Mort v. The Queen, 93 DTC 5058, [1993] 1 CTC 99 (FCTD)

Noël, J.:—The plaintiff, Clifford L. Mort, lodged an appeal before this Court against an assessment issued by the Minister of National Revenue with respect to his 1985 taxation year. The assessment denied the scientific research tax credit (herein the“ SRTC”) in the amount of $34,000 which had been claimed by plaintiff in filing his 1985 income tax return.

The basis for the disallowance is that the scientific research debenture underlying the credit claimed by Mr. Mort was not issued pursuant to arrangements which were substantially advanced before October 10, 1984, as contemplated by subparagraph 194(4.2)(b)(ii) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"), as amended.

It may be recalled that on that day, the Minister of Finance announced a moratorium with respect to what were commonly known as quick-flip transactions whereby an issuer would immediately redeem the debenture at a discount price while providing the acquiror with a tax credit based on the full face value of the debenture.

This moratorium was followed by implementing legislation putting a definite end to quick-flip transactions as of October 10, 1984, except with respect to debt obligations issued before 1986 pursuant to arrangements evidenced in writing which were substantially advanced before October 10, 1984.

The sole issue before me is therefore whether the debenture acquired by Mr. Mort, on December 20, 1985, was issued pursuant to arrangements, evidenced in writing, which were substantially advanced before October 10, 1984. This issue is primarily one of fact to which I now turn.

Facts

Alexander Palynchuk was the principal shareholder of 317966 Alberta Ltd., the company which issued the debenture to Mr. Mort. He was called to testify on behalf of the plaintiff. Mr. Palynchuk is a professional engineer aged 65. He was first employed by Canadian Industries Ltd., in McMasterville, Quebec, as a junior engineer. He was then transferred to CIL's Edmonton plant where his main function was to attend to unusual occurrences in the plant's mechanical function. From there he went to work for Canadian Phoenix Steel Ltd. where he was assigned to special projects. While at Canadian Phoenix, he created his first patentable invention. It involved a pipe manufacturing system using flat steel strips. While at Canadian Phoenix, he also adapted a method of pipe testing using high frequency sound. This testing system became of significant use to the pipe manufacturing industry as it allowed the non-destructive testing of pipe weakness and resiliency.

As will be seen, his inventions all stem from problem resolution. He indicated during his testimony that he does not consider himself as an inventor, but as a problem solver who incidentally invents.

After he left Canadian Phoenix, Mr. Palynchuk began a career as a consultant. His work mainly involved what he called “trouble shooting”. He turned his attention to improving the efficiency of sucker rods used by the oil industry to pump oil from deposits. He invented the "one piece coiled sucker rod system" with respect to which four patents were issued, three in his exclusive name, and one in which he is named as a co-inventor.

The main advantages of this system was the elimination of pipe couplings which were subject to high frequency failure, and its adaptability for directionally drilled wells. It was commercialized by an entity called Corod and became known worldwide in the oil industry as the Corod system.

The Corod system, while successful, had its problems. The reel on which the coiled sucker rod was transported on road trucks for field operations was 12 feet wide and 14 feet high, both dimensions being beyond standards established by highway regulations. The servicing system itself was heavy, complex and expensive. The gripping device to which the sucker rod was linked had many moving parts which required extensive maintenance. Finally, the rod manufacturing system was prone to creating cracked edges.

During the seventies, Mr. Palynchuk turned his attention to the abovedescribed shortcomings of the Corod system. That is when he conceived what he calls the multiple-use hydraulic oil well pump jack system. According to Mr. Palynchuk, this concept together with its auxiliary servicing equipment system had the potential of resolving the key deficiencies of the Corod system, without being in conflict with its patent.

It involved, amongst other things, the replacement of the gripper mechanism by a pump jack system, a new configuration for the coiled rod reel device with dimensions conforming with highway transport regulations, and the development of a smaller and lighter welder better adapted to field operations.

