to by the Supreme Court in Hunter v Southam Inc. [[1984] 2 S.C.R. 145]. If an individual would not reasonably expect another person to be able to authorize a search, th[e]n that person cannot consent to a search. The question is one of fact and does not turn upon the relationship between the consenter and the suspect. Thus, where a suspect is living with a parent and there are no restrictions as to the parent’s rights to use the residence, the parent may consent to a police search of the residence. On the other hand, where persons sharing a residence have private areas not accessible to other residen[t]s, a search of the private areas can be consented to only by the person controlling that area. ... The question of third party consents remains, then, in the realm of the reasonable, to be assessed against the measure of what it replaces, the judicially authorized search. 82 There is some authority for the proposition that, where two or more persons have “common authority” over a ‘thing’ which comes to be searched, circumstances may justify any one of them giving consent to that search (or waiving the Charter, s.8 right in relation to that thing). In R. v. Lowrey B.D. Rosborough Prov. J. 187

R. v. Sanelli (1987), 60 C.R. (3d) 142 (Ont. C.A.) Cory J.A. (as he then was) commented at p. 152: A person who shares a conversation is, in many respects, in a similar position to one who shares living accommodation with another. There is in accommodation as in conversation an expectation of privacy. Where the accommodation is, like the conversation, shared, that expectation of privacy must be shared. Thus, if one of those with whom the accommodation is shared gives consent to the entry and search of those premises, the consent justifies a warrantless search of the accommodation. In U.S. v Matlock, 415 U.S. 164, 39 L. Ed. 2d 242, 94 S. Ct. 988 (1974), particularly at p. 993, it was held that the voluntary consent of any joint occupant of a residence to search those jointly-occupied premises was valid against the co-occupant and permitted the evidence discovered in the search to be used against that co-occupant in a criminal trial. See also R v Gregson, Ont. C.A., 22nd February 1985 (not yet reported), (now reported, [1985] O.J. No. 1474), where the same principle is recognized in the endorse- ment made by the court, which reads: The officers that entered the shack had the permission to enter from persons who were authorized occupants. In our opinion, the evidence did not support a finding that there had been a breach of the respondent’s Charter rights.’” See also: R. v. Squires, 2005 NLCA 51 (N.L. C.A.); R. v. Horyn, 2003 ABPC 197 (Alta. Prov. Ct.); R. v. King (1993), 114 Nfld. & P.E.I.R. 353 (Nfld. T.D.); R. v. Meyers (1987), 58 C.R. (3d) 176 (Alta. Q.B.), per O’Leary J. (as he then was). 83 The contents of Exhibit V-D were shared by the person using the name Daniel Lowrey and Angela L. The identity of ‘Daniel Lowrey’ is unknown. The only other known participant in that conversation has consented to the police search. In the circumstances of this case and hear- kening back to the preceding discussion of Lowrey’s marginal expectation of privacy, it is my view that Angela L.’s consent was sufficient to authorize the search undertaken by Cpl. Bristow. 84 I have not overlooked the fact that Angela L. ‘agreed’ to keep her conversations with the person identifying her/himself as Daniel Lowrey private. The context of that ‘agreement’ must be borne in mind, however. It was an agreement entered into by a 14 year old child with some history of cognitive issues. Unlike the consent obtained by police, this ‘agreement’ was obtained in circumstances where a marked power imbalance was probable and where there was no intervention or guidance for An- 188 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

gela L. from a parent. In my view, the fact that she ‘agreed’ to privacy of those conversations is of no significance. 85 The Respondent has proven on a balance of probabilities that Angela L. consented to the search of her Facebook account and creation of Ex- hibit V-D. The search and seizure resulting in the creation of that exhibit was undertaken with lawful authorization. There was no violation of the Charter, s.8.

Charter, s.24 86 Having found no violation of Lowrey’s Charter, s.8 right, I decline to decide whether, had he proven such a violation, he has also proven entitlement to a remedy. I note, parenthetically, that the court in Craig declined to grant a remedy, even in circumstances where there was a proven violation of the accused’s Charter, s.8 right. 87 The application is dismissed. Application dismissed. Bio-Chem Consulting Services (1980) v. Syncrude Canada 189

[Indexed as: Bio-Chem Consulting Services (1980) Ltd. v. Syncrude Canada Ltd.] Bio-Chem Consulting Services (1980) Ltd. (Plaintiff) and Syncrude Canada Ltd. (Defendant) Alberta Court of Queen’s Bench Docket: Calgary 1201-14367 2016 ABQB 399 J.T. McCarthy J. Heard: March 14-17, 2016 Judgment: July 13, 2016 Evidence –––– Witnesses — Cogency — Credibility — Miscellaneous –––– Plaintiff invoiced defendant $891,990.75 for laboratory and technical services it performed in considering how to optimize chemical that was added to defendant’s pipeline to limit corrosion of pipe — Defendant denied it commissioned technical work and refused to pay invoice — Plaintiff brought action to recover amount owing on invoice — Action dismissed — Plaintiff’s main witness lacked credibility — Witness appeared forthright and firm on direct examination but he had difficulties with accuracy on cross-examination, and was frequently obstructive and evasive — Witness tailored evidence to suit narrative he wanted to prove — Defendant’s witnesses were forthright in evidence in direct and cross-examination, there was consistency with their version of events, and documents corroborated their version — Where there was conflict, defendant’s evidence was preferred over plaintiff’s evidence. Contracts –––– Formation of contract — Acceptance — Miscellaneous –––– Plaintiff invoiced defendant $891,990.75 for laboratory and technical services it performed in considering how to optimize chemical that was added to defendant’s pipeline to limit corrosion of pipe — Defendant denied it commissioned technical work and refused to pay invoice — Plaintiff brought action to recover amount owing on invoice — Action dismissed — Parties engaged in development of testing protocol related to optimization of chemical, but defendant did not provide plaintiff with mandate to address its corrosion issues, and plaintiff made incorrect assumption — Plaintiff sent revised protocol and budget to defendant, which represented its offer to perform certain services at specified price, and that was when there was clear offer that outlined essential terms — Plaintiff’s offer was not accepted by defendant — While plaintiff assumed that project would be approved by defendant, that assumption was not reasonable in circumstances, as budget had increased considerably — There was no contract formed and invoice was not payable. 190 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

