Canada: Update On The Enmax Case: A "Reasonable" Outcome?

It may not have been the collision of two worlds, but there is at least a fender bender to deal with. In Enmax Energy Corporation v. Alberta, the Alberta Court of Appeal ("ACA") recently reversed the decision of the trial court that had allowed two subsidiaries of Enmax Corporation ("ENMAX") to deduct interest paid on three inter-company loans at rates of 11.5 per cent, 10.3 per cent, and 9.9 per cent.1 Although both the trial court and the ACA spent a lot of time on the principles of interest deductibility related case law and legislation, the ACA went to great pains to describe its decision as being driven by regulatory as opposed to tax considerations.


The two subsidiaries, Enmax Energy Corporation, and Enmax PSA Corporations were exempt from federal tax by virtue of the operation of paragraph 149(1)(d.6) of the Income Tax Act (Canada) ("ITA"). However, both corporations were required to make payments to the Balancing Pool.2 Those payments were computed under the Payment in Lieu of Tax Regulation, Alta Reg 112/2003 ("PILOT Regulation"), as being equivalent to the amount of tax that would otherwise have been payable under the ITA and Alberta Corporate Tax Act. The Balancing Pool payments regime is established by the Electric Utilities Act, SA 2003, c E-5.1 ("Utilities Act") and the PILOT Regulation.

ENMAX was also tax exempt for the purposes of the ITA, but it was not subject to the Balancing Pool payment regime. That regime only applied to a "municipal entity" which referred to a municipality or corporation that was a retailer of electricity, a holder of a Power Purchase Agreement ("PPA") or an entity that owned a right derived from a PPA that allowed it to exchange electrical energy and ancillary services with a subsidiary of a municipality. There is no reference to a holding company in that definition, although that would be the logical way to organize the municipal ownership of regulated and non-regulated businesses.

Review of Court Decisions

The trial court decision3 made a number of taxpayer friendly findings:

  1. A 91 per cent debt to equity ratio was not offensive in the absence of a domestic thin cap rule. See Paragraph 271.
  2. Each of the inter-company notes had an "Inter-Company Debt Pricing Memorandum" which set out the borrower's explanation and justification for the reasonableness of the interest payable under each note. Having this type of "pricing" memo to support the terms of the notes and the business rationale was a reasonable process that will generally lead to a reasonable amount.
  3. Reasonableness in the context of applying the interest deductibility test is a subjective consideration. It does not necessarily follow that paying an interest rate that exceeds market is unreasonable, if business considerations otherwise support that conclusion. Moreover, the reasonableness of the interest rate should not be conflated with an arm's length standard — they are not the same test. As pointed out at paragraph 113, when the ITA requires an arm's length standard — that standard is specifically described in the applicable legislation.
  4. A final interest rate which was 150 bps in excess of the arm's length standard could still be reasonable, given the taxpayer's desire to have the top holding company act as the exclusive source of external financing. See paragraph 267.

In reversing those conclusions, the ACA substituted interest rates of 5.42 per cent, 5.26 per cent, and 5.24 per cent for the stated interest rates in the three loan agreements of 11.5 per cent, 10.3 per cent and 9.9 per cent, respectively. The principal justification for this conclusion was the stated purpose of the legislative scheme under the Utilities Act and PILOT Regulation to level the playing field between municipal entities in the electricity sector and the private sector. The conclusion reached by the ACA was that the playing field was titled in favour of ENMAX and the City of Calgary because they used artificial stratagems which were dependent on them not being subject to the Balancing Pool payment and tax exempt under the ITA.

In other words, artificial stratagems — which themselves depend on the fact that Calgary and ENMAX are not subject to payment of Balancing Pool Payments or income tax — are not reasonable. Otherwise, corporate parents like ENMAX, which are not subject to income tax or Balancing Pool Payments, could lend funds to their municipal entity subsidiaries at disproportionately high interest rates. This would in turn allow the municipal entities to enjoy corresponding disproportionately high deductions against their Balancing Pool Payments while the corporate parent collects these interest payments free of both income tax and Balancing Pool Payments. Without an objective limit on the amount of interest deductions, the municipal entity would enjoy a competitive advantage over their private sector competitors. This would render the Balancing Pool Payments regime toothless. [para 8]

The "artificial stratagems" identified by the ACA seem to be a combination of the corporate governance policy which required all external loans to be sourced through ENMAX, and the structuring of the inter-company loans to have a 91 per cent debt to equity ratio without the robust roster of financial covenants you would normally see in an external loan. The effect of the latter was to make the loans appear riskier than they might otherwise be, driving up the interest rate costs. As an aside, it would have been interesting to hear evidence on what the advantages were, if any, of sourcing all capital requirements to a parent company.