Mr. Palynchuk began developing these concepts essentially on his own and in some instances, with small government grants issued or approved by the National Research Council of Canada. The funding for the experimental development was limited, and the initial phase of the development of these projects was somewhat haphazard and slow. However, the creation of the SRTC program, in the early eighties, provided Mr. Palynchuk with the funding source required to bring these concepts to practical application.

As will be seen, this background is useful in ascertaining the point in issue as part of the debate is whether the scientific R&D project which was the subject matter of the debenture issued related to a concrete project which had actuallybeen conceptualized prior to October 10, 1984. It is also useful in understanding why Revenue Canada does not challenge the fact that R&D funded by the debenture in issue was genuine in all respects.

I now turn to the testimony of Mr. Palynchuk, as it pertains to the steps that had been taken by the issuing corporation prior to October 10, 1984, which resulted in the issuance of the debenture on which Mr. Mort relies in claiming his SRTC. As may be recalled, the issue is whether these steps had progressed to the point where they could be said to be, as of October 10, 1984, arrangements, evidenced in writing, which were substantially advanced.

The above-described projects as well as another project conceived by Mr. Palynchuk relating to ultrasonic pipe testing were segregated and were made the subject of five private offerings structured under the SRTC program. All offerings were made by companies owned and controlled by Mr. Palynchuk. The financing arrangements with respect to the first issue were concluded on August 27, 1984 by First Canadian Holdings and were used to fund the develop- ment of the hydraulic pump jack system. A further SRTC issue was made on May 2, 1985 by F. C. Research Institute Ltd. to fund the ultrasonic testing project. These two issues were not challenged by Revenue Canada, either because they preceded the moratorium on quick-flip transactions, or because they were considered to fall within the grandfathering provision.

On September 12, 1984, Mr. Palynchuk incorporated 317966 Alberta Ltd. for the purpose of conducting research relating to the hydraulic cylinder tubing and manufacturing process, as well as various aspects of the pump servicing and rod system (herein "the pump servicing system"). These two research projects ultimately became the subject matter of three separate SRTC issues made by 317966 Alberta Ltd.

The first of these three issues was made on December 28, 1984 and was used to fund the development of the hydraulic cylinder tubing and manufacturing process. The arrangements for this issue were completed just in time to meet the moratorium deadline. Sufficient details had been agreed to before October 10, 1984 to allow 317966 Alberta Ltd. to telex its broker, Thornbrook Research Inc. (herein "Thornbrook"), on that day, confirming the financing arrangements underlying the issue. Based on that, Revenue Canada issued a comfort letter on December 20, 1984, confirming that the financing arrangements constituted "agreements in writing entered into on or before October 10, 1984, or arrangements evidenced in writing and substantially advanced" before October 10, 1984, within the meaning of the Department of Finance Release No. 84-151 dated October 10, 1984”. With the assurance provided by this comfort letter, the issue proceeded smoothly on December 28, 1984.

The debenture issue with which we are concerned is one of the two which were structured to fund the pump servicing system. The project involved the development of auxiliary controls and equipment required to insert and remove the coiled rod into and from the pump jack. It was to be used to service the coiled tubing as well. The debenture issue relating to this project was challenged by Revenue Canada on the ground that it was not sufficiently advanced by October 10, 1984 to come within the grandfathering provision. I now turn to the evidence of Mr. Palynchuk in this regard.

By way of general background, Mr. Palynchuk explained the process of putting together an SRTC offering. He indicated that you first need a genuine research and development project, capable of description. You then need a preliminary budget of the projected expenditures required to perform the work. Thirdly, professional opinions are required, confirming that the activities underlying the proposed project constitute genuine research and development, and confirming that the project meets the technical requirements of the Income Tax Act. According to Mr. Palynchuk, an issuer armed with this information is in a position to approach a broker and initiate the financing process.

There is no question that the pump servicing system project was conceptualized well before 1984. The evidence indicates that, prior to initiating the SRTC financing, engineering fees of $112,000 had been spent in the furtherance of this project, and Mr. Palynchuk had invested his own efforts towards its realization for an estimated time value of $60,000.

The first concrete step taken towards an SRTC financing for the project took place on July 10, 1984 when Mr. Ralynchuk obtained from Becker Engineering Ltd. an opinion confirming that the development of a new servicing system for the continuous sucker rods would qualify as genuine research and development for tax purposes and confirming the commercial viability of the project.

By letter dated August 30, 1984, addressed to 317966 Alberta Ltd., a U.S. based manufacturer of welding equipment operating under the name Power Press Sales Company confirmed its agreement to participate in the development of “ welding equipment and process for both the manufacturing and field welding of high strength rod and tubing and the treatment of the weld area to make it suitable for the oilwell service”. The letter went on to state that Power Press Sales agreed to defer payment of approximately one-half of the cost of this project, being $225,000 (U.S.), which amount was to be secured by promissory notes. This amount ultimately found its way into the budget prepared by Mr. Palynchuk for the pump servicing system project.

Also of relevance are handwritten notes written by Mr. Palynchuk and dated August 21, 1984, reflecting discussions which he had on that day with Messrs. Turner and Hubley of Thornbrook. These discussions took place in Toronto, the day after the closing of the First Canadian Holdings debenture issue which was also brokered by Thornbrook. The notes indicate, inter alia:

They are interested in an additional one of mine—I told them that I expected it to be between 0.75 and 1.0 million. When I was asked by the lawyer at the closing about my $1.5—I told him that I was doing some restructuring.

The notes, on page two, also reflect the following comment:

Should prepare another small one, in much the same way I prepared the one done yesterday, but what size—and for what project—servicing system has no assets— except for eng. work—might do the epoxy repair system—but perhaps the testing system on a small scale—throwing in the exp. test system.

When asked during his examination-in-chief to identify the project stated to be “between 0.75 and 1.0 million”, Mr. Palynchuk answered that it was the pump servicing system project. In cross-examination, he indicated that he could not specifically recall whether that was the case and in re-examination, he indicated that based on the numbers quoted, that must have been the case. He further testified that the $1.5 million figure referred to in the memorandum was quoted in relation to the ultrasonic system. As to the statement relating to the servicing system which appears in the second paragraph, he indicated that there was no equipment committed to the project as of August 21, 1984, but that engineering work had been done.

The next piece of evidence concerning the debenture issue with which we are concerned is an internal memorandum dated October 3, 1984, from Brian Turner to Norm Hubley of Thornbrook. It summarizes a conversation between Mr. Palynchuk and Brian Turner which took place on or around October 3. The memorandum states, inter alia:

He (Mr. Palynchuk) has three projects he would like funded, as follows:

1. Gross $540,000

2. Gross $100,000

3. Gross $1,000,000 to $1,200,000

It sounds like all three projects are future, although the latter has some expenditures done now, I believe. He did advise that pursuant to our discussion, he would consider some portion of equity in #3. The timing on all three is that the information for us to review will be available by October 10, and he would like them to be funded altogether. We did not discuss rates, although we did point out that naturally our price would be controlled by the market and that you would be discussing that with him.

During his examination-in-chief, Mr. Palynchuk testified that project identified as "Gross 540,000” was the hydraulic cylinder tubing and manufacturing project, and that the project identified as "Gross 1,000,000 to 1,200,000” was the pump servicing system project. During cross-examination, he was asked whether his recollection was specific. He answered that he had no specific recollection but that his answer was based on a reconstruction of the events and the numbers quoted in the memorandum. The evidence indicates that, with respect to the pump servicing system project, no further discussions took place with Thornbrook beyond those reflected in the October 3 memorandum.

The other project had a different fate. The discussions with respect to the hydraulic cylinder tubing and manufacturing process project were pursued and the timetable established by the October 3 memorandum was adhered to. On October 9, 1984, 317966 Alberta Ltd. wrote Thornbrook, under the pen of Mr. Palynchuk, providing a description of that project, a summary of the arrangements in place and a detailed budget. On October 10, 1984, Mr. Ralynchuk was in telephone contact with Mr. Hubley of Thornbrook to finalize the details of the issue for this project, which, as seen earlier, was considered by Revenue Canada as having been substantially advanced or completed by October 10, 1984.

This takes us to October 10, 1984. Mr. Palynchuk testified that he was made aware early on that day that the moratorium on quick-flip transactions was to be announced by the Minister of Finance momentarily. He testified that he became concerned about the fate of the pump servicing project, and that with a view of protecting the then existing tax incentives, he mandated his accountant, Mr. Archibald, to execute, on behalf of 317966 Alberta Ltd., an agreement conveying those tax incentives to Thorne Riddell as trustee for its clients. The agreement identifies the figure of $1.1 million as the financing requirement for the project. This agreement was executed late, in the evening of October 10, 1984.

This ends the sequence of events which took place up to and including October 10, 1984. I now turn to the subsequent events.

Shortly after October 10, 1984, Thorne Riddell drafted a letter to Revenue Canada seeking a comfort letter, confirming that the transaction executed on that day was grandfathered. However, prior to sending the letter, Thorne Riddell was advised that Revenue Canada had discontinued the practice of issuing comfort letters with respect to the grandfathering of SRTC issues. Faced with that, Thorne Riddell felt that it would have difficulty in marketing the issue and asked to be released from the October 10 agreement. 317966 Alberta Ltd. agreed to set the agreement aside on December 3, 1984.

Prior to that occurrence, however, 317966 Alberta Ltd. had written Thorne Riddell two letters to provide background information relating to the project which was the subject matter of the October 10 agreement. The first letter dated November 16, 1984, described the project, the steps that had been taken towards its realization, and the previously-mentioned involvement of Becker Engineering and Power Press Sales Company. The second letter dated November 19, 1984, provided more details with respect to the project and a detailed budget as follows:

Mr. Palynchuk testified that after the agreement with Thorne Riddell was set aside, he continued his efforts to secure SRTC financing for the project but that it became much more difficult to attract investors. Clients were more cautious in light of the negative publicity on SRTCs which had been triggered by the moratorium, and the absence of a ruling as to the applicability of the grandfathering provision made it very difficult to convince potential clients that the project was indeed grandfathered.

Mr. Palynchuk nevertheless continued to canvas brokers. Towards the end of 1985, he found two brokers who were willing to proceed with the issue, one acting on behalf of investors from the Calgary area, and one acting on behalf of Ottawa investors. In order to accommodate both groups, the projected $1.1 million debenture issue, which was to fund the pump servicing project, was segregated into two segments of $390,000 (Calgary) and $710,000 (Ottawa), and made the subject of two separate issues.

The plaintiff, Mr. Mort, was one of three Calgary investors to whom the $390,000 debenture was issued. His share of the investment was $100,000. He testified that he was aware of the moratorium announced a year earlier and that he was concerned about whether or not the issue was grandfathered. His concerns were put to rest when he was presented, prior to closing in December 1985, with what he called a "firm" opinion from a reputed law firm with a specialized practice in taxation. Mr. Mort claimed the SRTC in filing his tax return for the 1985 taxation year.

On June 24, 1987, 317966 Alberta Ltd. was advised by Revenue Canada that its designations in the respective amounts of $390,000 and $710,000 under Part VIII of the Income Tax Act with respect to the pump servicing system project issue wereconsidered invalid on the ground that the underlying debt obligations were not issued pursuant to arrangements, evidenced in writing, which were substantially advanced before October 10, 1984.

By notice of assessment dated January 6, 1988, Mr. Mort's SRTC was disallowed on the eround that the underlying debt obligation had not been validly designated by the issuer. This appeal is from the foregoing assessment.

The law

Paragraph 194(4.2)(b) provides:

. no amount may be designated by a corporation in respect of. . .

(b) a share or debt obligation issued or a right granted by the corporation after October 10, 1984, other than a share or debt obligation issued or a right granted before 1986

(i) under the terms of an agreement in writing entered into by the corporation before October 11 . . . or

(ii) where arrangements, evidenced in writing, for the issue of the share or debt obligation or the granting of the right were substantially advanced before October 10,1984. . . .

Analysis

The only question to be decided is whether the "arrangements" made in anticipation of the issuance of the debenture in issue were "substantially advanced" before October 10, 1984 as those words are used in subparagraph 194(4.2)(b)(ii) of the Act. The key words of this provision have been the subject of judicial consideration in two recent cases.

The first is First Fund Genesis Corp. v. The Queen, [1991] 2 C.T.C. 14, 91 D.T.C. 5361 (F.C.T.D.). In that case, my brother, Joyal, J., concluded that the arrangements which led to the issuance of the debenture in May of 1985 were sufficiently advanced before October 10, 1984 to come within the grandfathering provision. The events which had occurred before October 10, 1984 and on which he relied in coming to his conclusion were as follows:

1. the approximate amount of the designation was determined;

2. the type of security to be issued to the investor was known (i.e. a debenture or a promissory note);

3. the approximate issue price was known; and

4. the details of the most important segment of the researchprogram were known.

In coming to this conclusion, Joyal, J. dealt with the meaning of the words “substantially advanced" as follows, at pages 24-25 (D.T.C. 5369):

Counsel for the plaintiff submitted that the term “substantially advanced” should be interpreted as referring to the moving forward of something by more than a nominal or insubstantial degree. As long as there has been some measurable progress, the parties have satisfied the test. In contrast, Crown counsel argued that the term “ substantially advanced" refers to arrangements considerably or largely advanced and to something more than de minimis progress.

Authorities were cited by both parties dealing with the proper interpretation of the word “substantial” in various contexts. However, those decisions seemed to rest upon the specific facts of each case. As Mr. Justice Deane of the Federal Court of Australia wrote in Tillmanns Butcheries Pty. Ltd. v. Australasian Meat Industry Employees' Union (1979), 42 F.L.R. 331 at page 348:

The word “substantial” is not only susceptible of ambiguity: it is a word calculated to conceal a lack of precision. In the phrase “ substantial loss or damage”, it can, in an appropriate context, mean real or of substance as distinct from ephemeral or nominal. It can also mean large, weighty or big. It can be used in a relative sense or can indicate an absolute significance, quantity or size. The difficulties and uncertainties which the use of the word is liable to cause are well illustrated by the guidance given by Viscount Simon in Palser v. Grinling where, after holding that, in the context there under consideration, the meaning of the word was equivalent to “considerable, solid or big”, he said: “Applying the word in this sense, it must be left to the discretion of the judge of fact to decide as best he can according to the circumstances of each case. . . .

Mr. Justice Deane then went on to conclude that whether the term is used to mean "large or weighty”, or “real or of substance as distinct from ephemeral or nominal”, “it would be necessary to know something of the nature and scope of the relevant business before one could say that particular, actual or potential loss or damage was substantial.” [Ibid, at page 348.]

Likewise, in the present case, I believe that the term “ substantially advanced” cannot be interpreted in a vacuum. Rather its interpretation must reflect the nature and the scope of the subject matter with which subsection 194(4.2) is dealing, ie. the issue of shares and debt obligations to finance scientific research.

While I do not find it strictly necessary to decide for the purposes of the present judgment, I am inclined to accept the plaintiff's argument that the term “substantially”, as it appears in paragraph 194(4.2)(b), has a relative rather than an absolute connotation. To my mind, the issue of whether arrangements were "substantially advanced” calls for a determination by this Court of whether the arrangements had been advanced or had progressed to a sufficiently measurable degree. In other words, there must have been more than just nominal or insignificant progress made by the parties towards securing an SRTC transaction.

This construction of the words “ substantially advanced" was applied by the Supreme Court of British Columbia in Arkelian et al. v. Daley, Black & Moriera, (unreported) B.C.S.C., April 6, 1992. This case dealt with an action against certain solicitors in which plaintiffs were seeking damages for the giving of negligent opinions. The opinions in question were to the effect that "arrangements" were “substantially advanced" before October 10, 1984 to meet the requirements of paragraph 194(4.2)(b) of the Act. The plaintiffs had relied on these opinions in their decision to proceed with the investment, and when Revenue Canada took a different view, they launched an action in negligence.

In reaching the conclusion that the opinions had not been given negligently, the Court discussed the propriety of the opinions given by the solicitors. After adopting the dictum of Joyal, J. with respect to the interpretation of the words” substantially advanced", Catliff, J. had this to say with respect to the meaning of the word "arrangements" as it appears in paragraph 194(4.2)(b), at page 27 of his judgment:

The meaning of “arrangement” was discussed by Lord Denning in Newton v. The Commissioners of Taxation, [1958], 2 All E.R. 759 at page 763:

Their Lordships are of opinion that the word “arrangement” is apt to describe something less than a binding contract or agreement, something in the nature of an understanding between two or more persons—a plan arranged between them which may not be enforceable at law.

The Oxford English Dictionary in its seventh definition defines "arrangement" as "disposition of measures for the accomplishment of a particular purpose; preparations for successful performance”. The November, 1984 release suggests arrangements may qualify for transitional relief where the issuer had a“ "strategy for issuing the SRTC instrument. . . but did not have a specific purchaser identified before October 10, 1984”. Without an identified purchaser there could hardly be “an understanding between two or more persons”. I take it” arrangements” in the present context refers simply to measures adopted for the purpose of selling SRTC's.

I believe that this wide rather than narrow interpretation of the word "arrangements" as it appears in paragraph 194(4.2)(b) is the correct one. I also accept Joyal, J.'s construction of the words “substantially advanced" as conforming with the legislative intent which led to the enactment of paragraph 194(4.2)(b).

In construing those words, it must be remembered that paragraph 194(4.2)(b) is remedial in nature. It is not a taxing measure, nor is it a tax exemption measure per se. It is a measure which provides for the transition from one regime of taxation to another and which identifies, for that purpose, those who will preserve the right to proceed under the former law and those who will be governed by the new law. The obvious legislative policy behind such a measure is the protection of those who, on the faith of the existing state of the law, have, to a measurable degree, expended time, money, energy towards a specific end, in this instance, a private or public issue under the SRTC program. That measurable degree, in the case at hand, is to be determined by reference to the existence of "arrangements" for an SRTC issue which must be both in place and "substantially advanced" before October 10, 1984.

Bearing this in mind, I now turn to the question in issue. What were the arrangements in place prior to October 10, 1984 and can they be said to have been substantially advanced?

First, a project had clearly been identified. The evidence indicates that the pump servicing system had been conceptualized by Mr. Palynchuk as far back as 1982, if not earlier, and that by the middle of 1984, research and development expenditures approximating $112,000 had already been invested in the project. The first piece of documentary evidence establishing that Mr. Palynchuk intended to fund the project by way of an SRTC issue is the Becker Engineering letter dated July 10, 1984. It indicates that Becker Engineering had been asked to analyse the project of creating "a new system for servicing continuous sucker rods", and concludes that project would qualify as research and development for income tax purpose. This letter establishes that by July 10, 1984, Mr. Palynchuk was contemplating an SRTC issue to fund the project.

The next piece of evidence is embodied in Mr. Ralynchuk's handwritten notes of August 21, 1984. These were written by Mr. Palynchuk the day after the closing of the SRTC issue relating to the hydraulic pump jack system which had taken place on that day in Toronto. In these notes, Mr. Palynchuk writes that Thornbrook is interested in "an additional one of mine”, including one with a budget between $750,000 and $1,000,000. Mr. Palynchuk testified that the project underlying this budget was the pump servicing system. According to the memorandum, while this budget range was conveyed to Thornbrook, the nature of the project underlying the budget was not.

Next is a letter from Power Press Sales Company dated August 30, 1984, addressed to 317966 Alberta Ltd. 317966 Alberta Ltd., it will be recalled, was incorporated by Mr. Palynchuk on September 12, 1984, and hence could not have been the addresseeof the Power Press letter on August 30, 1984, as the letter suggests. Mr. Palynchuk explained that the letter was probably drafted on that date, but addressed and sent to 317966 Alberta Ltd. after September 12, 1984, upon the name of the newly-formed company being communicated to Power Press Sales by him.

The letter confirms Power Press Sales’ agreement to provide financial assistance by deferring payment of “approximately one-half of the cost of this project", namely $225,000. There is some ambiguity as to the project to which this undertaking pertains. First, the budget figure does not coincide with the budget figures projected for the pump servicing system, and secondly, the project is identified in the letter as the" rod and tubing manufacturing and field welding systems, weld treatment and quality control”. When asked whether this related to the pump servicing system, Mr. Palynchuk answered that it did for the most part, but that it also related to other aspects. He testified that his projects were overlapping, and that this undertaking also pertained to the hydraulic cylinder tubing and manufacturing project. In the end, the whole of the amount was assigned by Mr. Palynchuk to the pump jack servicing system as evidenced by the project budget provided to Thorne Riddell by letter dated November 19, 1984.

Next is the Thornbrook in-house memorandum dated October 3, 1984, wherein reference is made to a telephone conversation between Brian Turner and Mr. Palynchuk during which Mr. Palynchuk indicated his intention to fund three SRTC projects in the order of $540,000, $100,000, and $1,000,000 to $1,200,000, respectively. Mr. Palynchuk testified that the latter was the pump servicing system project, and the first was the hydraulic cylinder tube manufacturing project. The memorandum adds very little else in terms of background and states that "the timing on all three is that the information for us to review will be available by October 10, and he (Mr. Palynchuk) would like them funded altogether". This memorandum shows that, by October 3, 1984, Mr. Palynchuk had established a budget range for the pump servicing project as well as a specific budget for the hydraulic cylinder tubing and manufacturing project, and had communicated those figures to Thornbrook. October 10 is indicated as the date by which the relevant information was to be submitted. By letter dated October 9, 1984, the detailed background information pertaining to the hydraulic cylinder tubing process was sent to Thornbrook, and on October 10, 1984, the details of the financing for that project were finalized. Nothing more, however, transpired with respect to the pump servicing system project before October 10, 1984, the day of the moratorium.

The question which I have to determine is whether the above-described events or steps as they pertain to the financing of the pump servicing system project constitute arrangements which were sufficiently advanced before October 10, 1984 so as to meet the grandfathering requirement. Events or steps subsequent to October 9, 1984, cannot be looked upon as "arrangements" for purposes of the grandfathering provision even though they may shed some light as to the state of affairs prior to October 10, 1984.

These subsequent events show that, on October 10, 1984, Mr. Palynchuk was in a position to put a final budget figure of $1.1 million on the pump servicing system project. They also show that Mr. Palynchuk was able to identify a redemption price of >660,000 as of the same date. Both those figures appear in the agreement with Thorne Riddell which was hastily put together on the evening of October 10, 1984.

On November 16 and 19, 1984, detailed background information for the pump servicing system project were provided to Thorne Riddell together with an itemized budget detailing the source of the financing as follows:

I believe it can safely be inferred from the evidence before me that the bulk of this information had been ascertained by Mr. Palynchuk prior to October 10, 1984. There is no question that the project had been identified and selected for a single SRTC issue by Mr. Palynchuk as of October 3, 1984, when the project's budget range was communicated to Brian Turner of Thornbrook. As well, I find that in order for Mr. Palynchuk to have been able to communicate the project's budget range of $1,000,000 to $1,200,000 to Mr. Turner on October 3, 1984, and to settle that budget at $1,100,000 on October 10, 1984, the itemized components of the $1.1 million budget communicated to Thorne Riddell on November 19, 1984 must have been ascertained by Mr. Palynchuk prior to October 10, 1984.

The following arrangements were therefore in place before October 10, 1984:

1. an identified research and development project slated for an SRTC issue;

2. a technical expertise as to its qualifications for income tax purposes;

3. a budget;

4. third party financing in the form of deferred cost by Power Press Sales Company secured by a promissory note and investments structured under the Alberta Small Business Corporations Act;

5. spent engineering expenditures of $112,000; and

6. discussions with Thornbrook, evidenced in writing, with a request that the project in question be funded by way of an SRTC issue.

This leads me to the conclusion that, by October 10, 1984, there were in place arrangements, evidenced in writing, for the issue of the debt obligation acquired by the plaintiff which were substantially advanced. While, prior to October 10, 1984, there were still numerous details left to be ascertained with Thornbrook, the steps which had been taken towards making an SRTC issue were meaningful, significant and advanced. This is made obvious when one refers to the fate of the cylinder tubing and manufacturing process project financing which, as of October 3, 1984, was no further advanced vis-a-vis Thornbrook than the pump servicing system project, but which was essentially concluded seven days later on the faith of the information contained in one further letter, namely a project description and a detailed budget.

The fact that Mr. Palynchuk had an established track record as a genuine researcher and developer and that Thornbrook was aware of that record is significant. The most important difficulty which confronted responsible brokers in dealing with SRTC issues during the time when quick-flip transactions were authorized was ensuring that the underlying R&D project was genuine. In the case at hand, Thornbrook had, by October 10, 1984, acted on two prior financings, both of which were aimed at obtaining SRTC funding for component parts of Mr. Ralynchuk's overall project. There was therefore no issue as to the genuineness of the project. In addition, the detailed modalities of these prior SRTC financings having been already worked out with Thornbrook, it seems Clear that the third issue with respect to the pump servicing system would have proceeded essentially along the same lines. These, in the context of the present case, were mere formalities. What is important is that by October 10, 1984, the substantive steps towards the proposed financing had been taken, and the essential components were in place.

Counsel for the plaintiff suggested at the close of the hearing that, in the event that his client was to be successful in this appeal, costs should be awarded on a solicitor and client basis or, in the alternative, in a lump sum. Written representations were filed by both parties on this question.

In support of his contention, counsel for plaintiff argued that this was a test case of significant importance, and relied on the complexity of the issue underlying the appeal.

Two other taxpayers who purchased the remaining portion of the debt obligation acquired by the plaintiff have filed actions in this Court and have formally agreed to be bound by the outcome of this appeal. Both are represented by counsel for the plaintiff. Five other taxpayers who purchased the other segment of the issue relating to the pump servicing system have also been reassessed, and notices of objection are pending in each case. These taxpayers have not agreed to be bound by the outcome of this appeal.

While resort to test cases is to be encouraged, they do not per se entitle the litigant who successfully leads the test case to an increased award of costs. While this was a test case, its incidence is fairly limited. Costs, generally speaking, must relate to the action, and I do not believe that there is an entitlement to costs by reason only of the fact that plaintiff's counsel also acted for other litigants who have agreed to be bound by the outcome of this appeal and that this decision may assist in resolving five outstanding notices of objection.

With respect to the complexity of the case, counsel for the plaintiff recognized that this is not, of itself, sufficient to support an additional award but submitted that the nature of the case is a factor in support of such an award. In this respect, it was stressed that, in this instance, it had been necessary for the plaintiff to incur considerable expense in order to obtain evidence in the form of documents and testimony from third parties, namely the corporate issuer and Mr. Palynchuk. I do not think that this would justify departing from the tariff. In the normal course, the actual expenditures incurred by a successful litigant are not subject to compensation. Costs awarded on a party and party basis are not intended to reimburse a litigant for the expense incurred in successfully prosecuting his or her case but rather represent arbitrary amounts fixed by the rules subject to variation arising out of the conduct of the proceedings. Here I can identify nothing in the defendant's conduct, both prior and during the proceedings, upon which to base an award for costs beyond the tariff.

There must be unusual and exceptional circumstances to justify an award of costs beyond the tariffs, and I do not believe the circumstances of this case would justify such a departure.

For the foregoing reasons, I will allow the appeal with costs and refer the matter back to the Minister for reassessment on the basis that there were arrangements, evidenced in writing, for the issue of the debt obligation acquired by the plaintiff, which were substantially advanced before October 10, 1984.

Appeal allowed.