Restitution and unjust enrichment –––– Benefits conferred in anticipation of reward — Quantum meruit –––– Plaintiff invoiced defendant $891,990.75 for laboratory and technical services it performed in considering how to optimize chemical that was added to defendant’s pipeline to limit corrosion of pipe — Defendant denied it commissioned technical work and refused to pay invoice — Plaintiff brought action to recover amount owing on invoice — Action dismissed — Plaintiff was not entitled to payment on quantum meruit basis, as defendant was not enriched by plaintiff’s test findings — Absent proof that defendant was enriched by plaintiff’s efforts, claim could not succeed. Cases considered by J.T. McCarthy J.: Bawitko Investments Ltd. v. Kernels Popcorn Ltd. (1991), 79 D.L.R. (4th) 97, 53 O.A.C. 314, 1991 CarswellOnt 836, [1991] O.J. No. 495 (Ont. C.A.) — referred to Canadian Dyers Assn. Ltd. v. Burton (1920), 47 O.L.R. 259, [1920] O.J. No. 138 (Ont. H.C.) — referred to Foley v. Alberta (Administrator, Motor Vehicle Accident Claims Act) (2002), 2002 ABCA 297, 2002 CarswellAlta 1623, [2002] A.J. No. 1551, [2003] 8 W.W.R. 271, 39 M.V.R. (4th) 228, 330 A.R. 1, 299 W.A.C. 1, 15 Alta. L.R. (4th) 231 (Alta. C.A.) — referred to Kerr v. Baranow (2011), 2011 CarswellBC 240, 2011 CarswellBC 241, 14 B.C.L.R. (5th) 203, 411 N.R. 200, 328 D.L.R. (4th) 577, [2011] S.C.J. No. 10, [2011] A.C.S. No. 10, 93 R.F.L. (6th) 1, 274 O.A.C. 1, [2011] 1 S.C.R. 269, (sub nom. Vanasse v. Seguin) 108 O.R. (3d) 399, 509 W.A.C. 1, 2011 SCC 10, 64 E.T.R. (3d) 1, 300 B.C.A.C. 1, [2011] 3 W.W.R. 575 (S.C.C.) — followed Pacific West Systems Supply Ltd. v. Vossenaar (2012), 2012 BCSC 1610, 2012 CarswellBC 3420 (B.C. S.C.) — referred to Prodigy Graphics Group Inc. v. Fitz-Andrews (2000), 2000 CarswellOnt 1178, [2000] O.J. No. 1203, [2000] O.T.C. 237 (Ont. S.C.J.) — referred to Saint John Tug Boat Co. v. Irving Refinery Ltd. (1964), [1964] S.C.R. 614, 49 M.P.R. 284, 46 D.L.R. (2d) 1, 1964 CarswellNB 4, [1964] S.C.J. No. 38 (S.C.C.) — considered

ACTION by plaintiff to recover amount owing on invoice from defendant.

Johanna C. Price, E. Jane Butcher, for Plaintiff Jonathan W. McCully, for Defendant

J.T. McCarthy J.: Introduction 1 This case involves a dispute between the parties over an unpaid invoice. Bio-Chem Consulting Services (1980) Ltd. invoiced Syncrude Bio-Chem Consulting Services (1980) v. Syncrude Canada J.T. McCarthy J. 191

Canada Ltd. for $891,990.75 on November 29, 2010. Bio-Chem’s invoice covered laboratory and technical services it performed in its lab from December 2008 to December 2009. The laboratory testing considered how to optimize a chemical which is added to Syncrude’s Intersite Pipeline to limit corrosion of the pipe. Syncrude denies that it commissioned the technical work and has refused to pay the invoice. 2 There are two issues for me to decide: • Did the parties enter into an enforceable contract making Syn- crude responsible for the invoice? • Alternatively, if there was no contract should Bio-Chem’s invoice be paid on a quantum meruit basis?

Background 3 Over the course of a three-and-a-half-day trial, I heard evidence from the parties about their course of dealings from 2006 leading up to the present dispute. 4 Although the parties offer divergent views on whether a contract was concluded or not, the events leading up to December 2008 were generally agreed upon. 5 The Plaintiff, Bio-Chem Consulting Services, was founded in 1980. Bio-Chem’s President, Joe Schulz, was a founder of the company and is currently its President, as well at its Operating Manager and Principal Corrosion Advisor. Mr. Schulz is a professional chemist and has worked for many years doing corrosion testing for industry, including the oil and gas industry. His work is often aimed at providing advice on how to miti- gate corrosion. Bio-Chem has an office and independent testing facility in Calgary. 6 The Defendant Syncrude is one of Canada’s largest operators in the oil sands industry. Syncrude uses hot water mixed with ore to recover the oil from the oil sands. When hot water and ore are applied to the oil sands they cause the oil to float while the sands sink, and oil can then be extracted. After this process is complete, the water is sent to a tailings pond where more of the dirt settles out. The water is then reused in the extraction process by being re-heated and applied to further oil sands. 7 Syncrude’s Intersite Pipeline transports recycled water used in this oil extraction process between two mining sites in northern Alberta. The pipeline is approximately 36 km long. It is constructed out of carbon- steel and corrosion is expected over time. Corrosion can be mitigated 192 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

through various strategies, including the addition of zinc-phospate, a corrosion inhibitor, into the water. 8 Pipelines are regulated in Alberta and operators are required to prevent leaks from occurring. Operators must monitor for leaks and report any leaks to the Energy Resources Conservation Board (the “ERCB”). If a pipeline leak occurs, the pipeline operator is required to cut out a piece of the pipe for analysis. The analysis attempts to determine the reason for the corrosion, which the operator must report to the ERCB. The pipeline is shut down in order to remove and replace the pipe when this occurs. 9 The Intersite Pipeline experienced difficulties with leaking in the period of 2006 to 2008, as three leaks occurred during that timeframe. This concerned the ERCB, who required Syncrude to address the issue by coming up with mitigation strategies in a report. 10 Bio-Chem became involved in assessing the pipeline leaks in 2006 through a contract with Co-Syn Technology to analyze a pipe cut-out. Co-Syn Technology provides engineering services to Syncrude. At the time, Co-Syn Technology was a partnership between Colt Engineering, an engineering firm owned by Worley Parsons Canada, and Syncrude. Colt Engineering saw itself as an arm of Co-Syn Technology, with Colt Engineering working directly for Co-Syn Technology, and Co-Syn Tech- nology working directly for Syncrude. 11 The relationship between Bio-Chem and Co-Syn Technology began when Dave Webster from Colt Engineering/WorleyParsons (“Worley Parsons”) was looking for a lab that could do testing on the Intersite pipeline cut-outs in 2006. Dave Webster was the Manager of Pipeline and Asset Integrity for WorleyParsons at the time. Mr. Webster became aware of Bio-Chem and its services and asked for a proposal to analyze the pipe cut-out. Bio-Chem provided a proposal and cost estimate for the work to Mr. Webster, who forwarded the documents to Co-Syn Technol- ogy. Co-Syn Technology was then responsible for getting approval for the funding from Syncrude. The proposal was accepted and Bio-Chem entered into a contract with Co-Syn Technology to provide its services. 12 The evidence was that over time, Mr. Webster asked Bio-Chem for further assistance with testing related to corrosion of the Intersite Pipe- line. Each time, Mr. Webster would put in a request to Co-Syn Technol- ogy for an extension to the contract to cover the additional work, and approval would be given from Syncrude. 13 Once work was completed, Bio-Chem sent its invoices to Co-Syn Technology and Mr. Webster would review the invoice and confirm to Bio-Chem Consulting Services (1980) v. Syncrude Canada J.T. McCarthy J. 193

Co-Syn Technology that the work was performed and priced as expected, and payment to Bio-Chem would follow. 14 Over the period of August 2006 to January 2008, at least 10 projects were provided to Bio-Chem in this fashion. The projects included analysis of pipe cut-outs after leaks on the Intersite Pipeline and testing and recommendations relating to mitigating corrosion of the pipeline. The budgets for the projects ranged between approximately $10,000 and $100,000, with one project in the $300,000 range. 15 During this period of time, Mr. Schulz of Bio-Chem was also in direct contact with Mr. Doug Flint, an engineer who worked directly for Syncrude. It appears that in once instance, while Mr. Webster was away, Mr. Flint provided direct approval of payment for Bio-Chem work. 16 As mentioned, by 2008 a third pipeline leak had occurred, and the ERCB requested a more thorough response from Syncrude relating to the problem. As a part of its package to the ERCB on its mitigation strategies, Syncrude included a report prepared by Bio-Chem which had analyzed pipe cut-outs and made recommendations to prevent corrosion of the pipeline (the “Leak Report”). The Leak Report was originally prepared in late 2007, and was further edited by Bio-Chem in 2008 for submission to the ERCB. 17 In September 2008, Mr. Webster of WorleyParsons wrote to Mr. Schulz of Bio-Chem asking for an update on pending work that had been requested. He advised that the work would either be approved or rejected based “on available funding and revised actual need”. Mr. Schulz responded promptly with an update on the various projects, most of which were nearing completion. At the end of his response, Mr. Schulz added a section entitled “New Business”. In this section, Mr. Schulz identified that through his work to date and review of an internal Syncrude report on corrosion, a possible further issue for testing and analysis was the effectiveness of the zinc-orthophosphate inhibitor, as 25% of corrosion was not being inhibited. He proposed to conduct in-house corrosion tests to establish the optimal dosage and application of zinc-orthophosphate into the pipeline. Mr. Schulz mentioned he had discussed this idea with Mr. Flint of Syncrude, and would prepare a cost proposal for Syncrude’s consideration. After this point in time, Mr. Schulz began work on his proposal for a testing protocol relating to the optimization of zinc-orthophosphate (the Protocol). It is this Protocol, and its costs, that eventually led to the dispute between the parties. 194 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

Development of the Protocol and Diverging Positions 18 In late September 2008, as Mr. Schulz began working on the Protocol he came into more frequent contact with Chris Austin of Syncrude. Mr. Austin is the Technical Advisor for Utilities at Syncrude and has a degree in chemistry. He had worked in water treatment for many years and oversaw the Intersite Pipeline for Syncrude. Mr. Austin explained that Mr. Flint was more involved in the mechanical aspects of the Intersite Pipeline and he was more involved in the technical aspects. In developing the Protocol, the technical aspects were more critical. Mr. Austin and Mr. Schulz discussed various chemicals to test in the Protocol that would potentially help to inhibit corrosion. 19 During their discussions, Mr. Austin suggested Mr. Schulz should obtain chemicals from a company called GE Betz. Mr. Shultz followed up on this suggestion and contacted GE Betz in late September. 20 Up until this point in time, the parties were fairly consistent in presenting the history of the relationship between Syncrude and Bio- Chem. However as the development of the Protocol continued over the fall months, the parties presented different interpretations of events and disagreed on certain critical events.

Evidence of Mr. Schulz 21 Bio-Chem’s only witness in these proceedings was Mr. Schulz. Mr. Schulz’s evidence was that there was great urgency developing the Pro- tocol because the Intersite Pipeline had been shut down by the ERCB. Mr. Schulz believed there was a huge financial incentive to get the pipeline going again. To this end, in the fall of 2008 he was working on the Protocol and making edits to the Leak Report. The Leak Report was to be submitted as a part of the package to the ERCB to alleviate their concerns. Mr. Schulz believed that he had a mandate to help solve the corrosion issues on the Intersite Pipeline and was committed to doing so. 22 Mr. Schulz saw development of the Protocol as a team effort and in- vited input from Syncrude. As Mr. Schulz worked on the Protocol, he liaised with Mr. Flint and Mr. Austin. In early October, he provided Mr. Flint with an advance peak of the Protocol for his review. By this time, he had also commenced work on getting chemicals for testing and was in contact with GE Betz about signing a confidentiality agreement to obtain chemicals. 23 On October 8, 2008, Mr. Flint asked Mr. Schulz for a budget estimate for the Protocol, which Mr. Schulz pegged at $300,000. Bio-Chem Consulting Services (1980) v. Syncrude Canada J.T. McCarthy J. 195

24 In early November, Mr. Schulz received back an edited version of the Protocol with comments and suggestions from Mr. Austin. Mr. Schulz incorporated the comments and suggestions, which included a suggestion for an additional area of testing. 25 In early November, Mr. Schulz and Mr. Austin were also working together on the Leak Report which was being edited for the ERCB. Mr. Austin sent a large number of edits to Mr. Schulz, asking for items to be removed, reworded or revised due to his concern that the Report was too negative. Mr. Schulz responded promptly to incorporate the changes and re-wrote the front end of the report from a more positive perspective. They continued to work on the Leak Report until it was finalized in mid- November. 26 In mid-November 2008, work on the Protocol was also continuing. Mr. Schulz received a revised confidentiality agreement from GE Betz for the chemicals. GE Betz informed Mr. Schulz, Mr. Austin and Mr. Flint that pending receipt of the confidentiality agreement, it would be procuring the product samples and information sheets for the products. 27 Mr. Schulz explained that once he received the chemicals, he could start on the project. In his experience, chemicals are only provided when the project is ready to go ahead. He explained that he did not need the actual chemicals to prepare the Protocol. 28 Mr. Schulz also reached out to Dave Webster of WorleyParsons to discuss the Protocol around this time. Mr. Webster suggested another area for testing which Mr. Schulz incorporated into the Protocol. 29 On December 9, 2008, Mr. Schulz sent Mr. Austin a revision of the Protocol which included input from GE Betz’ water quality experts and the input from Mr. Webster. In his covering email, Mr. Schulz stated the following: ... I believe we have now achieved and [sic] all around consensus on the optimum laboratory testing protocol. I have spoken to Doug Flint about the revisions and he has asked me to forward a summary budget document only, which I shall do next, so as to allow the creation of a formal P.O. Doug did not need the detailed protocol we are forwarding to you, per attached. We have since also received all test chemicals from GE Betz and have commenced some parts of the testing, per my previous comment to you. 196 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

Chris, if there are any further edits, please let me. [sic] Doug told me he would touch base with you to move the accounting process forward. ... 30 On the same date, Mr. Schulz sent a revised budget document to Mr. Flint (the “Budget Document”). He noted that since the initial budget projection, the project had tripled in size due to additional input from Mr. Webster, Mr. Austin and the GE Betz water quality experts, as well as Bio-Chem. The estimate now came to $834,165 for the preparation of the protocol and the testing required, plus another estimated $87,000 for project coordination, report writing, and other tasks. Mr. Schulz noted in his covering letter that he had not forwarded the Budget Document to Mr. Webster, as Doug had said Syncrude needed to initiate the accounting process. Mr. Schulz testified that he assumed Mr. Flint would forward the accounting paperwork to Mr. Webster once it came in. 31 The Budget Document also contained the following information regarding reporting and confidentiality: Please note, Bio-Chem Consulting Services has signed a non-disclosure agreement with GE Betz wherein it is agreed by GE Betz that any and all test findings and information reported to Syncrude Can- ada can only be released to GE Betz through the offices of Syncrude Canada. For clarity, Bio-Chem Consulting Services will not report any of our analytical test findings to GE Betz, its affiliates, or any stakeholder other than Syncrude Canada c/o Messers. Doug Flint and Chris Austin. 32 Mr. Schulz did not hear anything further from Mr. Flint after forwarding this document. 33 Mr. Schulz explained that by December 9, 2008, he had started some of the preparatory work of setting up testing equipment with the computer and cutting specimens from pipe, as well as doing base-line runs to get data on corrosion rates without the chemicals. 34 Mr. Schulz’s position was that by December 9, 2008, the parties had come to an agreement on the Protocol. He characterized the Protocol as a team effort between himself, Mr. Webster and Mr. Austin. Mr. Schulz received no further edits or communications from Syncrude and believed he had approval for the Protocol based on all of the parties’ dealings to date. He also relied on the fact he had received the chemicals for testing as a sign that the project had approval. In his experience it was not unusual to proceed with a project and have the accounting documentation Bio-Chem Consulting Services (1980) v. Syncrude Canada J.T. McCarthy J. 197

come later. For that reason, he was not concerned when he did not hear anything further from Syncrude. They had developed a relationship over the previous two years and he was not concerned about the accounting process which was out of his hands. 35 Mr. Schulz carried out the testing in the Protocol over the next year, from approximately December 2008 to November 2009. He did not have any contact with Mr. Flint or Mr. Austin during that period. He was in contact with Victoria Stranzinger of Worley Parsons in February of 2009, when he sent her a copy of the Protocol. Ms. Stranzinger was a colleague of Mr. Webster, and was described by Mr. Schulz as his principal contact during that year. Ms. Stranzinger appeared to be interested in the work and its potential application. 36 Mr. Schulz characterized Worley Parsons as an agent of Syncrude, as they were contracted to Syncrude for engineering services. He testified that over the year of testing, he provided three interim updates to Worley Parsons. He believed the interim reports or meetings were in February, May and December of 2009. Worley Parsons was his point of contact to disseminate information on the testing. He was used to reporting to them because of his prior work, and they were located in Calgary which made it easy to meet, unlike Mr. Flint and Mr. Austin who were located in Fort McMurray. 37 On December 8, 2009, at the third update, Mr. Schulz provided a Power Point presentation to Ms. Stranzinger and Mr. Webster on the Pro- tocol testing and findings to date. By this point in time, most of the testing had been completed and Mr. Schulz was able to provide a comprehensive 40-page report, which was labeled as Interim Report #3. The presentation took approximately two hours and was requested by WorleyParsons. Ms. Stranzinger was interested in the report and corresponded with Mr. Schulz regarding further testing suggestions and questions after the meeting. Mr. Schulz believed she was passing on the information to Syncrude and that it would be implemented by them. 38 By this point in time, Mr. Schulz had still not received the accounting paperwork from Syncrude and was concerned. He had not done any in- voicing on the project to date. He mentioned the accounting issue to Mr. Webster at the meeting, who promised to follow up with Syncrude. Mr. Webster wrote to Mr. Austin later that day, indicating that Mr. Schulz had met with him and provided interim testing results. Mr. Webster noted substantial charges had been incurred and Bio-Chem could not be 198 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

paid without the proper paperwork in place. He asked for Mr. Austin and Mr. Flint’s assistance. 39 In the weeks and months following this meeting, Mr. Schulz attempted to contact Mr. Flint and Mr. Austin regarding the accounting, without success. He hoped the paperwork would be generated so he could bill for the project. After waiting for many months, he eventually created an invoice for Syncrude totalling $891,990.75 on November 29, 2010. Mr. Schulz sent the invoice to Mr. Flint, Mr. Austin, and a senior operating officer at Syncrude. 40 There was correspondence between the parties after this date regarding the invoice, and it became apparent that Syncrude’s position was that it had not agreed to proceed with the Protocol. Syncrude refused to pay the invoice and Bio-Chem commenced the within Statement of Claim on November 14, 2012.

Evidence of Syncrude 41 Syncrude called three witnesses at trial, Mr. Austin, Mr. Webster, and Ms. Stranzinger. They presented a different interpretation of the events in the fall of 2008 while the Protocol was being developed. Their evidence diverges significantly regarding the events from December 2008 through to December 2009. 42 Mr. Austin agreed that he and Mr. Schulz worked together developing the Protocol in the fall of 2008. However he differed in his perspective of the importance of the Protocol and its urgency. He understood that Mr. Schulz had offered to help with corrosion mitigation and Mr. Austin was open to hearing his proposal and the costs for the proposal. Mr. Austin’s evidence was that there was no urgency to the Protocol. He stated that the Intersite Pipeline was frequently shut down and that shut downs were not costly and did not affect oil production. He explained that both mining sites have abundant water supplies and were not depen- dant on the recycled water from the Intersite Pipeline to function. The Protocol was related to the longevity of the pipeline, and not to the startup of the pipeline. 43 Mr. Austin recalled that in the fall of 2008, he was more concerned about providing a response to the ERCB after the third leak on the pipeline. He provided edits to Mr. Schulz for the Leak Report. In Mr. Aus- tin’s opinion, the Leak Report contained unsubstantiated recommendations which would have been difficult for Syncrude to implement, such as reducing organics in the water, so he asked for those to be taken out,. Bio-Chem Consulting Services (1980) v. Syncrude Canada J.T. McCarthy J. 199

The Leak Report was one item in the package of reporting going to the ERCB to satisfy the ERCB’s concerns about leaks. Another part of the package was Syncrude’s plan to reduce oxygen in the water going into the pipe, as oxygen contributes to corrosion. 44 In terms of the confidentiality agreement with GE Betz and the supply of chemicals, Mr. Austin was aware as a former GE Betz employee that they were concerned with their intellectual property. He believed the confidentiality agreement was necessary for GE Betz to provide Mr. Schulz with information necessary to develop the Protocol and estimate its costs. 45 As they worked on the Protocol, Mr. Austin asked Mr. Schulz to work on the tone of the Protocol to make it more positive. Mr. Austin knew he would need to get approval for the Protocol from upper management, and wanted it to focus less on what Syncrude was doing wrong and more on what positive results would come from the testing. As the Proto- col neared completion, he was still waiting on the final cost estimate in mid-November. Costs were of concern to both he and Mr. Flint. 46 Mr. Austin denied that Mr. Schulz was given a mandate to solve corrosion issues on the Intersite Pipeline, stating that was, in fact, Mr. Aus- tin’s mandate. 47 Mr. Austin received the revised Protocol and covering letter from Mr. Schulz on December 9, 2008. He also received the budget around this time from Mr. Flint. When questioned about the comments in the covering letter that Mr. Schulz had received the chemicals and had started testing, Mr. Austin stated it did not resonate with him that this meant anything other than Mr. Schulz was ready to carry out the work. He denied that he should have told Mr. Schulz to stop testing if the Protocol was not yet approved, noting “I never told him to start testing”. 48 Mr. Austin agreed that he did not provide more input on the Protocol after December 9, 2008. He took the proposal to his superior, Joe Matula, and asked for direction. Mr. Matula said no to the proposal as the proposed budget was too large for them to accept. Mr. Matula suggested Mr. Austin work with the technical department at Exxon-Mobile instead, which is Syncrude’s parent company. 49 Mr. Austin testified that he phoned Mr. Schulz in early January 2009 to tell him the news. He had a vivid recollection of telling Mr. Schulz that he was sorry, but that Syncrude was not proceeding with the Proto- col work. Mr. Schulz was upset and stated that he had already started 200 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

working on the project. Mr. Austin replied that he should not have done so as there was no Contract Work Authorization (CWA) in place. 50 Mr. Austin did not hear about the Protocol again, nor did he hear from Mr. Schulz, until December 2009 when he received the email from Mr. Webster that testing had proceeded and there was an issue with accounting. Mr. Austin was shocked to hear that testing had gone ahead. 51 As noted, Mr. Webster of WorleyParsons also gave evidence at trial. Mr. Webster was asked at trial about his involvement in developing the Protocol. He did not recall having any input into the Protocol or receiving the draft document, though he did recall hearing from Mr. Schulz that he was doing zinc phosphate testing for Syncrude around December 2008 or January 2009. Mr. Webster was somewhat surprised by this, as he did not know that Bio-Chem was on Syncrude’s approved vendor list. He noted that not even WorleyParsons was on the Syncrude approved vendors list, only Co-Syn Technology was. However, whatever interactions were going on with Syncrude were not within his knowledge. Mr. Webster was not at all involved in the work in December 2008 or Janu- ary 2009. 52 Mr. Webster did not receive interim reports #1 or #2, or have meetings with Mr. Schulz in the first half of 2009. Mr. Webster did recall receiving a presentation from Mr. Schulz in late 2009 where he presented the results of his testing. However, Mr. Webster’s recollection was based on documentation from that time, and was not an independent recollection. He confirmed that at the meeting, Mr. Schulz informed him that he could not get Mr. Austin or Mr. Flint to return his calls and sought assistance with accounting. 53 Mr. Webster’s email to Mr. Austin of December 8, 2009, the date of the meeting, reflects his understanding of events at the time, and shows that he did not feel that he was in the loop on the project: Chris, I had a meeting with Joe Schulz this morning where he presented the interim results of the testing entitled Optimization of Corro- sion Inhibition Practices. The test protocol that he followed was apparently developed with your assistance and in collaboration with GE Betz. This presentation was Update #3 and was provided to WorleyParsons as a courtesy, since we work closely with Doug in trying to keep the product in the pipeline... After seeing the amount of testing completed, I asked Joe if he had a Syncrude CWA for the testing work (knowing that it was not part of Bio-Chem Consulting Services (1980) v. Syncrude Canada J.T. McCarthy J. 201

the CoSyn CWA for the ongoing pipeline integrity work) and the answer was no but he was waiting for it. .... The bottom line is that there have been substantial charges incurred by Bio-Chem and there is no way that they can be paid without the appropriate Syncrude paperwork being in place. As I was never in the loop on this project, I have no idea if the test program was approved so can’t be of much assistance. The point of this email is to request that you, with Doug Flint’s assistance, address the accrued Bio-Chem charges and determine the path forward. ... 54 Mr. Webster characterized Bio-Chem as a contractor and disagreed Mr. Schulz was given a mandate to do corrosion mitigation on the Inter- site Pipeline. WorleyParsons was the corrosion consultant to Syncrude. Mr. Webster stated that Mr. Schulz was a contractor to WorleyParsons and Syncrude through Co-Syn Technology, he was contracted to do specific elements of work relating to the pipeline, and did that work well. There was no further mandate. 55 Victoria Stranzinger also gave evidence at trial. At the time of these events, Ms. Stranzinger had been newly hired by WorleyParsons as their Pipeline Corrosion Specialist, and started work in July 2008. Ms. Stranz- inger first met Joe Schulz in the fall of 2008 when she went to his offices to inspect and take photos of the pipe. Her next contact with Mr. Schulz was in February 2009 when she received a copy of the Protocol. She was interested in the Protocol and read it. She did not recall having a presentation about the Protocol or receiving Interim Report #1 with an update on the Protocol around that time. 56 Ms. Stranzinger was curious about the services Mr. Schulz provided, as she had previously run a lab, and arranged for a tour at Bio-Chem’s site in April 2009. She recalled that during the tour they went to the Bio- Chem boardroom and she was shown some documents, including graphs with preliminary results from the Protocol testing. Ms. Stranzinger recalled asking for a copy of the documents but was told by Mr. Schulz that he could not share them as they were proprietary, and had not yet been shared with Syncrude. Mr. Schulz told Ms. Stranzinger the Syncrude work had been authorized by Mr. Austin. 57 The next time Ms. Stranzinger had contact with Mr. Schulz was at the December 8, 2009 meeting with Mr. Webster. She did not recall meetings or conversations between the April tour and the December meeting, and did not receive Interim Report # 2 in that timeframe. The December meeting was in the morning at WorleyParsons’ office. Mr. Schulz pro- 202 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

vided a PowerPoint presentation and Interim Report # 3, and gave them a chance to ask questions. 58 Later that afternoon, Ms. Stranzinger emailed Mr. Schulz with questions and suggestions for testing, and also asked for a soft copy of In- terim Report #3, which he provided. However, two days later she called Mr. Schulz asking him to postpone the further testing until the project was approved, and advised Mr. Webster she had done so by email. She did not appear to have any further contact with Mr. Schulz. 59 Mr. Austin and Ms. Stranzinger both gave evidence at trial that they did not use the information from Bio-Chem’s Interim Report #3 to Syn- crude’s benefit. Mr. Austin said any implementation of the recommendations would have been done at his direction, and that did not occur. Syn- crude used Brenntag, not GE Betz, as its zinc-orthophosphate supplier prior to the Protocol and continues to use Brenntag to this day. Ms. Stranzinger testified that by the time she received Interim Report #3 she had finished her work on recycled water and had already reported to Syn- crude, therefore none of the information was passed on to Syncrude. 60 Mr. Webster’s evidence was that he did not know if Syncrude had switched chemical suppliers or changed the flow rate on the Intersite Pipeline. He could not answer a question on whether Syncrude had changed the water temperature in the pipeline, noting he is not part of Syncrude operations.

Findings 61 I must determine whether Bio-Chem and Syncrude entered into an enforceable contract for a testing protocol on zinc phosphate optimization. 62 In order to find a legally enforceable contract, Bio-Chem must show that the parties reached an agreement. For a concluded contract to exist, the court must find that the parties: (1) had a mutual intention to create a legally binding contract; and (2) reached agreement on all of the essential terms of the settlement: see: Bawitko Investments Ltd. v. Kernels Popcorn Ltd. (1991), 53 O.A.C. 314, 79 D.L.R. (4th) 97 (Ont. C.A.). 63 The basic position of the common law is clear that a contract is made when an offer, in accordance with its terms, is accepted. A contract does not exist until there has been a definite offer and an unqualified and unconditional acceptance of the terms of the offer is communicated to the offeror: see: Canadian Dyers Assn. Ltd. v. Burton (1920), 47 O.L.R. 259, [1920] O.J. No. 138; Bawitko Investments. Bio-Chem Consulting Services (1980) v. Syncrude Canada J.T. McCarthy J. 203

64 Acceptance is defined by Professor G.H.L. Fridman in his text, The Law of Contract in Canada (2011), 6th edition, at p. 45, as “... the signi- fication by the offeree of his willingness to enter into a contract with the offeror on the terms offered to him “. At p. 46, he goes on to say “[t]he response of the offeree must be a clear indication that the offer has been accepted. It must be unconditional, clear and absolute.” 65 The test for whether there has been acceptance is objective, rather than subjective. Professor Fridman explains at p. 47: Whether or not there has been an acceptance depends upon whether the offeree has so conducted himself that a reasonable man would believe that he has accepted, or is accepting, the offer in question, at least as long as the offeror has acted on such belief. The generally adopted theory of offer and acceptance is that the parties’ behaviour must be viewed objectively, in terms of how the reasonable man, if he were a bystander, would describe the effect of what he had seen or heard. 66 In some cases, acceptance can be communicated through conduct, rather than expressed orally or in writing. The Supreme Court considered the issue of acceptance by conduct, which again must be judged objectively, in Saint John Tug Boat Co. v. Irving Refinery Ltd. 1964 CanLII 88, [1964] S.C.R. 614, 46 D.L.R. (2d) 1, [1964] S.C.J. No. 38 (S.C.C.). The question is whether a reasonable person would interpret the offeree’s conduct as an acceptance of the offer. The applicable principle was described by Richie J., on behalf of the Court at p 7(QL): The test of whether conduct, unaccompanied by any verbal or written undertaking, can constitute an acceptance of an offer so as to bind the acceptor to the fulfilment of the contract, is made the subject of comment in Anson on Contracts, 21st ed., p. 23, where it is said: The test of such a contract is an objective and not a subjective one, that is to say, the intention which the law will attribute to a man is always that which his conduct bears when reasonably construed, and not that which was present in his own mind. So if A allows B to work for him under such circumstances that no reasonable man would suppose that B meant to do the work for nothing, A will be liable to pay for it. The doing of the work is the offer; the permission to do it, or the acquiescence in its being done, constituted the acceptance. In this connection reference is frequently made to the following statement contained in the judgment of Lord Blackburn in Smith v. 204 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

Hughes [ (1871), L.R. 6 Q.B. 597 at 607.], which I adopt as a proper test under the present circumstances: If, whatever a man’s real intention may be he so conducts himself that a reasonable man would believe that he was consenting to the terms proposed by the other party and that other party upon that belief enters into a contract with him, the man thus conducting himself would be equally bound as if he had intended to agree to the other party’s terms. 67 In this case, Mr. Schulz submits that it was reasonable for him to believe, based on the conduct of Syncrude’s employees and WorleyPar- sons as Syncrude’s agent, that Syncrude accepted Bio-Chem’s offer to perform the testing set out in the Protocol and accompanying budget. 68 My findings in this case turn in large part on credibility. There are small and large discrepancies between the parties regarding the events of 2008 and 2009, most notably in relation to whether Mr. Austin called Mr. Schulz to inform him that Syncrude would not proceed with the Pro- tocol, an event which Mr. Schulz denies occurred. 69 In assessing credibility, I have considered the following factors: • Demeanour of the witness: including forthrightness, spontaneity, firmness of memory, accuracy, and evasiveness; • Bias and interest in the outcome of the case; • Consistency: whether there is internal consistency with other parts of the witness’ evidence, both at trial and on prior occasions; • Corroboration: whether there is external consistency with other credible witnesses and documents; • Whether there is an air of reality to the evidence. See: Prodigy Graphics Group Inc. v. Fitz-Andrews, [2000] O.T.C. 237, [2000] O.J. No. 1203 (Ont. S.C.J.); and Pacific West Systems Supply Ltd. v. Vossenaar, 2012 BCSC 1610, 2012 CarswellBC 3420 (B.C. S.C.). 70 I find that Mr. Schulz lacked credibility as a witness. Although he appeared forthright and firm in his memory on direct examination, he had difficulties with accuracy on cross-examination and when confronted with previous answers he had given in discovery. His answers on cross- examination were frequently obstructive and evasive. Mr. Schulz refused to answer most questions directly, and danced around the answers to pointed questions when he knew the answer could be problematic to his case. He was intent on answering questions in a way that substantiated Bio-Chem Consulting Services (1980) v. Syncrude Canada J.T. McCarthy J. 205

his version of events or characterization of relationships, for example in- sisting that WorleyParsons was an agent of Syncrude. Overall, I found his evidence to be self-serving. His evidence was also uncorroborated or contradicted in key areas, such as whether and when Interim Reports #1 and #2 were delivered to WorleyParsons, and whether he interim billed or not. 71 On the other hand, I found the Syncrude witnesses to be forthright in their evidence in direct and cross examination. There was consistency in their version of events and characterization of the relationship between Syncrude and WorleyParsons. They were not hesitant to admit if they could not remember a detail or event. Overall, the documents corroborated their version of events in the fall of 2008 and in 2009. 72 I will provide a few examples of difficulties with Mr. Schulz’s evidence. 73 Mr. Schulz’s position at trial was that an agreement had been reached by the time he forwarded the finalized Protocol and Budget Document to Syncrude on December 9, 2008. He maintained that approval had been given for the project based on all of the interactions between the parties leading up to that date, and the fact that he had signed a confidentiality agreement with GE Betz and was in receipt of the chemicals. Mr. Schulz’s position was that all there was left to do after December 9, 2008 was to start on the project, as he had his instructions and approval, and that was what he did. He did not need to hear back from Mr. Austin or Mr. Flint regarding edits or the budget. 74 After giving this evidence, Mr. Schulz was confronted with his evidence at discovery (in 2013) regarding events in the December 2008 to January 2009 timeframe. He was asked when he next heard from Mr. Austin or Mr. Flint after sending the December documents. He replied that “we attempted to get a hold of Mr. Austin on several occasions, un- successfully”. He stated that this was during December 2008 to January 2009 timeframe, when the work was starting. Mr. Schulz explained the reason he was trying to get a hold of Mr. Austin “was because we wanted to secure his technical input or any opinions that he may have regarding the technical document we prepared, because there was — it was still in good time to make any changes, if he felt that was appropriate”. 75 This evidence clearly contradicts Mr. Schulz’ trial evidence that there was agreement on the Protocol by December 9, 2008. When confronted with this discrepancy, Mr. Schulz explained he had major surgery prior to the discovery, so was tired and his memory was lacking. He stated 206 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

there were not various attempts to contact Mr. Austin at that time. Mr. Schulz explained that at discovery he confused the period of time in De- cember 2008/January 2009 with December 2009/January 2010 - when he tried to call Mr. Austin numerous times about the invoice. He apologized and stated that his discovery evidence was incorrect. 76 This is an example of Mr. Schulz tailoring his evidence at trial, perhaps unconsciously, to suit the narrative he wanted to prove - namely that the Protocol was finalized and approved by December 9, 2008. 77 Mr. Schulz was also contradicted at trial by his discovery evidence relating to the relationship of WorleyParsons to Syncrude. In his Budget Document, Mr. Schulz wrote that Bio-Chem would not report their test findings to “GE Betz, its affiliates, or any stakeholder other than Syn- crude Canada c/o Messrs. Doug Flint and Chris Austin”. However his evidence at trial was that he did report test findings to Ms. Stranzinger and Mr. Webster of WorleyParsons. Mr. Schulz justified this by stating that WorleyParsons was an agent of Syncrude. 78 Mr. Schulz was then presented with discovery evidence where he was asked about the meaning of “stakeholder” in the very same phrase in the Budget Document. He answered that WorleyParsons was a stakeholder because they had an interest in the project. As such, they were not entitled to the confidential results of the testing: Basically, stakeholders would be those people that have an active interest in the progress of the project, the result that come about from doing any amount of work. And by the nature of the business relationship that we have and the professional status that I have and that my company has, it means that stakeholders would be WorleyPar- sons’ staff. You know it’s nobody else’s business. It’s a confidential matter, what goes on, what comes out, and what the consequences of findings are. 79 This is another example of Mr. Schulz characterizing events at trial in a way that he believed would suit his case, despite his own earlier contra- dictory evidence. 80 I find that Mr. Schulz’ discovery evidence that WorleyParsons was a stakeholder, and not entitled to the testing results, was his actual belief at the time of the events in 2008/2009. Ms. Stranzinger testified that when she asked for copies of the testing results in April 2009 Mr. Schulz refused, stating that the information was proprietary. 81 There were other instances where Mr. Schulz’ evidence was not corroborated. He provided different dates for when he provided Interim Re- Bio-Chem Consulting Services (1980) v. Syncrude Canada J.T. McCarthy J. 207

ports #1 and #2 in oral evidence and documentary evidence. For example, Interim Report #1 was cited as being presented in February on some occasions and in April on other occasions. This suggests his memory and record keeping of these events is poor. As well as confusion over the timing of the reports, there were no copies of Interim Reports #1 or #2 tendered in evidence, and the WorleyParsons witnesses denied ever receiving them. Ms. Stranzinger did recall an update meeting in April 2009, however she also clearly recalled that Mr. Schulz refused to provide copies of the documents. 82 Another example of uncorroborated evidence was Mr. Schulz’s testimony on the importance of the confidentiality agreement with GE Betz and that his receipt of the chemicals signified project approval. The documents in evidence show that GE Betz first provided a confidentiality agreement to Mr. Schulz for signing on October 7, 2008, which was before the initial Protocol document or preliminary budget were even provided to Syncrude. A revised confidentiality agreement was sent to Mr. Schulz November 13, 2008, with a notation asking which address the product samples should be sent to. The agreement was executed by Mr. Schulz November 21, 2008. This was before the Protocol was finalized and before the revised budget, which had tripled, was presented to Syn- crude. Thus the documents do not support a finding that the confidentiality agreement signified project approval. Nor did Mr. Schulz provide any corroboration from others in the industry that the receipt of chemicals signifies project approval. 83 Therefore, in considering credibility in this case, I prefer the evidence of Syncrude to that of Mr. Schulz where there is conflict. 84 With this in mind, I make the following findings. I find that Bio- Chem and Syncrude engaged in the development of the Protocol in the fall of 2008. There was serious interest in the Protocol expressed by Syn- crude based on its participation in editing the Protocol and based on the fact that it continued development of the protocol after the first budget estimate of $300,000 on October 8, 2008. However, I find that Syncrude did not provide Bio-Chem and Mr. Schulz with a mandate to address its corrosion issues. That was an incorrect assumption by Mr. Schulz. 85 Nor did Syncrude operate from a sense of urgency regarding the Pro- tocol. The evidence of Mr. Austin and from correspondence at the time shows that the urgency related to finalizing edits on the Leak Report to the ERCB. The urgency did not extend to the Protocol. In internal emails between Mr. Flint and Mr. Austin at Syncrude regarding the Protocol 208 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

development in October, Mr. Flint stated that “[t]ime is something I think we have on this matter”. The emails show that Mr. Austin took almost a month to respond with his comments on the first draft of the testing Protocol. 86 It appears that while Mr. Shulz was thorough in his development of the Protocol by consulting with others outside of Syncrude, there were not clear communications on how this would affect the budget, or approval for the project. This was likely an oversight by both parties. Mr. Schulz made an incorrect assumption that the budget was not an issue, despite the fact that it had increased from $300,000 to approximately $900,000, and was far above the monetary range of any work he had performed before. I believe Mr. Austin’s evidence that cost was a significant issue. 87 Therefore, I find that as of December 9, 2008, when the revised Pro- tocol and Budget Document were sent to Syncrude, this represented Mr. Schulz’ offer to Syncrude to perform certain services at a specified price. It was on this date that there was a clear offer that outlined the essential terms. Mr. Schulz’ communications to Mr. Flint and Mr. Austin of that date show he believed the project would be approved, and the accounting was a technicality to follow, but that was an assumption on his part. I do not find it was a reasonable assumption considering the degree to which the budget had expanded. 88 I accept Mr. Austin’s evidence that it did not resonate with him that Mr. Schulz had started testing by December 9, 2008. Mr. Austin’s comment that he “didn’t tell him to start testing” is indicative of Mr. Austin’s (and Syncrude’s) position at the time, which is that an agreement had not been concluded and approval was still needed from upper management. 89 As mentioned, I do not accept Mr. Schulz’s position that the signing of the confidentiality agreement and receipt of chemicals signified acceptance of the project. The timing in the documents did not support his position and furthermore, GE Betz was not in a position to provide approval of the project. Nor was there any substantiation that such a custom exists in the industry. 90 I find Mr. Schulz’s offer of December 9, 2008 was not accepted by Syncrude. I believe Mr. Austin’s evidence that he called Mr. Schulz in January 2009 and advised he was sorry but the project was not approved. I also note that Mr. Austin’s evidence to the same effect was read-in by Mr. Schulz’ counsel at trial, and bolsters this finding. Discovery evidence read-in by an opposing party becomes evidence in the action for Bio-Chem Consulting Services (1980) v. Syncrude Canada J.T. McCarthy J. 209

all purposes: Foley v. Alberta (Administrator, Motor Vehicle Accident Claims Act), 2002 ABCA 297, 15 Alta. L.R. (4th) 231 (Alta. C.A.). 91 There was no contract formed in this case, and the invoice is not payable on that basis. 92 It is unfortunate that Mr. Schulz made costly assumptions in this case and proceeded without authorization. It is clear that Syncrude and WorleyParsons viewed Mr. Schulz as a valuable contractor to address specific needs, but they did not give him a mandate beyond that.

Quantum Meruit 93 Bio-Chem claimed that in the alternative, I should find that Bio-Chem should be compensated for unjust enrichment on a quantum meruit basis. According to the Supreme Court in Kerr v. Baranow, 2011 SCC 10, [2011] 1 S.C.R. 269 (S.C.C.), quantum meruit can be restitutionary award of compensation for unjust enrichment. Bio-Chem would be required to prove the following elements: (i) The defendant has benefited or been enriched by the plaintiff’s efforts and contributions; (ii) The plaintiff has suffered a corresponding deprivation; and (iii) There is no juristic reason for the enrichment. 94 Bio-Chem’s difficulty in this case is that that Syncrude was not enriched by Bio-Chem’s test findings. Mr. Schulz assumed the information was passed on from Worley Parsons to Syncrude for implementation, but this was not born out in the evidence. Ms. Stranzinger testified she had already reported to Syncrude on recycled water by the time she received Bio-Chem’s results. 95 Mr. Austin was also clear that none of Bio-Chem’s recommendations were implemented at Syncrude. It would have been Mr. Austin who di- rected changes to their program, and they are on the same program they were at the time, just with tighter controls, such as controlling the oxygen letdown into the water as per the Syncrude report to the ERCB. Syncrude used Brenntag, not GE Betz, as its zinc-orthophosphate supplier prior to the Protocol and continues to use Brenntag to this day. 96 Absent proof of the first element of enrichment, Bio-Chem’s claim must fail. 97 In the result, the claim of Bio-Chem Consulting against Syncrude Canada is dismissed. 210 ALBERTA LAW REPORTS 40 Alta. L.R. (6th)

Costs 98 If the parties are unable to agree on costs, they may make an appointment to speak to me. Action dismissed.