The ACA and the trial court were faced with widely varying estimates from expert reports of what a reasonable interest rate should be. They dramatically differed on: (1) whether an implicit parent guarantee of the debt should be considered; (2) the use of "midpoint" credit rating by the trial court with numerous adjustments to establish a reasonable interest rate; and (3) whether the reasonableness of an interest rate was the same or at least quite similar to establishing a market rate of interest.

The ACA identified seven different reviewable errors made by the trial court in coming to its conclusion, the more interesting of which we discuss below.

First, the interpretation of the reasonableness requirement in paragraph 20(1)(c)(i) ITA should have taken into account government policy expressed in the Utilities Act in deregulating the electrical power market.

The trial judge erred in concluding that the interest payable to ENMAX on the three inter-company loans was reasonable and thus fully deductible. Determining whether the interest paid on each loan was reasonable requires proper consideration of the legislative scheme under the Utilities Act and the PILOT Regulation, including its key purpose, namely to level the playing field. Not only must the interest rate itself be objectively reasonable, but the structure of each loan must also be objectively reasonable to the extent it affects the amount of the interest paid.

[para 7]

The trial court had concluded that paragraph 20(1)(c) ITA should have the same meaning under the PILOT Regulation as it did under the ITA — it would be anomalous to find that Alberta's legislature wanted to incorporate by reference the words of the ITA, but not the jurisprudence considering the provision. But, because of the government policy expressed above, the ACA felt itself free to conclude that this was not an income tax case, and it had flexibility in applying the interest deductibility rules. Specifically, ENMAX did not have the right to organize its affairs in a tax efficient fashion, consistent with the principles in the Duke of Westminster.4 Rather, ENMAX had to make the "right" payment to the Balancing Pool. That of course begs the question of what is the "right" amount, and whether every municipal entity understands what "competitive balance" means, in the context of complex legislation. Nevertheless, the ACA concluded the trial court was wrong:

Accordingly, the trial judge erred in law when he concluded that the reasonableness standard set out in s 20(1)(c)(i) of the ITA cannot generally be based on an arm's length standard. Even if this were correct in the ordinary income tax context — and we do not agree it is — it is incorrect in law under the Balancing Pool Payments regime. The trial judge also erred in determining that ENMAX was unlikely to provide implicit parental support for loans secured by Energy and PSA. Thus, the trial judge's conclusion that the interest payable on each loan was reasonable cannot stand. Therefore, we set aside the trial judge's decision, affirm the Minister's reassessments, and dismiss the appeals of those reassessments by Energy and PSA. [para 9]

Second, the trial court did not apply the reasonableness test correctly. The test needed to be applied on an objective basis, taking into account that reasonableness must be measured from the perspective of the borrower, particularly since one party to the financing was not taxable. The trial court had stated that reasonableness must be measured with reference to the legal transactions to which the borrower was a party, not other contracts it might have made. It supported this statement with reference to the foreign currency/interest deductibility planning in Shell.5 The ACA disagreed, and approached the reasonableness analysis by ignoring the parameters of the actual loans, which had a high debt to equity ratio, and lacked the standard financial covenants.

Third, there was a failure to take into account the implicit parental support of ENMAX in measuring the reasonableness of the loan terms. The ACA was very critical of the trial court's reasoning and concluded that ENMAX almost certainly would have provided parental support:

Viewed through this lens, it is reasonable to conclude that ENMAX would likely have provided parental support not just for any arm's length Market Loans but also for the Parental Loans because parental support also buttressed its own position, not just that of Energy or PSA. In case of default, ENMAX would have two options: (a) let its subsidiaries fail and attempt to recover as much as possible; or (b) prop them up and recover as much as possible on a going-concern basis. It is clear on this record that, for the reasons given, ENMAX's interests were so linked with those of its subsidiaries that implicit parental support, as reflected in the second option, was inherent in the contractual arrangements made for the Parental Loans. As a result, even if one ignored the arm's length check — which we repeat would be an error — a court must nevertheless find a reasonable pricing for the Parental Loans as structured. Parental support was clearly implicit in that paradigm. [para 117]

Certain specific facts supported this conclusion:

  • One of the subsidiaries provided over 70 per cent of earnings for the group.
  • Given that size, an insolvency of the subsidiary would certainly impact ENMAX's own credit rating, and that credit rating was important to ENMAX — there was also the possible ripple effect on the credit rating of the City of Calgary to consider.
  • ENMAX had the financial resources to provide the support to its subsidiaries — it paid significant annual dividends of $168M and $147M in the relevant years to the City of Calgary.

Fourth, it was not appropriate to adjust the interest rate upwards to account for "saved" transaction costs, particularly when the estimate of those transaction costs was premised on the loans being speculative investment grade securities which the ACA, described as the creation of an "artificial stratagem".

The next to final paragraph of the judgment neatly summarizes the approach and thinking process of the ACA.

In the end, it comes down to this. Is it reasonable that a lender would consider a bond issued by PSA or its parent, Energy, which supplies electrical energy to Calgarians and others throughout Alberta and contributes the majority of ENMAX's income, to be a speculative grade CCC bond — essentially a junk bond — that carries with it a risk of default of 78.81%, when its parent, ENMAX, had an A- credit rating which carries with it a risk of default of only 1.69%? To ask this question is to answer it. [para 156]

The thrust of the ACA's concern was whether it was reasonable for ENMAX to borrow for investment in two subsidiaries and charge an interest rate that exceeded its own cost of funds by as much as 500bps. In other words, a policy driven interpretation of PILOT Regulation would suggest that you consider and measure reasonableness by looking at group financing costs.


The ACA rejected the argument that the question of reasonableness must be determined solely on the basis of federal income tax legislative provisions and related jurisprudence. Rather, the ACA felt able to read that provincial legislative policy into the interest deductibility rules to limit the creation of deductible financing expenses. That legislative policy underlying the Utilities Act and PILOT Regulation was to the effect that one of the purposes "was 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".

This creates some uncertainty, at least for the municipal sector, interpreting the interaction of tax and financing matters in the context of similar statutory regimes. The tax jurisprudence allowed a range of amounts to be considered to be reasonable and showed some deference to business judgement. If the PILOT regime is not a tax regime, it may no longer be correct to compute such payments as if the municipal entity were "liable to pay" the amounts otherwise computed under the ITA, subject to specifically described adjustments. A more subjective (and uncertain) policy driven approach may be required. In this case, the concept of "reasonableness" was looked at from the perspective of what a fair contribution to the Balancing Pool should be, having regard to the requirements imposed on other public participants.

Paragraph 20(1)(c) ITA requires that the amount of interest payable be reasonable, not just the interest rate. This would seem to open the door for an argument about a domestic thin cap rule, but no evidence was introduced on that topic, or previous legislative proposals involving pension funds. If the ACA is right, and the interest deductibility rules can be applied differently depending on the home jurisdiction of the borrower, does this thinking lead to new results for First Nations, crown corporations and pension funds?

Perhaps that statement should be scaled back in its application to other jurisdictions because establishing ENMAX as a non-taxable corporation is something of an outlier. In Ontario, for example, holding companies are subject to the proxy tax regime, so the type of easy tax arbitrage described in the case is not available. Moreover, Ontario also prescribes the debt equity ratio at an amount not exceeding 70 per cent and requires the borrower to establish a market rate of interest in order to obtain a rate recovery. On the other hand, perhaps the absence of those rather common sense limitations might also suggest that ENMAX had a freer hand in arranging its corporate finance structure than the ACA thought it had.

We will continue to monitor developments in this area and keep you updated through our bulletins.


Alberta v ENMAX Energy Corporation, 2018 ABCA 147.

2 The Balancing Pool itself was established as a statutory corporation under s75(1) of the Utilities Act for the benefit of Alberta electricity consumers.

3 2016 ABQB 334.

Commissioners of Inland Revenue v. Duke of Westminster, [1936] A.C. 1.

Shell Canada Ltd. v. Canada, [1999] 3 S.C.R. 622.

About BLG

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions