Teitelbaum
J:—This
is
an
appeal
from
a
reassessment
of
income
tax
wherein
the
Minister
of
National
Revenue
(the
M.N.R.)
disallowed
the
plaintiff's
claimed
scientific
research
tax
credit
(SRTC)
in
respect
of
the
plaintiff's
1985
taxation
year.
The
following
cases
were
heard
along
with
the
plaintiff
Penner
T-1462-90:
1.
O'Brien
v.
The
Queen
T-1461-90
2.
Robert
V.
The
Queen,
T-1463-90
3.
Kirton
v.
The
Queen,
T-1464-90
4.
Garritsen
v.
The
Queen,
T-1465-90
These
cases
involve
the
same
issue
as
in
the
Penner
case.
They,
in
fact,
will
be
referred
to
as
"the
investors"
who
became
involved
in
what
was
known
as
a
"quick
flip"
of
the
scientific
research
tax
credit.
As
such,
the
reasons
for
my
judgment
in
the
Penner
case
apply
equally
to
the
cases
of
O'Brien
T-1461-90,
Robart
T-1463-90,
Kirton
T-1464-90
and
Garritsen
T-1465-90.
At
the
commencement
of
the
hearing,
the
parties
filed
a
book
of
documents
as
Exhibit
1.
Exhibit
1
is
composed
of
90
tabs.
Each
tab
is
referred
to
as
Exhibit
1
followed
by
the
tab
number
or
simply
by
the
tab
number
itself.
The
parties
have
filed
an
agreed
statement
of
facts.
I
believe
that
I
could
do
no
better,
as
an
introduction
to
this,
my
judgment,
than
to
reproduce
the
entire
agreed
statement
of
facts
as
it
clearly
states
the
historical
background
of
the
SRTC
issue
as
well
as
the
agreed
facts
relating
to
the
issue
before
me.
Agreed
statement
of
facts
The
parties,
by
their
respective
solicitors,
for
the
purpose
of
these
appeals
only,
agree
to
the
following
facts:
A.
Legislative
Facts
1.
Incentives
for
research
and
development
have
been
provided
for
in
the
Income
Tax
Act,
R.S.C.
1952,
c.
148
(am.
S.C.
1970-71-72,
c.
63)
(the
“Act’”’),
for
some
time.
Historically
these
tax
incentives
were
only
of
value
to
companies
that
were
currently
paying
tax.
To
assist
research
companies
to
attract
external
financing
for
their
research
and
development
programs
in
the
April
19,
1983
budget
the
Minister
of
Finance,
the
Honourable
Marc
Lalonde
introduced
a
new
financing
mechanism
for
R
&
D
companies.
(Budget
speech—Tab
1;
Research
and
development
tax
policies
paper
tabled
with
speech—Tab
2;
Comments
of
Minister
of
Finance
on
introducing
amendments
to
the
Income
Tax
Act—Tab
3)
2.
The
scientific
research
tax
credit
system
provided
a
mechanism
permitting
corporations
making
expenditures
on
scientific
research
and
development,
but
which
were
not
in
a
position
to
otherwise
utilize
those
expenditures
as
deductions
under
the
Income
Tax
Act,
to
effectively
renounce
those
expenditures
in
favour
of
investors
who
purchased
certain
qualifying
securities
of
the
corporation.
3.
When
first
introduced
effective
October
1,
1983,
scientific
research
and
experimental
development
tax
credits
could
be
designated
with
respect
to
shares,
debt
or
scientific
research
financing
contracts.
4.
Pursuant
to
subsection
194(4)
of
the
Act,
a
taxable
Canadian
corporation
was
able
to
designate
an
amount
up
to
the
total
of
the
consideration
for
which
the
SRTC
Instrument
was
issued
or
granted.
Upon
such
designation,
the
first
registered
holder
of
the
SRTC
Instrument,
other
than
a
broker
or
a
dealer,
became
entitled
to
a
scientific
research
tax
credit
under
section
127.3
of
the
Act.
In
the
case
of
the
corporate
taxpayers,
the
credit
was
50
per
cent
of
the
amount
designated
by
the
“issuer
corporation”.
Individuals
other
than
trust
obtained
a
credit
of
34
per
cent
of
the
amount
designated.
When
provincial
income
tax
was
taken
into
account,
the
scientific
research
tax
credit
enjoyed
by
an
individual
approximated
50
per
cent
of
the
amount
designated.
5.
Upon
making
a
designation
in
respect
of
an
SRTC
Instrument
under
subsection
194(4),
the
“issuer
corporation”
was
required
to
pay
a
tax
under
Part
VIII
of
the
Act
which
was
equal
to
50
per
cent
of
the
amount
designated.
Pursuant
to
subsection
195(2),
such
tax
was
to
be
paid
by
the
end
of
the
month
following
the
month
in
which
the
SRTC
Instrument
was
issued
or
granted.
However,
it
would
be
unnecessary
for
the
“issuer
corporation”
to
make
such
payment
if
it
was
confident
that
it
would
have
a
Part
VIII
tax
refund
for
the
year
equal
to
its
Part
VIII
tax
liability.
6.
An
“issuer
corporation"
was
able
to
earn
a
Part
VIII
refund
for
a
taxation
year
up
to
a
maximum
of
its
refundable
Part
VIII
tax
on
hand
at
the
end
of
the
year.
Subject
to
this
maximum,
the
Part
VIII
tax
refund
was
made
up
of
two
components.
The
first
component
was
the
issuer
corporation's
own
scientific
research
credits,
if
any,
to
the
extent
that
the
issuer
corporation
had
not
used
such
credits
under
section
127.3
to
reduce
its
tax
otherwise
payable.
The
second
component
of
the
Part
VIII
tax
refund
was
50
per
cent
of
the
issuer
corporation’s
qualifying
scientific
research
expenditures
for
the
year
and
the
immediately
preceding
year,
provided
that
those
expenditures
had
not
been
previously
applied
to
produce
a
Part
VIII
tax
refund,
had
not
been
deducted
by
the
issuer
corporation
under
subsection
37(1)
for
Part
I
purposes
and
provided
that
no
investment
tax
credit
or
additional
allowance
for
scientific
research
and
experimental
development
had
been
claimed
by
the
issuer
corporation.
7.
If
the
Part
VIII
refund
for
the
year
equalled
or
exceeded
a
corporation’s
Part
VIII
tax
liability
for
the
year,
the
requirement
to
make
payments
on
account
of
Part
VIII
tax
liability
under
subsection
195(2)
for
the
year
was
effectively
eliminated
and
no
interest
obligations
under
subsection
195(3)
arose.
If
the
Part
VIII
refund
for
the
year
was
less
than
the
Part
VIII
tax
liability
for
the
year,
the
shortfall
was
the
total
amount
in
respect
of
which
interest
was
calculated.
8.
On
January
30,
1984,
Revenue
Canada
issued
a
press
release
announcing
that
it
would
issue
advance
income
tax
rulings
on
"quick-flip"
transactions
if
certain
conditions
were
met.
The
press
release
also
noted
that
the
Department
of
Finance
and
Revenue
Canada
would
be
monitoring
the
effectiveness
of
these
new
scientific
research
tax
credit
provisions
to
ensure
that
the
intent
of
the
legislation
was
achieved
and
there
were
no
abuses.
Prior
to
this
press
release,
many
income
tax
advisers
had
been
concerned
that
an
intended
temporary
ownership
of
the
SRTC
instrument
may
be
ineffective
for
the
purposes
of
obtaining
the
scientific
research
tax
credit.
The
press
release
seemingly
relieved
this
concern
and
“quick-flip”
transactions
became
widespread
(Tab
3a).
9.
In
a
typical
"quick-flip"
transaction:
(a)
the
research
corporation
would
issue
a
negotiable
debt
instrument
to
the
investor
for
say
$1,000.
Assume
that
the
principal
amount
of
the
debt
instrument
is
$600;
(b)
the
research
corporation
would
designate
the
full
amount
of
$1,000
consideration
received
by
it
for
the
debt
instrument
under
section
194(4)
of
the
Act;
(c)
immediately
after
the
issuance
of
the
debt
instrument,
the
research
corporation
would
retire
its
indebtedness
thereunder
and
pay
$600
to
the
investor
who
would
not
retain
any
continuing
interest
in
the
corporation.
10.
Effecting
such
a
transaction
would
give
rise
to
the
following
results:
(a)
the
investor
would
be
entitled
to
a
scientific
research
tax
credit
equal
to
$500
(i.e.,
50
per
cent
of
the
amount
designated
by
the
research
corporation
under
subsection
194(4)
in
respect
of
the
debt
instrument);
(b)
the
cost
of
the
investor
of
the
debt
instrument
otherwise
determined
under
the
Act
(i.e.,
$1,000)
would
be
reduced
by
$500
by
virtue
of
subsection
127.3(6);
(c)
upon
redemption
of
the
debt
instrument
for
its
principal
amount
of
$600,
the
investor
would
realize
a
profit
of
$100
which
would
be
subject
to
tax
according
to
the
principles
ordinarily
applicable
under
the
Act;
(d)
the
research
corporation
would
retain
$400
for
expenditures
in
its
scientific
research
and
development
program
and
would
lose
$1,000
of
deductions
for
expenditures
and
related
investment
tax
credits
which
it
may
not
have
been
able
to
currently
utilize;
(e)
the
research
corporation
would
have
a
Part
VIII
tax
liability
of
$500;
and
in
order
to
discharge
such
liability
without
the
actual
payment
hereof,
the
research
corporation
would
be
required
to
incur
$1,000
of
qualifying
expenditures.
Since
the
research
corporation
would
only
retain
$400
of
the
consideration
received
from
the
investor
for
the
issuance
of
the
debt
instrument,
the
research
corporation
would
be
required
to
finance
the
balance
of
the
required
$1,000
expenditure
requirement
in
another
manner.
11.
In
the
circumstances
described
above,
Revenue
Canada
eventually
became
concerned
that
unless
the
research
corporation
had
access
to
additional
financing,
the
net
proceeds
from
a
"quick
flip"
would
not
be
sufficient
to
finance
the
level
of
research
and
development
necessary
to
eliminate
all
of
the
corporation's
Part
VIII
tax
liability.
Moreover,
the
federal
government
also
became
aware
that
the
SRTC
program
was
costing
it
much
more
in
lost
tax
revenues
than
ever
expected
and
that
the
program
was
being
abused.
12.
On
October
10,
1984,
the
Honourable
Michael
Wilson,
Minister
of
Finance,
announced
a
moratorium
on
the
issuing
of
so-called
“quick
flip"
Scientific
Research
Tax
Credit
investments.
For
the
duration
of
the
moratorium
only
common
equity
shares
which
complied
with
the
criteria
governing
shares
qualifying
for
the
share
purchase
tax
credit
were
to
be
entitled
to
the
SRTC
benefit.
An
exception
was
made
for
certain
transactions
which
were
"grandfathered"
on
the
basis
of
agreements
in
writing
or
on
the
basis
that
they
were
substantially
advanced.
13.
The
limitations
which
were
imposed
upon
the
availability
of
scientific
research
tax
credit
designations
after
October
10,
1984
by
the
requirement
that
no
designation
could
be
made
unless
the
share
was
a
"qualifying
share”
are
found
in
subsection
192(6)
of
the
Act.
14.
By
the
first
week
of
May,
1985
it
was
publicly
reported
that
a
budget
would
be
presented
during
the
week
of
May
20,
and
on
May
6,
1985,
the
Minister
of
Finance
the
Honourable
Michael
Wilson
announced
that
he
would
present
a
budget
on
May
23,
1985
(Tab
5).
15.
The
ability
to
make
a
scientific
research
and
experimental
development
tax
credit
designation
with
respect
to
qualifying
shares
was
eliminated
in
the
budget
address
of
the
Honourable
Michael
Wilson
of
May
23,
1985,
effective
immediately,
unless
the
transaction
met
certain
grandfathering
provisions
which
included
qualifying
shares
issued
during
the
moratorium
between
October
10,
1984
and
May
22,
1985
(Tab
6).
16.
New
subsection
194
(4.2)
of
the
Act
was
introduced
setting
forth
the
transitional
provisions.
17.
Subsection
194
(4.2)
of
the
Act
reads
as
follows:
194
(4.2)
Notwithstanding
subsection
(4),
no
amount
may
be
designed
by
a
corporation
in
respect
of
(a)
a
share
issued
by
the
corporation
after
October
10,
1984,
other
than
(i)
a
qualifying
share
issued
before
May
23,
1985,
(ii)
a
qualifying
share
issued
after
May
22,
1985
and
before
1986
(A)
under
the
terms
of
an
agreement
in
writing
entered
into
by
the
corporation
before
May
23,
1985,
other
than
pursuant
to
an
option
to
acquire
the
share
if
the
option
was
not
exercised
before
May
23,
1985,
or
(B)
as
part
of
a
lawful
distribution
to
the
public
in
accordance
with
a
prospectus,
preliminary
prospectus
or
registration
statement
filed
before
May
24,
1985
with
a
public
authority
in
Canada
pursuant
to
and
in
accordance
with
the
securities
legislation
of
Canada
or
of
any
province
and,
where
required
by
law,
accepted
for
filing
by
such
public
authority;
(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,
1984,
other
than
pursuant
to
an
option
to
acquire
the
share,
debt
obligation
or
right
if
the
option
was
not
exercised
before
October
11,
1984,
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;
or;
(c)
a
share
or
debt
obligation
issued,
or
a
right
granted,
at
any
time
after
June
15,
1984,
by
a
corporation
that
was
an
excluded
corporation
(within
the
meaning
assigned
by
subsection
127.1(2)
at
that
time.
18.
With
respect
to
shares
issued
before
May
23,
1985,
subsection
192(6)
of
the
Act
reads
as
follows:
196
(6)
For
the
purposes
of
this
Act,
“qualifying
share",
at
any
time,
means
a
share
(other
than
a
share
acquired
by
a
taxpayer
under
circumstances
referred
to
in
section
66.3)
of
the
capital
stock
of
a
taxable
Canadian
corporation
issued
after
June
30,
1993
and
before
1987
for
consideration
(other
than
consideration
that
consists
of
or
includes
another
share
of
the
capital
stock
of
the
corporation)
where,
at
that
time,
the
share
was
a
prescribed
share
or
where,
at
that
time,
(a)
under
the
terms
or
conditions
of
the
share,
the
amount
(in
this
section
referred
to
as
the
“dividend
entitlement”)
of
the
dividends
that
the
corporation
may
declare
or
pay
on
the
share,
or
that
the
holder
may
receive
on
the
share,
is
not
limited
by
way
of
a
formula
or
otherwise
to
a
maximum
amount;
(b)
the
amount
(in
this
section
referred
to
as
the
“liquidation
entitlement")
that
the
holder
is
entitled
to
receive
on
the
share
on
the
dissolution,
liquidation,
or
winding-up
of
the
corporation
is
not
limited
by
way
of
a
formula
or
otherwise
to
a
maximum
amount;
and
(c)
none
of
the
following,
namely,
the
corporation,
a
person
with
whom
the
corporation
does
not
deal
at
arm's
length
or
a
partnership
or
trust
of
which
the
corporation
(or
a
person
with
whom
the
corporation
does
not
deal
at
arm's
length)
is
a
member
or
beneficiary,
(i)
has
either
absolutely
or
contingently
the
right
or
obligation,
at
any
time
(A)
to
redeem,
acquire
or
cancel
the
share
in
whole
or
in
part,
other
than
for
an
amount
equal
to
or
substantially
equal
to
the
fair
market
value
(determined
without
reference
to
any
such
right
or
obligation)
of
the
share
or
the
part
thereof,
as
the
case
may
be,
at
that
time,
or
(B)
to
convert
the
share
into
another
security,
other
than
into
another
security
the
fair
market
value
of
which
is
at
that
time
equal
to
or
substantially
equal
to
the
fair
market
value
(determined
without
reference
to
any
such
right
or
obligation)
of
the
share
at
that
time,
(ii)
has
either
absolutely
or
contingently
the
obligation,
at
any
time,
to
reduce
the
paid-up
capital
of
the
corporation
in
respect
of
the
share,
or
(iii)
could,
at
the
time
the
share
was
issued
reasonably
have
been
expected
(A)
within
two
years
of
that
time,
to
redeem,
acquire
or
cancel
the
share
in
whole
or
in
part
or
convert
it
into
another
security
(other
than
into
another
security
of
the
corporation
that
would,
if
it
were
issued
for
consideration
that
does
not
consist
of
or
include
a
share
of
the
capital
stock
of
the
corporation,
be
a
qualifying
share),
or
(B)
to
reduce
the
paid-up
capital
of
the
corporation
in
respect
of
the
share.
19.
No
regulations
were
enacted
setting
forth
“prescribed
share"
rules
for
the
purposes
of
subsection
192(6)
as
it
applied
with
respect
to
shares
issued
before
May
23,
1985.
B.
Adjudicative
Facts
20.
The
plaintiffs
Robert
Penner,
Nicholas
Kirton,
Donald
Robart,
Gerald
O'Brien
and
John
Garritsen
were
all
accountants
in
the
same
office
of
the
accounting
firm
of
Thorne,
Riddell
(as
it
was
then
known)
at
all
material
times.
21.
The
plaintiffs
Nicholas
Kirton,
Donald
Robart
and
Gerald
O'Brien
relied
on
Robert
Penner
and
John
Garritsen
to
conduct
the
negotiations
and
structure
and
complete
the
transaction
on
their
behaves.
22.
The
five
plaintiffs
purchased
shares
in
328734
Alberta
Ltd.
which
had
been
designated
under
subsection
194(4)
of
the
Act
pursuant
to
an
agreement
made
effective
May
21,
1985.
(Tabs
19,
20,
23,
24,
25.)
23.
These
shares
were
neither
issued
under
the
terms
of
an
agreement
in
writing
entered
into
before
October
11,
1984
nor
issued
under
arrangements
evidenced
in
writing
which
were
substantially
advanced
before
October
10,
1987.
24.
The
five
plaintiffs
sold
those
shares
to
Olds
Ag-tech
Industries
Ltd.
on
May
22,
1985.
(Tabs
29,
31,
33)
25.
The
share
certificates
of
the
plaintiffs
representing
the
shares
in
328734
Alberta
Ltd.
which
were
sold
to
Olds
Ag-tech
Industries
Ltd.
were
cancelled.
26.
Olds
Ag-tech
Industries
caused
328734
Alberta
Ltd.,
to
be
dissolved
on
or
about
July
31,
1985
(Tabs
58,
59).
27.
At
the
time
the
plaintiffs
purchased
the
shares
in
328734
Alberta
Ltd.,
neither
any
of
the
plaintiffs
nor
328734
Alberta
Ltd.
were
related
to
Olds
Ag-tech
Industries
Ltd.
or
any
of
the
shareholders
thereof
for
the
purposes
of
paragraph
251(1)(a)
of
the
Act.
28.
The
letter
dated
May
2,
1985
on
Olds
Ag-tech
Industries
Ltd.
stationery
(Tab
10)
signed
“Ann
Morgan
per
Kent
Ward”
was
dictated
to
Ann
Morgan
by
Kent
Ward
who
was
away
at
the
time.
Ann
Morgan
typed
it
and
signed
it
for
him.
29.
Kent
Ward,
the
President,
75
per
cent
shareholder
and
a
director
of
Olds
Ag-tech
Industries
at
all
material
times
was
killed
in
an
airplane
crash
in
March
of
1993.
When
I
refer,
in
this
judgment,
to
"the
numbered
company"
(#
co.)
I
am
referring
to
328734
Alberta
Ltd.
The
issues,
as
stated
by
the
plaintiff's
counsel,
are:
1.
Whether
or
not
the
plaintiff,
the
#
co.
and
Olds
Ag-Tech
were
dealing
at
arm's
length
on
May
21,
1985
which
date
isconsidered
the
relevant
time
in
that
May
21,
1985
is
the
date
when
the
#co.
issued
the
shares
to
the
plaintiff.
The
plaintiff
added
that
if
I
find
that
the
transaction
was
not
an
"arm's
length”
transaction
as
defined
by
the
Income
Tax
Act,
he
concedes
that
the
shares
purchased
by
the
plaintiff
and
sold
to
Olds
Ag-Tech
would
not
be
considered
qualifying
shares.
In
the
event
that
I
do
find
that
the
transaction
was
one
that
could
be
considered
as
an
"arm's
length”
transaction:
2.
Whether
or
not
the
shares
that
were
issued
to
the
plaintiff
by
the
#
co.,
at
the
time
they
were
issued,
it
could
reasonably
be
expected
by
the
plaintiff
that
the
#
co.
would,
shortly
after,
be
dissolved.
It
is
agreed
that
should
I
find
that
it
was
not
reasonable
for
the
plaintiff
to
reasonably
expect
that
the
#
co.
would,
shortly
after,
be
dissolved,
the
plaintiff's
claim
must
be
allowed.
Counsel
for
the
plaintiff
stated
that
if
I
find
that
it
was
reasonable
for
the
plaintiff
to
expect
an
early
dissolution
of
the
#
co.,
does
this
give
rise
to
a
reduction
of
the
paid-up
capital
of
the
#
co.?
Counsel
for
the
plaintiff
submitted
that
the
winding
up
of
the
#
co.
does
not
give
rise
to
the
conclusion
that
there
was
a
reduction
of
the
paid-up
capital
of
the
#
co.
Furthermore,
counsel
for
plaintiff
suggested
that
if
I
find
that
the
winding-up
does
not
give
rise
to
a
reduction
of
the
paid-up
capital,
then
I
must
find
that
the
#
co.'s
shares
qualify
as
"qualifying
shares"
even
if
I
find
that
the
plaintiff
could
have
reasonably
expected
the
winding-up
of
the
#
co.
Counsel
for
the
defendant
agreed
with
the
issues
as
presented
by
counsel
for
the
plaintiff
but
he,
as
well,
submitted
that
the
plaintiff
acted
in
such
a
way
that
plaintiff,
in
concert
with
Olds
Ag-Tech
offended
the
object
and
spirit
of
the
Act.
I
will
immediately
state
that
I
am
satisfied
the
plaintiff,
the
#
co.
and
Olds
Ag-
Tech
were
dealing
at
arm's
length
and
that
the
plaintiff
could
not
reasonably
have
been
expected
that
the
#
co.
would,
shortly
after,
be
dissolved,
that
is,
be
dissolved
shortly
after
the
effective
date
of
the
transaction.
To
determine
whether
or
not
a
transaction
is
an
arm's
length
transaction
is
a
question
of
fact.
It
is
therefore
most
important
to
examine
all
of
the
relevant
evidence
presented.
For
this
reason,
I
will
attempt
to
summarize
the
testimony
of
the
witnesses
given
at
trial.
I
will
also
attempt
to
summarize
the
relevant
exhibits
and
then
make
my
conclusions.
Plaintiffs,
Penner
and
Garritsen
both
testified
on
their
own
behalf.
These
two
gentlemen
acted
for
and
on
behalf
of
the
other
three
plaintiffs.
The
three
other
plaintiffs,
O’Brien,
Robart
and
Kirton
were
investors
but
had
nothing
to
do
with
the
transaction.
Penner
gave,
what
I
consider,
clear
and
unambiguous
evidence.
He
clearly
outlined
the
entire
transaction.
I
have
no
reason
to
disbelieve
his
evidence.
In
1984-85,
Penner
was
a
partner
in
the
accounting
firm
of
Thorne
Riddell
(as
it
was
then
known).
Penner
was
in
1984-85,
as
well
as
now,
an
accountant
who
specialized
in
income
tax.
As
is
known,
he
is
one
of
the
investors
in
328734
Alberta
Ltd.
(the
#
co.)
and
is
one
of
the
investors
who
sold
his
shares
in
the
#
co.
to
Olds
Ag-Tech.
Penner
was
the
first
of
the
investors
to
become
involved
in
this
transaction
in
that
a
friend
of
his
who
was
acquainted
with
the
late
Kent
Ward
(Ward)
of
Olds
Ag-Tech
informed
him
in
the
summer
of
1984
that
Olds
Ag-Tech
was
looking
for
investors
for
its
research
projects.
On
September
13,
1984,
Ward,
on
behalf
of
Olds
Ag-Tech
wrote
to
Penner's
friend,
a
Jerry
Stotts
who
did
business
with
Olds
Ag-Tech,
concerning
the
research
and
development
proposed
to
be
done
by
Olds
Ag-Tech
with
a
request
to
give
the
letter
and
enclosures
to
Thorne
Riddell
so
that
“a
buyer
(for
the
SRTC)
can
be
found"
(Exhibit
1-7).
This
letter
was
given
to
Penner.
Penner,
after
receiving
this
letter,
came
into
contact
with
Ward.
Between
September
13,
1984
and
October
10,
1984,
Penner
stated
Ward
advised
him
that
Olds
Ag-Tech
was
active
in
the
field
of
research
projects,
there
were
three
such
projects
and
that
each
of
the
three
projects
involved
an
expenditure
of
approximately
$250,000.
Ward
also
advised
him
that
the
first
of
the
three
projects
was
partially
completed
and
that
some
investors
had
already
been
found
for
part
of
the
first
project.
Penner
also
stated
that
he
was
told
by
Ward
that
Ward
would
have
no
objection
if
Penner
would
be
an
investor
for
the
1984
project.
As
a
result,
Penner
and
Ward
discussed
how
the
investment
would
be
made,
"quick
flip"
or
"redeeming
shares".
Soon
after
this
discussion,
Penner
testified
he
was
told
by
Ward
that
the
1984
program
was
not
available
but
the
1985-86
programs
were
available
as
a
SRTC
investment.
This
was
left
in
abeyance
until
the
programs
were
under
way.
According
to
Penner,
shortly
after
the
SRTC
moratorium
was
announced,
he
discussed
the
implications
flowing
from
the
announcement
with
Ward
and
informed
him
that
the
transaction
to
purchase
the
SRTC
could
not
proceed
in
the
manner
previously
outlined
but
what
could
be
done
was
to
sell
a
new
corporation
to
Olds
Ag-Tech.
Penner
testified
that
in
December
1984
or
January
1985,
he
had
a
conversation
with
Ward
at
which
time
Ward
informed
him
that
Olds
Ag-Tech
was
ready
to
proceed
with
the
second
of
his
three
proposed
research
projects,
the
1985
project,
but
that
he
had
not
yet
decided
how
he
would
fund
the
project.
On
May
2,
1985,
Ward,
on
behalf
of
Olds
Ag-Tech,
sent
a
letter
to
Penner
outlining
a
structure
by
means
of
which
Olds
Ag-Tech
would
transfer
"the
benefit
of
various
tax
incentives
relating
to
expenditures
in
respect
of
scientific
research
made
during
the
period
December
1,
1984
until
November
30,
1985”
(Exhibit
1-10).
In
this
letter,
Ann
Morgan,
on
behalf
of
Kent
Ward,
indicated:
Olds
Ag-Tech
Industries
Ltd.,
a
taxable
Canadian
corporation,
wishes
to
transfer
the
benefit
of
various
tax
incentives
relating
to
expenditures
in
respect
of
scientific
research
made
during
the
period
December
1,
1984
until
November
30,
1985.
The
transfer
of
these
tax
incentives
to
an
investor
requires
Olds
Ag-Tech
Industries
to
renounce
any
right
which
it
might
otherwise
have
claim
to
as
a
tax
deduction
or
as
a
tax
credit,
any
amount
in
respect
of
such
scientific
research
expenditures.
Olds
Ag-Tech
Industries
Ltd.
hereby
offers
to
sell
approximately
$250,000
worth
of
expenditures
of
which
about
60
per
cent
have
been
incurred
and
40
per
cent
will
be
incurred
by
November
1985
subject
to:
(a)
The
approval
of
the
terms
of
security
documents
by
counsel
to
our
company,
which
approval
will
not
be
unreasonably
withheld.
(b)
Approval
of
security
documents
by
the
board
of
directors
of
the
company,
which
approval
will
not
be
unreasonably
withheld.
Olds
Ag-Tech
Industries
understands
that
an
investor's
commitment
to
purchase
is
based
upon
the
assumption
that
a
review
of
the
company's
financial
records
and
credit
standing
will
lead
the
investor
to
conclude
that
there
is
no
reason
to
believe
that
there
is
any
risk
that
we
will
be
unable
to
honour
our
obligation
for
any
liability
arising
under
Part
VIII
of
the
Income
Tax
Act
in
respect
of
the
sale
of
research
tax
credits.
Olds
Ag-Tech
Industries
Ltd.
will
satisfy
an
investor
that
it
qualifies
for
a
scientific
research
tax
credit
pursuant
to
the
provisions
of
section
194
of
the
Income
Tax
Act.
We
acknowledge
that
we
have
reviewed
the
relevant
provisions
of
the
Income
Tax
Act
and
the
memorandum
in
effect
and
we
are
aware
of
the
nature
and
consequences
of
the
purchase
and
sale
contemplated
by
this
letter.
Penner
testified
that
this
letter
reflected
the
proposed
transaction
discussed
with
Ward
before
the
announced
moratorium
but
did
not
reflect
the
proposed
transaction
discussed
after
the
announced
moratorium.
Penner
indicated
Exhibit
1-11
reflected
the
structure
of
the
transaction.
Exhibit
1-11
is,
what
can
be
called,
a
letter
of
intent
dated
May
16,
1985
signed
by
Ward
as
president
of
Olds
Ag-Tech
in
which
the
structure
of
the
proposed
SRTC
transaction
is
outlined.
Messrs.
John
B.J.
Garritsen
and
R.D.
Penner
1200—205,
5th
Avenue
S.W.
Calgary,
Alberta
T2P
2W4
Dear
Sirs:
Olds
Ag-Tech
Industries
hereby
agrees
to
purchase
from
you,
and
from
other
individuals
whom
you
represent,
all
the
outstanding
shares
of
a
corporation
for
$162,500
cash.
The
corporation
to
be
purchased
is
to
have
the
following
status
at
the
time
of
closing:
a.
Cash
in
the
bank
of
$125,000.
b.
Share
capital
of
$250,000.
c.
The
corporation
will
have
renounced
$250,000
of
scientific
research
expenditures
to
its
shareholders,
and
will
have
filed
the
appropriate
designations
with
Revenue
Canada.
d.
Cash
in
an
escrow
account
in
the
amount
of
$125,000
to
be
held
for
payment
of
the
potential
Part
VIII
tax
liability
on
the
designation
of
scientific
research.
e.
The
corporation’s
Articles
of
Incorporation
prohibit
the
redemption
or
cancellation
of
any
of
its
shares
issued
before
a
date
that
is
at
least
two
years
from
the
date
of
issue.
It
is
intended
that
the
transaction
will
close
before
May
23,
1985
and
is
subject
to
documentation
being
prepared
which
is
approved
by
the
solicitors
for
both
parties,
such
approval
not
to
be
unreasonably
withheld.
It
is
important
to
note
that
on
May
16,
1985,
there
was
no
mention
of
the
winding-up
of
the
corporation
that
Olds
Ag-Tech
agreed
to
purchase
from
Penner
and
his
associate
Garritsen.
According
to
Penner,
at
the
time
the
May
16,
1985
letter
of
intent
was
signed,
it
was
the
intention
of
all
the
parties
to
this
transaction
that
the
investors
would
sell
the
shares
of
the
new
corporation
to
Olds
Ag-Tech.
Penner
stated
that
he
was
the
individual
that
devised
the
entire
structure
of
the
proposed
transaction.
He
indicated
he
spoke
to
a
person
in
the
Department
of
Finance
(Canada)
and
sought
clarification
of
what
was
meant
by
common
equity
shares
as
it
was
his
desire
to
alleviate
any
possible
concern
that
Revenue
Canada
may
have
regarding
a
lack
of
funds
to
continue
and
complete
a
research
project.
As
noted
in
the
agreed
statement
of
facts,
it
was
announced
that
a
budget
would
be
handed
down
on
May
23,
1985.
Penner
testified
he
was
concerned
that
the
SRTC
program
would
be
changed
on
this
date
and
therefore
knew
that
any
proposed
transaction
had
to
be
completed
before
May
23,
1985.
On
May
16,
1985,
Penner,
together
with
Garritsen
met
with
Ward
and
Olds
Ag-Tech's
legal
counsel
Douglas
Stuart
Martinson
(Martinson).
The
proposed
transaction
was
discussed.
Garritsen
then
had
the
letter
of
intent,
Exhibit
1-11
drawn
up.
Ward
signed
the
document.
The
terms
of
this
document,
according
to
Penner
were
drafted
in
advance
of
the
May
16,
1985
meeting.
Penner
stated
unequivocally
that
he
was
satisfied
that
if
a
transaction
was
to
occur
it
would
have
had
to
be
in
the
manner
outlined
in
the
May
16,
1985
letter
of
intent
and
could
not
have
proceeded
in
the
manner
outlined
by
Ward
(Morgan)
in
the
May
2,
1985
letter
(Exhibit
1-10).
Penner
also
stated
that
he
never
spoke
to
the
accountants
of
Olds
Ag-Tech
either
before
the
signing
of
the
May
16,
1985
letter
(Exhibit
1-11)
or
before
the
signing
of
the
closing
documentation.
In
fact,
Penner
indicated
he
never
spoke
to
Olds
Ag-Tech’s
accountants.
Before
entering
into
the
SRTC
transaction,
Penner
testified
he
satisfied
himself
as
to
the
legitimacy
of
Olds
Ag-Tech's
research
projects
by
speaking
to
the
person
who
introduced
him
to
Ward
and
whose
company
did
work
for
Olds
Ag-Tech,
as
well
as
speaking
to
Ward
concerning
the
research
projects.
He
also
obtained
three
brochures
from
Ward
regarding
the
projects.
The
legitimacy
of
the
research
projects
are
not
in
issue
in
that
Ms.
Karen
Smith,
an
auditor
with
Revenue
Canada,
testified
that
she
was
satisfied
the
research
projects
where
legitimate.
Penner
stated
that
after
the
May
16,
1985
meeting
he
engaged
the
law
firm
of
Burnet,
Duckworth
and
Palmer.
It
was
Mr.
Ronald
L.
Spackman
(Spackman)
who
acted
on
behalf
of
the
plaintiff
and
was
instructed
to
complete
the
documentation
that
would
reflect
the
May
16,
1985
transaction.
The
corporation
to
be
used
for
the
transaction
(Exhibit
1-8)
was
obtained
for
the
investors
by
Spackman.
It
was
a
"shelf"
corporation.
Amendments
were
later
made
to
the
articles
of
incorporation
(see
Exhibits
1-12,
13
and
15)
whereby
by
resolution,
dated
May
23,
1985,
Anne
P.
Birkert
being
the
sole
director
resolved
certain
general
matters
(Exhibit
1-12),
appointed
Garritsen
(one
of
the
plaintiffs)
President
and
Secretary
of
328734
Alberta
Ltd.
(the
#
co.)
and
transferred
to
Garritsen
her
one
share
of
the
#
co.
(Exhibit
1-13).
Exhibit
1-15
is
the
certificate
of
amendment
of
the
#
co.
Penner
indicated
that
paragraph
1(c)
of
the
articles
of
amendment
was
specifically
inserted
to
ensure
the
snares
would
be
"qualifying
shares”
and
to
ensure
that
any
subsequent
holder
of
the
shares
would
be
bound
by
the
terms
and
conditions.
Paragraph
1(c)
provided:
1
(c)
None
of
the
corporation,
a
person
with
whom
the
corporation
does
not
deal
at
arm's
length
or
a
partnership
or
trust
of
which
the
corporation
(or
a
person
with
whom
the
corporation
does
not
deal
at
arm’s
length)
is
a
member
or
beneficiary,
(i)
has,
either
absolutely
or
contingently,
the
right
or
obligation,
at
any
time,
(A)
to
redeem,
acquire
or
cancel
a
Class
A
share
in
whole
or
in
part,
other
than
for
an
amount
equal
to
or
substantially
equal
to
the
fair
market
value
(determined
without
reference
to
any
such
right
or
obligation)
of
the
Class
A
share
or
the
part
thereof,
as
the
case
may
be,
at
that
time,
or
(B)
to
convert
a
Class
A
share
into
another
security
other
than
into
another
security,
the
fair
market
value
of
which
is
at
that
time
equal
to
or
substantially
equal
to
the
fair
market
value
(determined
without
reference
to
any
such
right
or
obligation)
of
the
Class
A
share
at
that
time,
or
(ii)
has
either
absolutely
or
contingently
the
obligation,
at
any
time,
to
reduce
the
paid
up
capital
of
the
corporation
in
respect
of
the
Class
A
share;
and
no
transfer
or
transmission
of
any
Class
A
share
shall
be
made
without
the
approval
of
the
directors,
who
shall
withhold
such
approval
until
they
are
satisfied
that
the
transfer
or
transmission,
as
the
case
may
be,
will
not
offend
this
provision.
The
phrase
"arm's
length”,
as
used
in
this
paragraph,
shall
have
the
same
meaning
as
the
phrase
bears
in
the
Income
Tax
Act.
Penner
stated
that
the
year
end
of
the
#
co.
was
purposely
made
to
be
May
20
in
each
and
every
year.
He
added
that
this
date
was
adopted
to
ensure
that
the
SRTC
designation
be
completed,
that
is,
that
the
research
project
be
completed
or
the
#
co.
would
complete
the
Part
VIII
tax
requirement.
The
1985
Scientific
Research
Tax
Credit
Share
Purchase
Agreement
between
the
plaintiffs,
as
purchasers,
and
the
#
co.
was
completed
on
May
21,
1985
(Exhibit
1-19).
Pursuant
to
this
agreement,
Penner
testified
the
#
co.
agreed
to
issue
and
sell
to
the
plaintiffs
25,350
shares
for
a
subscription
price
of
$10
each.
Penner
stated
that
the
amount
designated
for
the
research
project
was
$250,000.
A
sum
of
$3,500
was
designated
to
cover
legal
expenses,
$2,500
for
the
incorporation
and
documentation
plus
$1,000
for
Olds
Ag-Tech’s
counsel
Martinson.
Clause
3.01
reads
as
follows:
3.01
The
corporation
hereby
undertakes
and
covenants
with
each
and
every
one
of
the
purchasers,
jointly
and
severally
as
follows
and
acknowledges
that
the
purchasers
have
relief
upon
such
undertakings
and
covenants
in
purchasing
the
shares:
a.
It
shall
designate
on
the
day
of
closing,
pursuant
to
subsection
194(4)
of
the
Act
for
the
benefit
of
each
purchaser,
the
designation
amount
(as
indicated
in
Schedule
"A"
hereto),
by
completing
at
the
closing,
Form
T-2113
prescribed
by
Revenue
Canada,
Taxation,
and
filing
same
forthwith
after
the
closing
with
the
Minister
of
National
Revenue
and
in
any
event,
within
the
time
required
by
subsection
194(4)
of
the
Act,
provided
that
it
shall
not
attach
to
the
said
form
the
cheque
or
money
order
mentioned
in
line
5
thereof
and
such
failure
shall
not
be
in
a
breach
of
its
undertakings
and
covenants
hereunder;
b.
It
shall
file
with
the
Minister
of
National
Revenue
the
prescribed
information
returns
(Forms
T-2114
and
T-2114
Summary)
relating
to
the
scientific
research
tax
credit
in
respect
of
the
shares
within
the
time
required
by
the
Act
or
the
regulations
thereunder;
and
c.
It
shall
not
wilfully
evade
or
attempt
to
evade,
in
any
manner
whatsoever,
the
payment
of
the
tax
under
Part
VIII
of
the
Act
in
respect
of
the
issue
of
the
shares
and
the
designation
herein
before
contemplated.
According
to
Penner,
to
ensure
that
the
research
funds
were
properly
used,
an
escrow
Clause
was
inserted
into
the
agreement.
Clause
5.01
provided:
5.01
The
parties
hereto
agree
to
enter
into
an
agreement
substantially
in
the
form
of
Schedule
"B"
attached
hereto
and
the
corporation
covenants
and
agrees
with
the
purchasers
to
deposit,
pursuant
to
such
agreement
with
the
escrow
agent
(as
therein
defined),
$125,000
(Cdn.),
cash.
The
proposed
escrow
agreement
is
found
at
Exhibit
1-19
and
the
signed
escrow
agreement
is
found
at
Exhibit
1-28.
The
escrow
agent
is
the
law
firm
of
Macinnes,
Martinson
&
Carlyle,
which
represented
Olds
Ag-Tech.
Penner
stated
that
clause
7
of
the
escrow
agreement,
which
reads
as
follows:
7.
This
agreement
shall
not
be
revoked,
rescinded
or
modified
as
to
any
of
its
terms
and
conditions,
except
by
the
consent
in
writing
given
jointly
by
the
company
and
the
purchasers
but
the
rights,
duties,
liabilities
and
immunities
of
the
escrow
agent
may
not
be
altered
without
its
prior
written
consent.
was
inserted
into
the
escrow
agreement
to
ensure
that
any
subsequent
owner
of
the
shares
of
the
#
co.
could
not
modify
the
terms
of
the
escrow
agreement
without
the
consent
of
the
"purchasers"
who
are
the
present
plaintiffs.
Penner
indicated
that
after
the
purchase
of
the
shares
in
the
#
co.
by
the
plaintiffs
on
May
21,
1985,
the
plaintiffs
sold
the
shares
which
they
had
purchased
to
Olds
Ag-Tech
on
May
22,
1985
(Exhibit
1-29).
Penner
stated
that
on
the
morning
of
May
22,
1985,
the
agreement
was
presented
to
O’Brien,
Robart
&
Kirton
for
signature.
The
agreement
was
later,
in
the
afternoon,
brought
to
a
meeting
for
signature
by
Ward
on
behalf
of
Olds
Ag-Tech.
According
to
Penner,
the
purchase
price
of
the
shares
was
to
be
paid
by
solicitors’
trust
cheque
or
by
a
certified
cheque
(clause
1.02).
He
also
stated
the
#
co.
agreed
not
to
amend
its
articles
of
incorporation
or
continuance
for
a
period
of
two
years
(clause
4.01)
and
that
Olds
Ag-Tech
represents
and
warrants
to
each
of
the
plaintiffs
"that
it
will
not
sell
transfer
or
otherwise
dispose
of
the
shares
to
a
party
dealing
at
non-arm's
length
with
the
company
for
a
period
of
two
years”
(clause
5.01).
Penner
added
that
the
conditions
attached
to
the
shares
of
the
#
co.
were
specifically
inserted
so
that
the
#
co.
would
continue
to
have
qualifying
shares.
Penner
testified
that
no
mention
was
made
in
any
of
the
agreements
regarding
a
prohibition
of
a
wind-up
because
of
the
existence
of
an
escrow
agreement,
which
prohibited
the
wind-up
of
the
#
co.
There
was,
he
indicated,
and
I
agree,
$125,000
in
escrow
for
research.
It
was
clearly
understood,
as
noted
by
Penner,
that
if
the
#
co.
failed
to
do
the
necessary
research
the
escrow
funds
were
to
be
sent
to
Revenue
Canada
on
account
of
the
#
co.'s
liability
for
tax
under
Part
VIII
of
the
Act.
Penner,
in
his
evidence,
stated
that
he
first
became
aware
that
the
#co.
was
wound
up
in
the
fall
of
1986
when
Ward
told
Penner
that
the
Federal
Government
was
conducting
an
audit
and
that
Revenue
Canada
had
sent
a
list
of
questions
to
Olds
Ag-Tech
(Exhibit
1-66).
A
response
to
one
of
the
questions
noted
that
the
#
CO.
was
wound
up.
Penner
testified
that
when
he
discovered
Olds
Ag-Tech
had
used
trust
funds
to
finance
the
purchase
of
the
#
co.
shares,
he
found
this
most
surprising
but
added
that
"some
time
later
on"
Marteinson
acknowledged
that
he
had
used
the
funds
in
his
trust
account
to
finance
the
purchase
of
the
shares.
It
should
be
noted
that
Martinson
admitted
doing
this
in
his
testimony
before
the
Court.
Penner
testified
that
on
October
27,
1989,
he
wrote
to
Kent
Ward
wherein
he
indicated:
I
received
the
package
of
material
you
forwarded
recently
and
am
attempting
to
sort
out
the
sequence
of
events
that
occurred
after
Olds
Ag-Tech
acquired
the
shares
of
328734
Alberta
Ltd.
What
is
unclear
are
the
transactions
in
the
McGuiness,
Martenson
and
Carlyle
Trust
accounts.
Penner
continued:
While
the
investors
were
not
party
to
these
transactions,
given
that
they
had
sold
Olds
Ag-Tech
the
shares
of
328734
Alberta
Ltd.
and
ceased
to
have
any
further
interest
in
the
affairs
of
that
company
after
having
assured
that
the
funds
could
not
be
utilized
for
anything
other
than
the
stated
purpose,
I
believe
the
transactions
that
transpired
must
have
been
as
follows:
1.
Olds
Ag-Tech
acquired
the
shares
of
328734
Alberta
Ltd.
at
a
time
when
it
had
$250,000
of
cash
and
$250,000
of
stated
capital.
The
cash
was
comprised
of
$125,000
on
deposit
with
McGuiness
Martenson
and
Carlyle
in
their
trust
account
and
an
additional
$125,000
on
deposit
with
McGuiness
Martenson
and
Carlyle
in
their
trust
account
which
was
subject
to
an
escrow
agreement.
2.
Payment
by
McGuiness
Martenson
and
Carlyle
of
$162,500
to
the
vendors
was
made
from
funds
in
trust
accounts.
I
assume
this
disbursement
would
not
have
been
made
with
the
funds
which
belonged
to
328734
Alberta
Ltd.
as
there
was
no
bases
upon
which
those
funds
could
be
used
for
that
purpose.
I
assume
that
the
Olds
Ag-
Tech
would
have
used
its
credit
facilities
to
put
McGuiness
Martenson
and
Carlyle
in
funds
of
$162,500
in
order
to
enable
them
to
satisfy
the
purchase
obligation.
3.
Having
acquired
shares
of
328734
Alberta
Ltd.
Olds
Ag-Tech
dissolved
its
wholly
owned
subsidiary
company
after
which
the
$125,000
on
deposit
in
the
McGuiness
Martenson
and
Carlyle
trust
account
not
subject
to
escrow
conditions
together
with
the
$125,000
subject
to
escrow
conditions
passed
to
Olds
Ag-Tech
and
became
their
funds.
4.
Having
concluded
the
winding-up
of
328734
Alberta
Ltd.
Olds
Ag-Tech
proceeded
in
the
normal
course
to
complete
the
scientific
research
to
enable
it
to
withdraw
the
$125,000
from
escrow.
It
also
had
unrestricted
use
of
the
unescrowed
funds
of
$125.
In
this
connection
we
note
that
funds
from
the
escrow
account
were
released
on
the
basis
of
scientific
research
expenditures
incurred
by
Olds
Ag-Tech
prior
to
its
acquisition
of
328734
Alberta
Ltd.
This
is
contemplated
in
the
relevant
provisions
of
the
Income
Tax
Act
relating
to
the
winding-up
of
a
corporation.
This
was
not
contemplated
in
the
letter
of
intent
dated
May
16,
1985
although
it
was
contemplated
in
your
letter
to
me
dated
May
2,
1985.
In
any
case,
I
had
always
assumed
that
if
it
was
not
possible
to
recover
the
funds
out
of
escrow
on
the
basis
of
the
expenditures
incurred
prior
to
May
20,
1985,
the
funds
could
have
been
recovered
out
of
escrow
on
the
basis
of
future
expenditures
already
budgeted
at
the
time
we
closed
the
transaction.
[Exhibit
1-77.]
After
writing
the
October
27,
1989
letter
to
Ward,
Penner
received
from
Martinson
a
reply
letter
dated
April
24,
1990,
in
which
Martinson
provided
Olds
Ag-Tech's
perception
of
how
the
May
22,
1985
transaction
transpired;
including
what
happened
with
the
funds
that
were
in
the
#
co.
(Exhibit
1-78).
Penner
disagreed
with
a
number
of
the
statements
made
in
the
letter
and
was
most
surprised
at
the
contents
of
the
letter.
It
appears
that
Penner
had
good
reason
to
be
''surprised"
at
what
was
said
as
Martinson,
during
his
evidence,
admitted
an
error
in
the
third
paragraph
of
his
April
24,
1990
letter.
He
admitted
the
agreement
date
was
May
22,
1985
and
not
May
2,
1985.
This
is
a
very
important
difference.
In
cross-examination,
Penner
testified
that
he
paid
scrupulous
attention
to
ensure
the
shares
of
the
#
co.
should
be
considered
qualifying
shares
and
that
he
was
taken
by
surprise
by
the
events
that
took
place
after
the
May
22,
1985
meeting.
This
is
quite
understandable,
as
there
was
no
indication
Ward
would
have
the
#
co.
wound
up.
Penner
stated
that
he
most
definitely
told
Ward
in
December
1984
or
January
1985
that
all
expenditures
relating
to
any
of
the
research
projects
could
not
be
used
for
a
SRTC
transaction
and
that
"only
prospective
expenditures
could
be
used".
In
cross-examination,
Penner
gave
evidence
as
to
the
necessity
of
"own"
financing;
in
other
words,
it
was
for
Olds
Ag-Tech
to
finance
the
purchase
of
the
#
co.
shares
and
not
to
use
the
#
co.
funds
to
make
the
purchase.
Penner
testified
that
he
did
not
recall
telling
Ward
he
needed
his
own
financing
but
stated
"I
believe
I
said
to
him
he
had
to
have
the
funding".
Penner
stated
he
would
have
told
this
to
Ward
in
October
1984.
Penner
also
stated
that
at
the
May
16,
1985
meeting
he
asked
Ward
where
he
got
the
funds
for
the
transaction.
Penner
indicated
he
was
never
told
that
the
#
co.
funds
would
be
used
to
finance
the
purchase
of
its
own
shares.
Penner
stated
that
when
Ward
attended
at
his
office
on
May
16,
1985,
it
was
absolutely
critical
that
Ward
(Olds
Ag-Tech)
have
its
own
funds
for
the
purchase
or
its
own
source
for
funds.
He
furthermore
stated
there
would
not
have
been
any
“deal”
if
he
knew
that
Ward
planned
to
wind
up
the
#
co.
Penner
indicated
he
did
not
care
nor
would
he
care
where
Olds
Ag-Tech
found
the
funds
for
the
purchase
of
the
shares
so
long
as
it
was
not
the
#
co.'s
funds,
which
was
put
into
the
#
co.
by
the
investors.
Penner
added
he
was
not
concerned
where
the
funds
came
from
because
Ward
had
stated
that
Olds
Ag-
Tech
had
a
line
of
credit
at
the
bank.
In
speaking
of
the
winding
up
of
the
#
co.,
Penner
indicated
it
was
anticipated
the
#
co.
could
be
wound
up
but
not
before
the
research
had
been
completed.
Penner
testified
he
did
not
tell
Ward
that
the
#
co.
could
be
wound
up
nor
did
he
have
anything
to
do
with
the
wind-up
of
the
#
co.
As
I
have
stated,
I
see
no
reason
to
disbelieve
Penner.
His
evidence
is
unequivocal
on
this
point.
It
was
also
confirmed
by
Garritsen.
Further,
nothing
in
the
interviews
of
Penner
and/or
Garritsen
conducted
by
Karen
Smith
or
O'Connor
of
Revenue
Canada
indicated
otherwise.
John
Garritsen
was
called
as
a
witness
by
the
plaintiff.
He
testified
that
in
1984-85
he
was
a
partner
in
the
accounting
firm
of
Thorne
Riddell.
His
specialty
was
income
tax.
It
was
his
belief
that
Penner
first
came
to
see
him
in
May
1985
concerning
a
proposed
SRTC
transaction
wherein
Olds
Ag-Tech
was
involved.
Garritsen
basically
corroborated
Penner’s
testimony.
The
structure
of
the
transaction
was
devised
by
Penner.
Penner
negotiated
the
price
to
be
paid
for
the
shares
in
the
#
co.
Garritsen
testified
that
he,
Penner,
Ward
and
Martinson
attended
a
meeting
on
May
16,
1985
at
which
time
Ward
signed,
on
behalf
of
Olds
Ag-Tech,
a
letter
of
intent
drafted
by
Garritsen
(Exhibit
1-11).
Garritsen
did
not
recall
any
particular
discussion
as
to
where
Olds
Ag-Tech
was
to
obtain
the
funds
to
make
the
purchase
contemplated
in
the
May
16,
1985
letter
of
intent
but
“sincerely
believed
Olds
Ag-Tech
had
a
line
of
credit
to
pay
for
the
shares".
This
confirmed
what
Penner
had
said.
Garritsen
indicated
his
role
was
to
"document
the
transaction,
to
look
after
the
paperwork
and
to
ensure
that
the
transaction
unfolded
as
intended”.
Garritsen
stated
that
after
the
May
16,1985
meeting,
he
engaged
counsel
and
instructed
counsel
to
incorporate
a
company
and
to
prepare
all
the
necessary
documentation.
A
shelf
company
was
used.
Necessary
modifications
to
this
company
were
to
be
done.
The
shelf
company
became
known
as
328734
Alberta
Ltd.,
the
#
co.
On
May
21,
1985,
a
1985
Scientific
Research
Tax
Share
Purchase
Agreement
was
signed
(Exhibit
1-19).
This
agreement
was
signed
by
John
B.J.
Garritsen,
Gerald
W.
O’Brien,
Nicholas
G.
Kirton,
Donald
Robart
and
A.H.
Penner
as
the
purchasers
of
the
shares
in
the
#
co.
All
of
the
purchasers
were
partners
in
the
office
of
Thorne
Riddell.
Each
of
the
purchasers
purchased
the
number
of
shares
shown
on
Schedule
"A"
attached
to
the
share
purchase
agreement
for
the
price
shown
on
Schedule
"A".
Schedule
"A"
also
shows
the
"designation
amount"
accorded
each
purchaser.
The
total
number
of
shares
purchased
from
the
#
co.
on
May
21,
1985
is
shown
to
be
25,350
for
a
total
purchase
price
of
$253,500
and
a
total
designation
amount
of
$250,000.
The
$253,500
paid
for
the
shares
was
deposited
to
the
#
co.'s
bank
account
on
May
21,
1985.
Exhibit
1-21
is
the
deposit
slip.
The
slip
is
date
stamped
May
22,
1985
but
is
dated
May
21,
1985
when
the
deposit
was
actually
made.
It
was
deposited
late
in
the
day
and
the
bank
date
stamped
the
deposit
for
the
next
day.
Garritsen
stated
that
on
May
21,
1985,
as
president
of
the
#co.
he
had
prepared
Exhibits
1-23,
1-24
and
1-25.
These
are
the
documents
relating
to
the
designation
under
section
194
(scientific
tax
credit)
of
the
Act.
He
also
stated
that
all
three
of
these
documents
were
required
to
do
the
designation
and
the
reporting
of
the
scientific
research
tax
credits
to
Revenue
Canada.
According
to
Garritsen,
Exhibit
1-28
is
an
escrow
agreement
signed
by
himself
on
behalf
of
the
#
co.
and
by
Maclnnis,
Martinson
&
Carlyle
per
D.
Martinson.
Maclnnis,
Martinson
&
Carlyle
(Maclnnis)
was
the
law
firm
acting
for
Olds
Ag-
Tech
and
also
acting
as
escrow
agent
under
the
escrow
agreement.
This
agreement
was
signed
on
May
22,
1985
during
the
closing
or
the
purchase
of
the
"Investors"
snares
by
Olds
Ag-Tech.
The
closing
was
attended
by
Ward
of
Olds
Ag-Tech,
Martinson,
counsel
for
Olds
Ag-Tech,
Mr.
Spackman
of
Burnet
Duckworth
&
Palmer,
solicitor
for
the
"investors"
who
was
also
solicitor
for
the
#
co.
When
asked
the
purpose
of
the
escrow
agreement,
Garritsen
replied
(transcript,
volume
I,
page
155):
The
purpose
of
the
escrow
agreement
was
to
ensure
that
50
per
cent
of
the
amount
that
was
designated
as
scientific
research,
i.e.
$125,000.
We
had
designated
250,000.
Fifty
per
cent
of
that
would
eventually
have
to
be
paid
to
Revenue
Canada
as
Part
8
tax
unless
the
company
could
do
an
adequate
amount
of
research,
which
would
indicate
that
those
dollars
would
then
become
available.
The
escrow
agreement
appointed
an
escrow
agent
to
be
responsible
to
ensure
that
funds
were
released—escrow
funds
were
only
released
to
the
company
on
the
satisfactory
completion
of
the
research,
and
otherwise
remit
it
to
Revenue
Canada
if
research
was
not
done.
“Company”,
according
to
Garritsen,
refers
to
the
#
co.
Therefore,
if
the
it
co.
did
the
required
research,
the
escrow
agent
could
release
the
funds
to
the
#
co.,
as
it
was
the
#
co.
which
was
to
do
the
research.
Garritsen
believed,
based
on
all
of
the
documents
prepared
for
the
transaction,
starting
with
the
letter
of
intent
of
May
16,
1985,
that
the
it
co.
was
to
be
sold
to
Olds
Ag-Tech.
It
was
also
Garritsen’s
belief
that
the
research
programs
proposed
by
Ward
of
Olds
Ag-Tech
would
be
carried
out
by
the
#
co.
In
fact,
Garritsen
stated
that
the
purpose
of
the
escrow
agreement
was
to
ensure
the
escrow
funds
were
only
released
to
the
#
co.
on
the
satisfactory
completion
of
the
research
by
the
#
co.
or
otherwise
remit
the
funds
to
Revenue
Canada
if
the
research
was
not
done.
In
terms
of
the
share
purchase
agreement
(Exhibit
1-29),
Garritsen
stated
that
this
agreement
was
signed
in
two
stages.
In
the
morning
of
May
22,
1985,
the
agreement
was
signed
by
the
"partners",
who
have
been
referred
to
as
the
“Investors”
and
in
the
afternoon,
the
agreement
was
signed
by
Ward
on
behalf
of
Olds
Ag-Tech
and
Garritsen
on
behalf
of
the
#co.
On
the
same
day,
during
the
closing
but
before
the
completion
of
the
total
transaction,
a
sum
of
$250,000
was
transferred
from
the
#
co.'s
bank
account
to
the
account
of
Maclnnis,
Martinson
&
Carlyle.
The
transfer
of
funds
was
arranged
by
Garritsen.
He
testified
that
the
money
was
transferred
to
Maclnnis,
Martinson
&
Carlyle
to
be
deposited
to
their
trust
account.
Garritsen
indicated
that
the
transfer
consisted
of
two
components,
the
first
component
was
the
$125,000
that
needed
to
be
paid
in
trust
to
the
law
firm
under
the
terms
of
the
escrow
agreement
(Exhibit
1-28)
and
the
other
$125,000
for
the
#
co.
However,
in
the
hands
of
Olds
Ag-Tech
solicitors,
the
#
co.
became
a
subsidiary
of
Olds
Ag-Tech
after
the
purchase
of
the
shares
of
the
#
co.
by
Olds
Ag-Tech.
Garritsen
stated
that
the
$250,000
would
consist
of
$125,000
in
trust
for
the
escrow
agent
and
$125,000
being
held,
in
trust,
for
the
#
co.
When
Olds
Ag-Tech
purchased
the
shares
of
the
#
co.
from
the
"Investors"
(Exhibit
1-29)
who
are
referred
to
as
vendors
on
the
Agreement,
it
was
obliged
to
pay
to
the
vendors
a
sum
of
$162,500.
This
sum
was
to
be
paid
by
way
of
certified
cheque
or
solicitor’s
trust
account
cheque
in
the
specific
amounts
mentioned
in
Schedule
"A"
of
Exhibit
1-29.
In
fact,
the
amount
of
$162,500
was
paid
by
four
solicitor
trust
account
cheques,
from
the
trust
account
of
Maclnnis,
Martinson
&
Carlyle
(Exhibit
1-31).
Garritsen
stated
that
at
the
time
when
these
cheques
were
received,
at
the
closing
on
May
22,
1985,
he
had
no
suspicion
as
to
the
source
of
the
funds.
Garritsen
also
stated
he
assumed
the
funds
belonged
to
Olds
Ag-Tech
and
were
deposited
with
Olds
Ag-Tech's
solicitors.
These
cheques
"were
tabled”
with
all
the
other
documents
after
Garritsen
had
transferred
the
$250,000
to
the
trust
bank
account
of
Maclnnis,
Martinson
&
Carlyle
to
be
held
by
them
in
trust;
$125,000
for
the
escrow
agent,
the
same
law
firm,
and
$125,000.
for
the
#
co.
I
accept
this
evidence
as
being
logical.
Garritsen
indicated
he
believed
Olds
Ag-Tech
had
its
own
financing
for
this
transaction.
This
being
so,
there
was
no
reason
for
Garritsen
to
believe
the
funds
used
for
the
purchase
would
be
the
#
co.'s
funds.
Attached
to
the
escrow
agreement
(Exhibit
1-28)
are
two
documents,
a
"certificate
of
director"
and
an
"auditor's
certificate".
According
to
paragraph
3
of
the
escrow
agreement,
the
#
co.
may
direct
the
escrow
agent
to
release
part
or
all
of
the
funds
held
in
escrow
by
delivering
to
the
escrow
agent
a
certificate
in
the
form
attached
as
a
certificate
of
director
or
auditor's
certificate.
Exhibit
1-40
is
a
letter
addressed
to
the
escrow
agent,
Martinson,
by
Dean
Wickman,
Professional
Corporation.
According
to
Garritsen,
this
is
the
type
of
letter
(Auditor's
certificate)
contemplated
by
the
escrow
agreement.
Paragraph
1
reads
as
follows:
At
the
request
of
Mr.
Kent
Ward,
we
have
reviewed
the
scientific
research
and
development
expenditures
incurred
by
Olds
Ag-tech
Industries
Ltd.
during
the
period
from
December
1,
1984
to
May
15,
1985
and
the
budgeted
expenditures
for
the
period
from
December
1,
1984
to
November
30,
1985.
and
in
the
first
full
paragraph
on
page
2,
it
states:
We
reviewed
the
expenditures
incurred
by
the
company
during
the
period
December
1,
1984
to
May
15,1985
in
connection
with
the
projects.
Based
on
this
review
we
believe
that
the
company
incurred
expenditures
relating
to
the
projects
amounting
to
at
least
$99,000.
From
these
paragraphs,
it
should
be
noted
that
the
time
frame
for
the
research
expenditures
is
from
December
1,
1984
to
May
15,
1985
"and
the
budgeted
expenditures
for
the
period
from
December
1,
1984
to
November
30,
1985”.
According
to
page
2,
paragraph
1,
the
auditors
state
that
they
have
reviewed
the
expenditures
from
December
1,
1984
to
May
15,
1985
and
they
believe
“that
the
company
incurred
expenditures
relating
to
the
projects
amounting
to
at
least
$99,000."
It
is
also
interesting
to
note
that
the
scientific
research
and
development
expenditures
are
not
of
the
#
co.
but
of
Olds
Ag-Tech.
This
letter,
Exhibit
1-40,
was
not
tabled
at
the
May
22,
1985
closing
and,
according
to
Garritsen,
was
not
contemplated.
Garritsen
testified,
and
I
see
no
reason
to
disbelieve
him,
that
although
there
were
discussions
about
research
done
during
the
period
December
1,
1984
to
May
15,
1985,
it
was
explained
to
Ward
that
these
expenditures
could
not
be
used
as
part
of
the
proposed
transaction.
Garritsen
stated
that
had
he
seen
the
letter
(Exhibit
1-40)
he
would
not
have
proceeded
with
the
transaction.
He
added
that
had
he
known
how
the
$250,000
would
eventually
be
used
to
purchase
the
shares,
he
would
not
have
proceeded
with
the
transaction.
In
explaining
the
payment
of
$253,500,
Garritsen
indicated
$250,000
was
paid
to
the
#
co.
as
part
of
the
research
transaction
and
$3,500
for
expenses
to
Spackman
and
Martinson.
The
ledger
sheet,
Exhibit
1-49,
from
Maclnnis,
Martinson
&
Carlyle,
entitled
purchase
of
shares
for
328734
Alberta
Ltd.
was
shown
to
Garritsen.
Although
my
copy
of
the
ledger
sheet
was
illegible,
Garritsen
stated
that
if
he
were
to
review
this
sheet
as
an
accountant,
it
would
indicate
that
Maclnnis,
Martinson
&
Carlyle
received
$250,000
on
May
21,
1985
for
and
on
behalf
of
the
#
co.
and
that
the
trust
funds
were
disbursed
on
May
22,
1985
in
the
amounts
indicated
and
to
the
individuals
indicated.
The
individuals
are
the
"Investors".
This
ledger
is
obviously
incorrect.
If
the
trust
funds
were
used
to
purchase
the
shares
and
it
was
the
money
in
the
trust
account
which
was
wired
to
the
law
firm,
in
trust,
by
Garritsen
on
May
22,
1985,
as
the
evidence
indicated,
the
ledger
is
incorrect.
The
closing
of
the
transaction
was
scheduled
to
commence
at
1:00
p.m.
on
May
22,
1985.
Garritsen
testified
that
the
closing
took
place
in
the
early
afternoon
ana
lasted
approximately
one
and
one
half
hours.
Garritsen
was
asked
about
his
recollection
with
respect
to
the
wind-up
of
the
#
co.
He
stated
that
at
some
stage
of
the
proceedings,
the
issue
of
wind-up
may
have
been
mentioned
to
Ward
in
relation
to
the
question
of
what
would
happen
if
all
the
funds
were
expended
on
the
research
project
or
projects
and
the
#
co.
wound
up.
He
also
stated
that
he
had
one
telephone
conversation
with
the
accountant
for
Olds
Ag-Tech
for
the
purpose
of
reviewing
the
accounting
entries
for
the
transaction
and
that
during
this
telephone
conversation
he
was
asked
a
question
regarding
the
wind-up
provision
in
the
Income
Tax
Act,
in
the
context
of
the
wind-up
taking
place
after
the
moneys
had
been
spent.
Garritsen
added
he
informed
Ward
that
for
a
wind-up
the
"Investors"
would
be
required
to
give
their
consent.
It
was
Garritsen's
understanding
if
there
was
to
be
any
modification,
such
as
a
winding-up
of
the
#
co.,
because
of
the
escrow
agreement,
the
“investors”
would
have
to
agree
to
such
a
modification.
Garritsen
stated
that
pursuant
to
clause
3
of
the
escrow
agreement
(Exhibit
1-28)
funds
could
only
be
released
upon
receipt
of
a
certificate
that
research
work
had
been
completed
by
the
#
co.
If
any
funds
remained,
the
funds
must
be
sent
to
Revenue
Canada
to
cover
the
Part
VIII
tax.
Garritsen
added
that
pursuant
to
clause
7
there
can
be
no
modification
to
any
of
the
terms
of
the
escrow
agree-
ment.
It
was
his
belief
that
a
modification
would
be
required
to
release
funds
in
a
manner
other
than
mentioned
in
the
agreement.
Clause
7
of
the
escrow
agreement
provided
as
follows:
This
agreement
shall
not
be
revoked,
rescinded
or
modified
as
to
any
of
its
terms
and
conditions,
except
by
the
consent
in
writing
given
jointly
by
the
company
and
the
purchasers
but
the
rights,
duties,
liabilities
and
immunities
of
the
escrow
agent
may
not
be
altered
without
its
prior
written
consent.
Garritsen
stated
that
he
had
no
knowledge
nor
was
he
suspicious
that
a
windup
of
the
#
co.
would
take
place
when
it,
in
fact,
took
place.
He
added
that
had
he
been
made
aware
of
an
immediate
plan
to
wind
up
the
#
co.
he
would
not
have
gone
through
with
the
proposed
transaction.
I
see
no
reason
to
disbelieve
Garritsen.
In
cross-examination,
Garritsen
indicated
that
he
was
aware
that
Olds
Ag-Tech
wanted
to
be
able
to
use
both
past
and
future
expenditures
for
the
SRTC
transaction
before
the
SRTC
transaction
actually
took
place.
He
stated
that
at
the
meeting
of
May
16,
1985,
Penner
explained
how
the
transaction
would
be
structured,
Exhibit
1-11,
and
he
believed
that
Penner
would
have
explained
the
format
of
the
transaction
and
would
have
stated
that
past
expenditures
could
not
be
used.
This
corroborates
Penner's
evidence.
Garritsen
also
admitted
that
there
is
nothing
in
the
May
16
letter
indicating
past
expenditures
could
not
be
part
of
the
transaction.
I
do
not
see
anything
sinister
in
the
fact
that
nothing
was
mentioned
of
past
expenditures
in
the
May
16,
1985
letter.
This
document
was
drawn
up
to
indicate
how
the
SRTC
transaction
was
to
proceed.
I
see
no
reason
to
specifically
state
that
past
expenditures
cannot
form
part
of
the
transaction.
I
am
satisfied
that
Ward,
after
sending
his
May
2,
1985
letter,
Exhibit
1-10,
was
told
by
Penner
that
past
expenditures
could
not
form
part
of
the
SRTC
transaction.
This
is
all
the
more
apparent
since
all
expenditures
had
to
be
made
by
the
company
to
be
incorporated,
namely
the
#
co.
With
regard
to
the
issue
of
negotiating
a
price
for
the
transaction,
Garritsen,
having
had
some
past
experience
with
SRTC
transactions,
stated
that
there
existed
a
general
range
for
the
type
of
transaction
contemplated
and
that
the
negotiation
of
the
price
was
neither
long
nor
arduous
but
was
not
decided
beforehand
by
Penner
or
Garritsen.
I
believe
that
this
is
what
Garritsen
also
said
in
his
Examination
for
Discovery
on
page
30
commencing
at
line
17.
With
regard
to
the
issue
of
winding-up,
Garritsen
stated
that
he
had
no
recollection
of
speaking
to
Ward
about
winding-up
at
any
particular
time
but
recalled
speaking
about
it
to
Ward,
either
on
May
16,
1985
or
sometime
between
May
16
and
May
22,
1985
and
only
as
it
related
to
the
issue
of
what
would
happen
when
Olds
Ag-Tech
no
longer
needed
the
#
co.
or
if
the
#
co.
was
unable
to
do
all
of
the
research.
Garritsen
testified
he
researched
the
issue
of
winding-up
in
the
Income
Tax
Act
as
it
related
to
the
#
co.
and
what
would
happen
if,
toward
the
end
of
the
period
of
a
year
not
all
the
research
was
done
and
the
funds
were
not
expended.
Garritsen
stated
he
did
the
research
between
May
2,
1985
and
May
22,
1985.
Garritsen
spoke
to
Dean
Wickman,
Olds
Ag-Tech's
accountant,
he
believes
on
May
16,
1985
or
shortly
thereafter
and
as
he
said,
at
Ward's
request,
to
explain
any
questions
Wickman
may
have
had
concerning
the
transaction.
Exhibit
1-26,
appears
to
be
a
working
paper,
but
not
Garritsen’s,
although
it
has
Garri-
tsen's
name
and
his
1985
home
and
office
telephone
numbers
written
on
the
top
of
the
paper.
In
explaining
this
document,
Garritsen
stated
that
on
the
left
side
under
Column
"A"
he
agreed
that:
the
transaction
was
structured
to
incorporate
a
company;
there
would
be
cash
in
the
amount
of
$125,000
and
escrow
funds
in
the
amount
of
$125,000;
he
had
no
recollection
if
the
share
capital
was
to
be
250
shares
at
$1,000
each;
the
shares
were
to
be
non-cancellable
within
two
years
of
issue;
there
was
to
be
a
designation
of
$250,000
made
to
the
shareholders;
and
$125,000
was
to
be
put
in
escrow
for
Part
VIII
tax
liability.
Garritsen
indicated
$125,000
was
to
be
put
in
escrow
for
the
Part
VIII
tax
liability,
in
accordance
with
the
escrow
agreement.
The
exhibit
itself
showed
that
someone
crossed
out
the
word
"escrow"
and
inserted
the
word
"trust".
Garritsen
agreed
the
transaction
was
also
structured
to
sell
the
shares
of
the
company
to
be
incorporated
for
$162,500,
but
that
the
transaction
was
not
structured
to
include:
|
(c):Olds
Ag-Tech
will
get
|
$250,000
|
|
and
pay
|
162,500
|
|
Net
proceeds
|
|
|
or
35
per
cent
of
$250,000
|
$87,500
|
nor
was
it
structured
to
include
the
issue
of
wind-up
as
noted
in
Exhibit
1-26.
Garritsen
once
again
emphasized
that
with
regard
to
the
issue
of
winding-up,
what
was
discussed
was
a
winding-up
after
completion
of
the
research
or
“at
the
end
of
term”.
Garritsen
stated
he
did
not
discuss
with
Wickman
the
matter
on
the
right
side
of
the
document
wherein
it
indicated:
|
Put
in
|
$250,000
|
|
Get
back
|
162,500
|
|
87,500
|
|
Tax
Credit
|
$125,000
|
|
$37,500
|
and
believed
Wickman
may
have
figured
this
out
by
himself.
Garritsen
stated
that
between
May
16
and
22,
he
arranged
to
have
the
paperwork
completed
for
the
transaction
and
opened
a
bank
account
in
the
Toronto-
Dominion
Bank
in
Calgary.
The
intent
was
only
to
change
signing
officers
when
the
SRTC
transaction
was
completed,
however,
at
the
closing
a
request
was
made
to
send
the
money,
namely
the
$250,000
in
the
#
co.'s
account
to
Martinson,
Olds
Ag-Tech's
solicitor.
Therefore
$125,000
was
to
be
in
trust
and
$125,000
was
to
be
held
in
escrow.
When
questioned
by
counsel
for
Defendant
with
regard
to
the
issue
of
due
diligence,
Garritsen
stated
he
reviewed
the
research
projects
of
Olds
Ag-Tech
by
examining
the
brochures
that
outlined
the
research
project
and
did
not
make
any
inquiries
regarding
Olds
Ag-Tech’s
finances
because
he
was
made
aware
that
Ward
(Olds
Ag-Tech)
had
a
line
of
credit.
In
further
cross-examination,
Garritsen
stated
that
for
the
payment
of
the
shares
to
the
"Investors"
Martinson
produced
a
number
of
cheques
from
his
trust
account.
These
cheques
were
prepared
before
the
May
22,
1985
meeting.
He
stated
once
again,that
he
asked
the
Toronto-Dominion
Bank
in
Calgary
to
transfer
$250,000
to
the
law
office
of
Maclnnis,
Martinson
&
Carlyle
in
Olds,
Alberta.
Martinson
called
his
bank
to
see
if
the
money
had
been
transferred
and
then
issued
his
trust
cheques.
When
questioned
about
a
May
13,
1987
meeting
with
representatives
of
Revenue
Canada,
Karen
Smith,
and
Mark
O'Connor,
at
which
time
Garritsen
was
questioned
about
the
transaction
and
asked
for
certain
documents,
Garritsen
was
shown
notes
made
by
Karen
Smith
(Exhibit
1-68).
Garritsen
disagreed
with
the
following
portion
of
Karen
Smith's
notes:
We
were
advised
that
they
directed
their
lawyers
to
incorporate
a
company
as
a
vehicle
for
SRTCs
to
renounce
expenditures.
This
was
done
to
facilitate
Kent
Ward’s
Olds
Agtech
research.
Now,
do
you
recall
that
being
said
at
that
meeting?
A.
I
have
no
such
recollection,
no.
Q.
And
is
that
note
right
or
wrong?
A.
Well,
it
is
correct
only
to
the
extent
that
it
was
the
research
that
had
been
planned
by
Olds
Agtech
and
that
was
going
to
be
carried
out
by
the
numbered
company.
Q.
They
had
a
preference
that
the
research
be
done
in
the
numbered
company,
but
they
really
didn't
care
where
this
was
done.
Do
you
recall
that
answer
having
been
given
to
a
response
to
any
question
put
to
you?
A.
No.
When
read
the
following
statement
from
Ms.
Smith's
notes
relating
to
the
source
of
the
purchase
price:
Did
not
need
to
determine
if
Olds
had
sufficient
funds
or
source
of
same.
Indicated
funds
sent
on
May
22
to
Maclnnis
Martinson
in
trust
in
anticipation
of
closing,
and
it
was
of
no
concern
to
them
how
Olds
obtained
the
funds.
Garritsen
indicated
he
was
not
concerned
that
the
money
for
the
purchase
price
of
the
shares
of
the
#
co.
came
from
Olds
Ag-Tech,
as
he
always
assumed
that
it
did.
He
never
considered
the
money
could
be
borrowed
from
Martinson’s
trust
fund,
to
whom
he
had
transferred
$250,000,
as
that
would
be
in
violation
of
the
escrow
agreement.
I
agree
with
Garritsen.
It
would
be
perfectly
logical
for
him
to
believe
that
Martinson,
as
escrow
agent,
would
not
violate
the
escrow
agreement
and
release
funds
from
the
escrow
account
to
enable
Olds
Ag-Tech
to
purchase
the
shares
of
the
#
co.
Garritsen
also
stated,
and
I
believe
him
to
be
correct,
that
where
Olds
Ag-Tech
got
the
funds
for
the
purchase
was
of
no
concern
to
him,
with
the
added
proviso
that
Olds
Ag-Tech
did
not
get
the
funds
from
the
#
co.
This
was
clear
in
Garritsen's
mind
because
he
believed
Olds
Ag-Tech
had
the
necessary
financing.
The
following
witnesses
were
called
by
the
defendant:
Mr.
Dean
Wickman
(Wickman),
Mr.
Carl
Young
(Young),
Mr.
William
Stitt
(Stitt),
Mr.
Douglas
Martinson
(Martinson),
Ms.
Karen
Smith
(Smith)
and
Mr.
Mark
O'Connor
(O'Connor).
In
1985
Wickman
was
the
accountant
for
Olds
Ag-Tech
and
at
that
time
income
tax
formed
part
of
his
practice.
Wickman
testified
that
as
part
of
his
role
at
Olds
Ag-Tech
he
and
his
associates
prepared
financial
statements
and
did
special
work
related
to
SRTCs.
However,
Young,
Wickman's
associate,
was
the
account
administrator
of
the
Old
Ag-Tech
file.
The
extent
of
Wickman’s
and
his
firm's
involvement
in
the
transaction
at
issue
is
set
out
in
his
letter
to
Revenue
Canada,
dated
June
9,
1987
(Exhibit
1-72).
It
should
be
noted
that
the
letter
is
signed
Dean
Wickman
Professional
Corporation.
As
indicated
in
the
letter
and
as
Wickman
testified,
the
firm
issued
a
comfort
letter
relating
to
scientific
research
expenditures;
examined
invoices
supporting
the
expenditure
for
withdrawing
money
in
trust
and
recorded
the
transactions
in
Olds
Ag-Tech's
records
and
financial
statements.
When
questioned
about
a
telephone
conversation
with
Garritsen,
Wickman
testified
he
had
no
recollection
of
a
conversation
with
Garritsen
regarding
to
the
sale
of
shares
of
the
#
co.
to
Olds
Ag-Tech.
This,
of
course,
does
not
mean
he
did
not
have
such
a
telephone
conversation.
With
respect
to
the
comfort
letter
(Exhibit
1-40)
addressed
to
Martinson,
Wickman
indicated
the
letter
was
prepared
at
Ward's
request
to
show
that
Olds
Ag-Tech
had
completed
some
research
expenditures
during
the
year
and
within
a
budget
to
provide
extra
expenditures
against
scientific
research
and
development.
Wickman
testified
that
he
was
not
aware
of
the
escrow
agreement,
either
signed
or
unsigned,
when
he
sent
the
comfort
letter.
Wickman
indicated
that
the
accountant's
certificate
of
Dean
Wickman
Professional
Corporation,
dated
August
28,
1985
was
prepared
at
the
request
of
Ward
(Exhibit
1-61).
Wickman
testified
that
although
he
signed
the
document
he
did
not
prepare
it
as
such.
Essentially
all
his
office
did
was
fill
in
the
blanks.
He
believed
that
“we
completed
the
blanks
in
the
document
and
the
document
did
not
offend
me
in
that
it,
in
my
opinion,
fairly
represented
the
transaction
and
therefore
I
executed
the
document"
(page
288
of
the
transcript)
According
to
Wickman,
they
filled
in
the
amount
of
$56,037.14
and
certified
that
expenditures
in
this
amount
had
been
incurred
between
May
16
and
August
27,
1985.
The
certificate
was
then
either
given
to
Ward
or
mailed
to
Martinson.
With
respect
to
the
accountant's
certificate
found
at
Exhibit
1-64,
Wickman
testified
this
document
was
dealt
with
in
the
same
manner
as
the
other
certificate,
but
covered
the
accounting
period
from
August
28
to
November
27,
1985.
With
respect
to
the
preparation
of
Olds
Ag-Tech's
financial
statements,
Wickman
indicated
that
he
was
not
involved
in
the
preparation
of
the
financial
statements
and
it
was
Young
who
did
the
majority
of
the
work,
even
though
Wickman's
name
appeared
on
the
statement.
Wickman
also
had
no
recollection
of
having
a
discussion
with
Young
about
the
information
recorded
in
Young's
working
paper
(Exhibit
1-26).
Young
testified
that
in
1985
he
had
been
working
for
the
Dean
Wickman
Professional
Corporation
for
about
four
months,
primarily
as
an
account
administrator
for
some
of
Wickman's
clients,
including
Olds
Ag-Tech.
Young
indicated
that
tax
planning
or
income
tax
work
was
not
part
of
his
practice
and
had
no
background
in
Canadian
tax,
his
responsibilities
involved
financial
statements.
He
also
indicated
that
he
was
allowed
to
sign
reports
as
long
as
they
did
not
include
an
opinion
and
that
Wickman
signed
reports
containing
opinions.
Young
identified
Exhibit
1-26
as
his
working
paper
but
did
not
have
any
recollection
of
the
circumstances
under
which
this
paper
was
prepared
or
where
he
obtained
the
information
contained
therein.
He
stated
that
this
working
paper
looked
very
similar
to
financial
statement
disclosures
and
planning
memos
used
for
the
preparation
of
year-end
financial
statements.
The
working
paper
had
Garritsen's
name,
home
and
office
telephone
numbers
written
on
the
top,
however,
Young
could
not
recall
why
or
how
this
information
came
to
be
on
the
working
paper.
He
thought
perhaps
the
telephone
number
was
given
to
him
by
Ward.
The
working
paper
recorded
the
structure
and
the
effect
of
the
transaction
that
is
set
out
in
the
letter
of
intent
of
May
16,
however,
when
questioned
on
each
notation,
Young
could
not
recall
where
he
had
obtained
the
information.
Young
had
no
recollection
of
having
a
conversation
with
Smith
or
O'Connor
with
respect
to
Olds
Ag-Tech's
purchase
of
the
shares
of
the
#
co.,
but
did
recall
Smith
and
O'Connor
coming
to
Dean
Wickman's
office.
When
presented
with
the
notes
made
by
Karen
Smith
(Exhibit
1-71)
and
specifically
the
following
entry
of
June
12,
.
.
.
discussed
phone
call
Dean
Wickman
had
received
from
John
Garritsen
at
time
Olds
purchased
shares
of
328734
Alberta
Ltd.Carl
did
not
know
if
Dean
had
kept
notes
on
the
conversation
but
he
had
notes
on
file
that
he
made
up
after
Dean
advised
him.
Told
Carl
I
was
particularly
interested
in
these
notes.
Young
still
could
not
recall
the
above
noted
conversation.
With
respect
to
the
accountant's
certificate
(Exhibit
1-61),
Young
testified
that
the
client
would
send
the
documents
to
the
office,
he
then
assigned
it
to
a
staff
member
and
the
staff
member
did
the
audit
work
and
the
report
was
framed.
The
working
papers
would
then
be
reviewed
by
him
and
then
forwarded
to
Wickman
for
approval.
With
respect
to
the
financial
statements,
specifically
note
8
which
dealt
with
the
acquisition
and
subsequent
winding-up
of
the
#
co.,
Young
stated
that
he
did
not
prepare
this
paragraph
and
that
the
draft
of
note
8
had
been
in
Wickman's
handwriting.
Young
indicated
he
signed
the
statement
on
behalf
of
the
Dean
Wickman
Professional
Corporation.
He
also
stated
that
he
had
no
involvement
in
the
structuring
of
the
transaction
that
resulted
in
the
purchase
by
Olds
Ag-Tech
of
the
#
co.
During
cross-examination,
Young
testified
that
he
could
not
recall
having
a
conversation
with
Penner
or
Garritsen
regarding
the
structuring
of
the
transaction.
He
also
testified
that
no
one
mentioned
a
wind-up
of
the
#
co.
to
him.
When
asked
about
the
provisions
of
the
escrow
agreement
he
commented
that
as
the
accountant's
certificate
mentioned
the
escrow
agreement,
the
agreement
would
have
been
looked
at.
However,
he
did
not
look
at
the
agreement
as
it
was
Wickman
who
signed
the
certificate.
In
1985,
Stitt
was
the
Branch
Manager
of
the
Royal
Bank
of
Canada
in
Olds,
Alberta.
The
Royal
Bank
was
Olds
Ag-Tech's
banker.
With
regards
Olds
Ag-Tech's
finances,
Stitt
testified
that
for
the
period
from
July
1984
to
August
1985,
Olds
had
a
$50,000
line
of
credit
that
was
more
or
less
fully
drawn
during
that
period,
and
some
term
assistance
by
way
of
a
small
business
development
bond
that
was
fully
drawing
down
and
reducing
as
well
as
some
temporary
over
draft
accommodation.
Stitt
testified
that
at
no
time
in
May
of
1985
did
Ward
or
any
officer
of
Olds
Ag-Tech
approach
the
Royal
Bank
for
money
to
fund
the
acquisition
of
shares
of
another
company.
In
1985
Martinson
was
the
solicitor
for
Olds
Ag-Tech.
He
carried
on
a
very
general
legal
practice
in
Olds,
Alberta,
an
agricultural
community
serving
approximately
5,000
people.
The
nature
of
Martinson's
legal
practice
did
not
include
income
tax
work
and
he
testified
he
had
no
expertise
in
the
field
of
tax
law.
Martinson
was
also
a
personal
friend
of
Ward.
Martinson
testified
that
his
involvement
in
this
matter
began
when
Ward
indicated
to
him
that
he
was
going
to
be
involved
in
some
research
tax
credits
and
wanted
to
know
if
Martinson
would
be
available
to
assist
him.
This
meant
accompanying
Ward
to
the
May
16th
meeting
in
Calgary.
Martinson
testified
he
did
nothing
to
prepare
for
this
meeting.
Martinson
indicated
that
on
May
16th
he
and
Ward
drove
to
Calgary
and
met
with
either
Penner
or
Garritsen
at
the
offices
of
Thorne
Riddell.
Martinson
stated
he
had
no
input
into
the
structuring
of
the
transaction,
but
that
there
were
discussions
between
Ward
and
Penner
with
respect
to
the
structure
of
the
transaction
and
the
figures.
Martinson
also
stated
that
his
understanding
of
the
purpose
of
his
presence
at
the
meeting
was
to
be
"another
set
of
eyes
and
ears”
(page
357
of
the
transcript).
Martinson
testified
that
he
did
not
recall
any
discussion
surrounding
the
specific
numbers
of
the
purchase
price;
or
the
source
of
the
funds
for
the
purchase
price;
or
that
the
$250,000
in
cash,
which
was
part
escrow
money
and
part
free
cash,
could
not
be
used
to
fund
the
acquisition
of
the
shares.
Martinson
recalled
that
past
expenditures
were
discussed,
in
the
sense
that
past
expenditures
had
in
fact
been
incurred
or
spent.
When
asked
if
he
recalled
anyone
at
the
meeting
saying
that
past
expenditures
could
not
be
used
in
the
transaction,
Martinson
replied
(page
360
of
the
transcript):
No.
My
understanding,
again
based
on
that
letter
and
the
previous
letter
to—that
Mr.
Ward
had
been
involved
in,
that
past
expenditures
may
be
used.
So
there
was
no
discussion
saying
that
they
could
not
be
used.
Martinson
also
indicated
that
there
were
no
discussions
about
the
wind-up
or
the
dissolution
of
the
corporation
and
he
did
not
recall
that
a
numbered
company
was
discussed,
just
a
reference
to
a
corporation
without
a
name.
Martinson
testified
that
sometime
between
May
16
and
May
22
he
became
aware
that
the
firm
Maclnnes,
Martinson
&
Carlyle
was
going
to
be
asked
to
be
the
escrow
agent
and
that
certain
amounts
of
money
were
to
be
paid
to
certain
individuals,
was
given
those
names
and
the
amounts
to
be
paid
to
them.
He
had
cheques
prepared
for
the
next
meeting
with
the
individual’s
names
on
them.
At
that
particular
time,
the
firm's
trust
account
required
two
signatures,
a
bookkeeper
and
a
lawyer.
The
bookkeeper
signed
the
cheques
and
Martinson
took
the
cheques
to
the
meeting
held
in
Calgary
on
May
22.
Martinson
prepared
no
other
documents,
apart
from
the
cheques,
related
to
the
closing
of
the
transaction.
Martinson
testified
that
he
and
Ward
drove
together
to
Calgary
and
went
to
the
offices
of
Burnett,
Duckworth,
where
the
transaction
was
to
close.
When
they
arrived,
the
documentation
had
not
been
completed.
Spackman,
counsel
for
the
investors,
was
in
the
process
of
reviewing
documents.
Martinson
testified
that
he
reviewed
the
documents
prepared
by
Spackman
for
their
legal
content,
but
at
no
time
did
he
provide
Ward
with
any
tax
advice.
With
respect
to
the
money
to
cover
the
cheques,
Martinson
testified
that
to
the
best
of
his
knowledge
the
funds
were
going
to
be
transferred
to
his
firm's
trust
account
in
Olds,
and
once
he
was
aware
the
funds
were
in
the
trust
account
he
would
write
out
and
sign
the
cheques.
Martinson
indicated
he
placed
his
signature,
being
the
second
signature,
on
the
cheques,
after
the
agreement
for
the
snare
transfer
had
taken
place.
According
to
Martinson's
understanding,
Ward
as
a
representative
of
Olds
Ag-Tech
became
the
sole
director
of
the
#
co.
and
authorized
Martinson
to
release
the
funds.
Martinson
described
the
closing
in
the
following
terms:
Ward,
Spackman,
Garritsen
and
he
were
present
in
the
boardroom;
Garritsen
telephoned
his
bank
and
confirmed
that
the
funds
had
been
sent
to
Olds;
Martinson
contacted
his
office
and
waited
for
confirmation
that
the
funds
had
been
transferred
to
the
firm’s
trust
account
in
Olds;
once
it
was
confirmed
that
the
funds
were
in
the
trust
account,
Ward
authorized
Martinson
to
release
the
funds
at
which
point
he
signed
the
cheques.
In
terms
of
the
escrow
agreement,
Martinson
testified
the
agreement
was
prepared
by
Spackman,
with
the
certificate
of
the
director
and
the
auditor's
certificate
attached.
These
two
certificates
served
as
confirmation
that
funds
could
be
released
based
on
moneys
spent
or
expenditures
on
research.
With
respect
to
the
share
purchase
agreement,
Martinson
testified
that
once
the
agreement
was
reviewed
and
signed,
Olds
Ag-Tech
as
the
purchaser
became
the
shareholder.
Then
Ward,
on
behalf
of
Olds
Ag-Tech,
which
owned
the
shares
in
the
#
co.,
became
the
sole
director
and
therefore,
at
least
in
Martinson's
belief,
in
control
of
the
company.
Therefore,
on
Ward's
direction
Martinson
released
the
funds.
Martinson
testified
$250,000
was
transferred
to
the
firm’s
trust
account
and
that
a
portion
of
that
amount,
namely
$125,000,
was
impressed
by
the
escrow
agreement.
However,
Martinson
agreed
the
trust
cheques
written
by
him
totalled
$162,500,
which
came
out
of
the
$250,000
deposited
to
the
trust
account.
In
this
regard,
Martinson
testified
he
had
no
recollection
of
anyone
stating
that
the
money
which
was
in
the
trust
account
of
the
#
co.
could
not
be
used
by
him
to
pay
for
the
shares.
After
the
meeting
closed,
Ward
and
Martinson
decided
not
to
drive
directly
home
and
instead
went
to
a
bar
or
restaurant
and
discussed
the
transaction.
Martinson
testified
that
this
occurred
around
4:00
p.m.
It
was
during
this
discussion
that
Ward
indicated
to
Martinson
that
he
wanted
the
#
co.
wound
up.
Martinson
stated
that
in
essence
a
shareholders
meeting
was
held
in
the
restaurant.
He
subsequently
prepared
the
minutes
of
the
meeting
of
all
the
shareholders
of
the
#
co.
(being
Ward)
held
in
Calgary
at
4:00
p.m.
on
May
22,
1985.
Martinson
also
indicated
that
on
Ward's
instructions
he
prepared
the
articles
of
dissolution
of
the
#
co.
Martinson
testified
that
the
statement
that
the
corporation
had
no
property
and
no
liabilities
was
signed
by
Ward.
Martinson
also
testified
that
he
did
not
recall
speaking
to
anyone,
other
than
Ward,
about
the
wind-up
of
the
#
co.
In
terms
of
the
accountant's
certificate
(Exhibit
1-61),
Martinson
stated
that
he
did
not
prepare
the
document,
but
received
it
either
from
Dean
Wickman
or
from
Ward.
The
accountant's
certificate
certified
that
the
#
co.
has
been
wound
up
into
its
parent
company
Olds
Ag-Tech
and
in
accordance
with
the
escrow
agreement,
the
accountants
were
required
to
report
and
make
a
certification
with
respect
to
expenditures.
Martinson
indicated
that
he
used
this
certificate
to
release
further
escrow
money.
On
cross-examination,
Martinson
confirmed
that
it
was
common
practice
in
agreements
of
purchase
and
sale
for
the
purchase
price
to
be
paid
by
way
of
purchaser’s
counsel
or
lawyer
tendering
his
or
her
trust
cheque.
I
agree
there
is
nothing
nefarious
about
using
a
solicitor’s
trust
cheque
which
would
put
the
vendor
on
notice,
that
he
or
she
should
be
suspicious
of
the
transaction.
Martinson
once
again
indicated
that
his
first
real
involvement
in
the
transaction
was
his
attendance
at
the
May
16
meeting,
at
which
the
essential
structuring
of
the
transaction
was
discussed
and
led
to
the
letter
of
Intent,
dated
May
16,
1985.
Martinson
testified
that
Ward
was
a
personal
friend
and
considered
him
to
be
very
intelligent
and
particularly
well
informed
in
the
financing
of
research
and
development
matters,
as
these
were
the
life
blood
of
Ward's
business.
Martinson
also
stated
that
although
Ward
may
have
appeared
to
be
an
unsophisticated
businessman,
Martinson
considered
him
to
be
very
intelligent,
dynamic,
knowl-
edgable
and
perfectly
capable
of
holding
his
own
in
any
negotiations
with
Penner
and
Garritsen.
Martinson
reiterated
his
recollection
that
use
of
previous
expenditures
had
been
raised
at
the
meeting
but
did
not
recall
any
discussions
indicating
that
previous
expenditures
could
not
be
used.
On
the
other
hand,
Martinson
also
stated
that
he
did
not
recall
any
discussions
that
previous
expenditures
could
be
used.
Martinson
recalled
discussions
at
this
meeting
that
the
particular
transaction
contemplated
by
Ward
and
outlined
in
the
letter
dated
May
2,
1985,
could
not
be
structured
in
the
same
way
because
of
the
moratorium.
Martinson
testified
the
concept
of
a
new
company
being
sold
to
Olds
Ag-Tech
which
would
have
the
attributes
outlined
in
paragraphs
"A"
through
"E"
of
the
May
16
letter
was
discussed
and
was
considered
as
an
alternative.
Martinson
confirmed
that
this
alternative
was
accepted
and
after
the
May
16
meeting,
the
agreement
in
principle,
as
far
as
his
understanding
and
he
believed
it
was
Ward's
understanding
as
well,
was
that
Penner,
Garritsen
and
the
other
investors
would
get
a
company
ready,
invest
funds
in
that
company,
make
the
appropriate
designations
for
tax
purposes
and
et
the
renunciation
of
R&D
expenditures
that
the
company
was
to
perform.
In
other
words,
the
corporation
that
would
be
sold
to
Ward
would
be
adequately
funded
to
do
$250,000
of
research,
the
money
would
be
in
that
corporation
because
it
had
$125,000
free
cash
to
start
incurring
expenses,
and
as
it
incurred
expenses,
funds
would
be
released
from
escrow
to
provide
more
funds
so
that
a
total
of
$250,000
could
be
spent
in
R&D
activities
in
this
new
company.
These
R&D
activities
would
be
activities
that
Olds
Ag-Tech
would
have
otherwise
performed
if
it
had
not
taken
this
company.
Martinson
repeated
that
between
May
16
and
the
closing,
Martinson
was
asked,
probably
by
Ward,
that
his
firm
act
as
the
escrow
agent
under
the
escrow
agreement.
Martinson
also
confirmed
that
this
was
not
an
uncommon
request
and
that
as
the
funds
would
be
released
to
the
#
co.
when
the
#
co.
did
research
and
as
the
#
co.
would
be
situated
in
Olds,
it
was
simply
convenient
to
have
the
firm
act
as
the
escrow
agent.
Once
again
there
is
nothing
nefarious
about
Martinson's
firm
acting
as
escrow
agent,
it
was
done
simply
out
of
a
matter
of
convenience.
Martinson
testified
that
he
had
not
reviewed
the
escrow
agreement
beforehand,
as
it
was
part
of
the
documentation
prepared
at
the
closing.
He
stated
that
during
his
discussions
with
Ward
while
driving
to
Calgary,
their
view
was
that
if
they
were
not
happy
with
the
documents,
there
was
always
the
option
of
calling
the
deal
off.
Martinson
testified
that
the
closing
took
place
at
the
offices
of
Burnet
Duckworth,
Calgary
in
the
early
afternoon
of
May
22,
1985.
In
attendance
were
Garritsen
and
Spackman,
on
behalf
of
the
investors,
and
Ward
and
Martinson
on
behalf
of
Olds
Ag-Tech.
As
noted
earlier,
Martinson
had
not
been
provided
with
copies
of
documentation
as
the
closing
documents
were
in
the
process
of
being
prepared
when
he
and
Ward
arrived
at
Spackman's
office.
He
testified
that
he
reviewed
the
documents
for
their
legal
content.
In
terms
of
the
agreement
of
purchase
and
sale,
Martinson
agreed
that
he
was
aware
that
his
client
would
have
to
pay
$162,500
to
the
investors,
as
the
purchase
price
of
the
shares
being
transferred
to
Olds
Ag-Tech.
Martinson
also
agreed
that
ne
knew
the
#
co.
was
to
have
$250,000
in
it
and
that
$125,000
of
the
$250,000
would
be
impressed
by
an
escrow
or
a
trust
and
that
his
firm
was
to
act
as
the
escrow
agent
with
respect
to
the
$125,000.
This
left
$125,000
freely
usable,
however
it
was
not
enough
to
cover
the
purchase
price
of
$162,500.
When
asked
why
he
thought
he
could
utilize
$37,500
from
the
$125,000
held
in
trust
in
order
for
Olds
Ag-Tech
to
purchase
the
shares,
in
light
of
the
provisions
of
the
escrow
agreement
which
specifically
provided
that
$125,000
was
to
be
retained
in
escrow
or
in
trust,
Martinson
replied
that
it
was
his
belief
that
the
comfort
letter
issued
by
Wickman
allowed
him
to
release
the
amount
from
escrow
and
apply
it
to
the
purchase
price
of
the
shares.
Martinson
also
indicated
that
at
the
time,
he
was
equating,
in
his
own
mind,
the
two
companies,
namely
Olds
Ag-Tech
and
the
#
co.
and
therefore
treated
the
authorization
from
Olds
Ag-Tech
towards
Olds
Ag-
Tech
expenditures
as
allowing
him
to
release
the
funds.
It
should
benoted
that
the
Wickman
comfort
letter
referred
only
to
expenditures
incurred
on
behalf
of
Olds
Ag-Tech
and
not
to
expenditures
incurred
by
the
#
co.
Martinson
added
that
he
did
not
make
a
distinction
between
the
escrowed
and
free
funds.
Martinson
conceded
that
he
assumed
incorrectly
that
he
could
use
$37,500
of
the
$125,000
held
in
escrow.
He
also
conceded
that
the
parties,
including
Garritsen
and
Spackman,
could
have
proceeded
on
the
assumption
of
competence
and
on
the
understanding
that
obligations
contained
in
the
relevant
agreements
would
not
be
breached.
Martinson
testified
it
was
his
impression
that
Garritsen
was
aware
that
Martinson
was
going
to
use
the
funds
the
way
he
did,
as
the
funds
were
wired
to
Martinson's
trust
account
and
Martinson
was
to
write
cheques
on
that
account.
I
do
not
accept
this
explanation.
Martinson
agreed
that
at
the
time
the
funds
were
transferred
to
his
trust
account,
the
funds
were
being
held
in
trust
for
the
#
co.
and
that
if
for
some
reason
the
transaction
did
not
close,
the
funds
would
remain
in
trust
for
the
#
co.
and
as
such,
Garritsen
would
not
have
been
at
risk
by
transferring
the
funds
to
Martinson's
trust
account.
With
respect
to
the
wind-up,
Martinson
confirmed
the
decision
to
wind
up
the
#
co.
took
place
in
the
restaurant
after
the
closing.
He
testified
that
Ward
would
have
told
him
that
he
wished
to
have
the
company
wound
up
and
to
prepare
the
documentation
to
effect
the
wind-up.
Martinson
admitted
that
he
did
not
consider
whether
the
$125,000
and
the
Part
VIII
tax
were
either
assets
or
liabilities.
It
should
be
noted
that
in
Alberta,
in
order
for
a
corporation
to
be
dissolved,
it
must
have
no
assets
nor
any
liabilities.
Martinson
confirmed
that
after
the
#
co.
was
wound
up,
he
continued
to
hold
the
escrowed
funds
in
trust
for
the
#co
and
eventually
released
the
funds
to
Olds
Ag-Tech
based
on
Olds
Ag-Tech's
expenditures.
Martinson
felt
that
the
accountant's
certificate
and
the
director's
certificate,
both
dated
August
25,
1985
and
the
accountant's
certificate
and
the
director's
certificate
both
dated
November
29,
1985,
allowed
him
to
release
the
funds.
In
1985,
Smith
was
working
as
an
auditor
for
Revenue
Canada.
She
testified
that
the
#
co.
had
been
selected
for
audit
under
the
SRTC
and
she
was
assigned
to
do
the
audit.
Smith
testified
that
she
contacted
Ann
Morgan
and
Ward
of
Olds
Ag-Tech
and
made
arrangements
to
go
to
Olds
to
review
Olds
Ag-Tech
records.
After
conducting
primary
discussions
and
reviewing
accounting
records,
Smith
stated
she
had
concerns
about
the
designation
and
consulted
with
members
of
the
tax
avoidance
section
of
Revenue
Canada,
specifically
O'Connor,
who
became
involved
with
her
audit.
Smith
testified
that
they
continued
toask
questions
of
the
#
co.,
Ann
Morgan
and
Ward,
collected
papers
from
the
accountants
and
lawyers
and
spoke
with
the
investors.
Smith
testified
that
she
made
notes
of
her
discussions
or
interviews.
She
indicated
that
she
had
a
telephone
conversation
with
Young
on
June
12,
1986
for
the
purposes
of
arranging
a
trip
to
Edmonton
to
examine
the
Wickman
files
relating
to
Olds
Ag-Tech
and
the
#
co.
Smith
testified
that
Young
had
previously
advised
them
that
they
(the
Wickman
corporation)
may
have
planning
notes
and
that
she
indicated
that
these
notes
were
of
interest
to
her.
Smith
also
testified
that
during
the
course
of
that
conversation,
Young
had
told
her
that
Dean
Wickman
had
a
telephone
conversation
with
Garritsen
regarding
the
transaction.
After
the
telephone
conversation
of
June
12th,
Smith
and
O'Connor
went
to
Edmonton
to
collect
information
as
part
of
the
requirement,
and
obtained
a
copy
of
Young's
planning
note.
After
reviewing
the
records
and
planning
note
at
Dean
Wickman's,
Smith
drew
up
a
query
sheet
with
various
questions
that
"tax
avoidance”
wanted
asked.
Smith
and
O'Connor
visited
the
offices
of
Olds
Ag-Tech
and
met
with
Ann
Morgan,
the
Olds
secretary,
and
left
the
query
sheet
with
Olds
Ag-Tech.
On
May
13,
1987,
Penner
and
Garritsen
were
interviewed
by
O'Connor,
Mr.
Stuart
Scott
(Scott),
who
at
the
time
was
chief
of
tax
avoidance
at
the
Calgary
District
Office,
and
Smith.
Smith
testified
her
role
at
the
interview
was
to
take
notes
while
Scott
and
O'Connor
asked
the
questions.
Smith
also
testified
that
she
did
not
recall
writing
the
following
portion
of
her
notes:
We
were
advised
that
they
directed
lawyers
to
incorporate
a
company
as
a
vehicle
for
SRTCs
to
renounce
expenditures.
This
was
done
to
facilitate
Kent
Ward’s
and
Olds
Agtech
research.
They
had
a
preference
that
the
research
be
done
in
the
numbered
company,
but
they
didn't
care
where
this
was
done,
and
the
company
was
simply
a
mechanism
to
designate.
[Exhibit
1-68.]
I
note
that
the
letter
of
May
16
contradicts
the
above
statement
Smith
made
in
her
notes.
This,
together
with
Smith's
comments
during
cross
examination
that
at
times
her
impressions
of
what
was
being
said
crept
into
her
notes
leads
me
to
conclude
that
little
or
no
weight
should
be
placed
on
the
above
portion
of
Smith's
notes.
Smith
recalled
that
the
investors
had
been
asked
if
they
cared
about
the
source
of
the
funds
and
her
impression
was
that
Garritsen
seemed
surprised
that
the
funds
came
from
the
trust
account.
Smith
had
no
recollection
of
being
told
by
either
Penner
or
Garritsen
that
they
had
been
told
the
source
of
funds
for
the
transaction
was
to
have
been
a
line
of
credit,
however
she
did
recall,
and
her
notes
reflected
her
recollection
that
the
investors
stated:
Did
not
need
to
determine
if
Olds
had
sufficient
funds
or
source
of
same.
Indicated
funds
sent
May
22
to
Macinnes
Martinson
in
trust
in
anticipation
of
closing,
and
it
was
of
no
concern
to
them
how
Olds
obtained
funds.
[Exhibit
1-68.]
Smith
testified
both
in
examination-in-chief
and
in
cross-examination
that
after
she
made
the
notes
of
the
meetings,
she
would
review
the
notes
with
Scott
and
O'Connor
(the
other
people
who
attended
the
meetings
on
behalf
of
Revenue
Canada)
to
ensure
what
she
had
written
accurately
reflected
what
had
occurred
at
the
meetings
and
if
required,
to
expand
on
any
point
or
points
in
her
notes.
Smith
would
then
put
her
notes
in
a
final
form
to
reflect
the
comments
of
the
others
who
attended
the
meetings.
Smith
testified
that
she
was
unaware
of
any
Revenue
Canada
policy
requiring
that
her
notes
be
provided
to
taxpayers
for
review,
to
ensure
the
notes
accurately
reflected
the
taxpayer's
position
or
recollection
of
the
meeting.
Smith
indicated
she
attempted
to
make
notes
of
what
was
said,
but
admitted
that
in
some
instances
her
impressions
crept
into
her
notes.
In
light
of
this
admission
I
find
it
difficult
to
place
any
weight
to
Smith's
notes.
Further,
it
is
not
clear
which
portion
of
her
notes
simply
reflect
her
impressions
as
opposed
to
an
accurate
account
of
what
transpired,
be
it
during
a
telephone
conversation
or
the
meeting
with
Penner
and
Garritsen.
Smith
also
indicated
that
in
the
course
of
her
audit,
Revenue
Canada
considered
the
research
done
by
Olds
Ag-Tech
to
be
valid
research.
What
Revenue
Canada
was
looking
at
was
the
mechanics
of
the
transaction
which
created
the
funding.
In
terms
of
the
meeting
with
Penner
and
Garritsen,
Smith
described
the
meeting
as
non-adversarial.
She
indicated
her
impression
was
that
Garritsen
was
surprised
when
he
was
informed
the
funds
for
the
purchase
came
from
the
#
co.,
but
added
that
she
remembered
that
it
did
not
seem
to
matter
to
Garritsen.
Smith
also
indicated
that
she
expected
otherwise.
However,
she
admitted
Garritsen
and
Penner
mentioned
that
it
was
their
understanding
that
in
some
jurisdictions
one
could
not
use
the
company's
own
funds
to
purchase
shares
and
that
the
escrow
agreement
was
in
place.
Smith
testified
she
recorded
Penner
and
Garritsen's
belief
that
it
might
not
be
possible
for
a
company
to
use
its
own
funds
to
buy
back
shares,
but
she
did
not
contact
anyone
to
obtain
an
opinion
as
to
whether
this
was
a
valid
thought
in
their
mind.
In
a
letter,
dated
November
24,
1987
(Exhibit
1-74),
to
Ward,
Revenue
Canada
advised
that
they
proposed
to
invalidate
the
SRTC
designation
made
by
the
#
co
to
the
investors,
thereby
eliminating
the
tax
required
to
be
paid
under
Part
VIII
of
the
Act.
Smith
indicated
that
it
was
Revenue
Canada’s
position
that
by
virtue
of
paragraph
251(1)(b)
of
the
Income
Tax
Act,
the
#
co.,
Olds
Ag-Tech
and
the
investors
were
not
dealing
at
arm's
length
during
the
relevant
period
and
it
could
reasonably
be
expected
that
the
shares
would
be
acquired
and
redeemed
with-
intwo
years.
In
arriving
at
this
position
Revenue
Canada
considered
the
following
facts:
1.
On
May
22,
1985,
the
shares
of
328734
were
purchased
by
Olds
Ag-tech
from
six
individuals
for
$162,500
with
the
transaction
closing
at
1:00
p.m.
2.
Olds
Ag-Tech
utilized
the
funds
of
329734
to
purchase
those
shares.
3.
At
4:00
p.m.
of
the
same
day,
328734
held
a
shareholder’s
meeting
at
which
it
was
resolved
that,
as
328734
had
no
remaining
assets
or
liabilities,
it
would
be
in
order
to
dissolve
the
corporation.
No
mention
is
made
of
the
apparent
receivable
from
Old
Ag-
tech
of
$162,500.
4,
The
part
VIII
liability
of
328734,
in
the
amount
of
$125,000,
was
held
in
escrow.
It
was
necessary
for
all
of
the
following
transactions
to
occur
simultaneously
in
order
that
there
would
be
enough
cash
available
to
pay
out
the
$162,500:
(i)
A
letter
was
issued
by
Olds
Ag-Tech’s
accountant
stating
that
$99,000
of
scientific
research
had
been
conducted
by
Olds
Ag-Tech.
(ii)
This
allegedly
permitted
the
escrow
agents
(Olds
Ag-tech's
lawyers)
to
release
$49,500
of
the
Part
VIII
liability.
(iii)
This
provided
sufficient
casu
so
that
the
six
investors
could
be
paid
for
the
shares.
When
presented
with
the
above
letter,
which
concluded
that
“since
Olds
Ag-
tech
used
the
funds
of
Newco
without
any
indication
of
a
loan
agreement
and
caused
the
issuance
of
a
"comfort
letter"
in
conjunction
with
the
purchase
of
the
shares,
our
view
is
that
the
wind-up
was
always
planned
regardless
of
the
restrictions
placed
on
redemption.”
(Exhibit
1-74),
Smith
testified
that
although
she
signed
the
letter,
the
contents
had
been
prepared
by
the
tax
avoidance
section
of
Revenue
Canada.
She
also
admitted
that
she
did
not
necessarily
understand
all
of
the
facts
or
reasoning
behind
the
November
24
letter
and
that
she
was
not
the
one
that
decided
there
may
have
been
some
collusion
between
the
investors
and
Olds
Ag-Tech.
From
1986
to
1990
O'Connor
worked
in
the
tax
avoidance
office
of
the
Calgary
District
office
of
Revenue
Canada
and
became
involved
in
this
matter
when
the
tax
avoidance
office
received
a
referral
from
the
regular
audit
staff.
O'Connor
testified
that
Ward,
Ann
Morgan,
Young
and
two
of
the
investors,
Penner
and
Garritsen
had
been
interviewed
and
that
Revenue
Canada
had
served
"requirements"
on
Olds
Ag-Tech
and
their
legal
representative
as
well
as
Young.
O'Connor
also
stated
that
they
had
visited
the
offices
of
Dean
Wickman,
went
through
the
files
related
to
the
transaction
and
found
what
they
considered
to
be
a
relevant
document,
Young's
planning
notes
(Exhibit
1-26).
O'Connor
along
with
Smith
and
Scott
interviewed
Penner
and
Garritsen
on
May
13,
1987.
O'Connor
stated
the
interview
was
largely
directed
by
himself
and
Scott,
Smith's
role
was
note
taking.
O'Connor
testified
that
he
had
no
recollection
of
being
told
that
the
transaction
was
to
be
funded
by
Olds
Ag-Tech,
or
by
Ward
accessing
a
line
of
credit.
With
respect
to
Smith's
notes,
when
shown
the
notes
O'Connor
indicated
that
he
did
not
remember
the
exact
responses,
but
that
the
notes
reflected
the
gist
of
what
was
said.
He
added
that
he
and
Scott
reviewed
the
notes
made
by
Smith
and
made
a
number
of
suggestions
including
addendums
1,
2
and
3.
During
cross-examination
O'Connor
admitted
that
in
tax
cases
and
in
other
litigation
matters,
exact
words
are
important
and
that
if
one
takes
a
statement
a
little
bit
out
of
context
it
could
throw
it
into
a
totally
different
light.
O'Connor
added
that
he
and
Scott
took
care
in
the
meeting
with
Penner
and
Garritsen
as
they
were
nervous
because
they
were
concerned
confidentiality
rules
would
be
breached
if
they
disclosed
information
received
from
Olds
Ag-Tech
and
because
they
knew
they
were
dealing
with
"professionals
at
the
pinnacle
of
their
profession".
O’Connor
did
state
that
despite
their
nervousness
every
thing
went
fine
at
the
meeting.
O'Connor
confirmed
that
it
is
not
Revenue
Canada's
policy
to
provide
the
taxpayers
with
a
copy
of
notes
taken
at
meetings
with
the
taxpayer,
but
added
that
there
was
nothing
to
prevent
them
from
taking
such
a
step.
O'Connor
stated
that
he
did
not
believe
notes
of
the
May
13
meeting
were
provided
to
either
Penner
or
Garritsen.
Once
again,
O'Connor
confirmed
that
Garritsen
and
Penner
expressed
surprise
when
they
were
informed
money
had
been
taken
out
of
the
#
co.’s
account
for
the
payment
of
the
purchase
price
of
the
shares.
O'Connor
stated
that
he
did
not
disbelieve
Penner
and
Garritsen’s
surprise.
I
would
add
that
neither
do
I.
During
cross-examination
O'Connor
was
given
the
escrow
agreement
to
review,
and
testified
that
he
would
have
reviewed
the
document
in
the
course
of
the
audit.
He
agreed
that
according
to
the
terms
of
the
agreement,
$125,000
was
to
remain
in
escrow
and
could
only
be
released
in
two
instances:
(1)
when
the
escrow
became
satisfied
by
the
documentation
set
forth
in
"A",
"B",
"C"
or
“D”
that
the
#
co.
has
incurred
the
research
and
upon
becoming
so
satisfied
the
agreement
permitted
a
release
of
50
cents
on
the
dollar
for
the
research
that
was
spent
and
(2)
if
the
#
co.
did
not
do
the
research,
the
escrow
agent
was
to
pay
any
remaining
funds
to
the
Receiver
General
on
account
of
the
#
co.'s
liability
for
Part
VIII
tax.
Written
consent
of
the
investors
was
required
if
the
funds
were
to
be
applied
for
any
other
use.
O'Connor
indicated
he
did
not
recall
asking
Penner
or
Garritsen
if
they
have
had
given
their
written
consent
for
the
use
of
the
funds
for
any
other
purpose.
O'Connor
admitted
that
during
the
interview
Penner
and
Garritsen
expressed
surprise
at
the
funds
being
used
in
the
manner
in
which
they
were
used
because
it
was
their
understanding
that
at
least
in
some
jurisdictions
it
was
not
possible
for
a
company
to
give
financial
assistance
for
the
purchase
of
its
own
shares.
O’Connor
confirmed
that
notwithstanding
that
these
individuals
were
professionals
in
their
field,
he
did
not
pursue
any
inquiry
or
request
a
legal
opinion
as
to
whether
Penner
and
Garritsen
were
correct
in
so
far
as
the
law
of
Alberta
was
concerned.
O'Connor
added
that
he
was
not
sure
of
the
relevance
of
this
matter
with
respect
to
the
impact
of
this
case.
O'Connor
explained
that
they
were
attempting
to
do
research
on
the
relevant
factors
related
to
the
non-arm's
length
issue.
O'Connor
stated
that
the
factors
or
Revenue
Canada’s
position
was
set
out
in
the
letter
to
Ward,
dated
November
24,
1987.
He
added
that
the
letter
was
drafted
mainly
by
Wayne
Adams
in
head
office,
tax
avoidance.
O'Connor
agreed
that
the
only
two
things
that
came
out
of
this
letter
to
point
to
a
non-arm’s
length
relationship
were
the
use
of
the
escrow
funds
and
the
close
timing
of
the
wind-up.
Upon
further
review,
O'Connor
stated
that
they
had
three
basic
arguments
why
the
transaction
was
not
at
arm's
length:
1.
the
argument
of
de
facto
control,
based
on
the
intent
of
the
investors
not
to
hold
the
shares;
2.
the
existence
of
a
common
mind
which
directed
the
bargaining
for
both
parties;
3.
Olds
Ag-Tech
did
not
get
independent
advice,
in
that
the
investors
were
tax
specialists
on
behalf
of
Olds
Ag-Tech
and
Olds
Ag-Tech
relied
on
the
investors
and
therefore
did
not
obtain
their
own
independent
counsel
on
the
mechanism
that
was
to
be
used.
In
other
words,
Olds
Ag-Tech
acquiesced
totally
to
the
investors
in
respect
of
the
structure
of
the
transaction.
The
planning
document
prepared
by
Young
was
also
considered
a
factor.
O'Connor
also
stated
that
the
use
of
the
escrow
funds
for
the
purchase
of
the
shares
was
relied
on
in
the
determination
that
there
was
a
reasonable
expectation
that
the
#
co.’s
shares
would
be
redeemed,
acquired
or
cancelled
in
any
manner
whatsoever
within
the
two
years.
With
respect
to
the
use
of
the
escrow
funds,
O'Connor
agreed
that
the
escrow
agreement
provided
for
the
escrow
funds
to
be
applied
against
the
#
co.’s
research
expenditures
or,
alternatively,
remitted
to
Revenue
Canada.
He
conceded
that
Revenue
Canada
had
not
come
to
the
conclusion
that
the
plaintiff
consented
to
the
provisions
of
the
escrow
agreement
being
ignored.
He
also
agreed
it
was
reasonable
for
the
plaintiff
to
expect
the
escrow
agreement
not
to
be
breached,
however,
this
was
not
considered
a
relevant
factor
with
respect
to
Revenue
Canada's
determination
that
the
relationship
between
the
parties
was
not
at
arm's
length.
In
terms
of
the
existence
of
a
common
mind
and
the
suggestion
that
the
plaintiff
devised
the
transaction
in
question,
O'Connor
agreed
that
the
letter
of
intent
did
not
contain
a
reference
to
a
subsequent
wind-up.
He
stated
that
Revenue
Canada
relied
on
the
planning
document
obtained
from
the
offices
of
Dean
Wickman
to
arrive
at
their
belief
that
there
was
to
be
a
subsequent
wind-up.
The
planning
document
is
found
at
Exhibit
1-26
and
is
an
undated
memo
in
Young's
handwriting.
O'Connor
identified
the
planning
document
as
the
primary
factor
in
their
conclusion,
combined
with
the
circumstantial
evidence
of
the
immediate
wind-up.
O'Connor
conceded
that
they
did
not
have
any
real
evidence
until
they
obtained
the
planning
document.
He
also
indicated
that
he
was
not
told
who
authored
the
document.
O'Connor
testified
it
was
his
belief
that
Young
received
a
telephone
call
from
Garritsen
and
this
call
was
the
source
of
the
information
contained
in
the
planning
document.
The
evidence
clearly
indicates
that
O'Connor's
belief
is
incorrect.
Young
never
spoke
to
Garritsen.
I
have
great
difficulty
placing
the
same
absolute
reliance
on
an
unsigned,
undated
planning
document
as
was
placed
by
the
defendant.
In
this
regard,
I
note
that
Wickman
testified
that
he
had
no
recollection
of
a
telephone
conversation
with
Garritsen
with
respect
to
the
transaction
at
issue.
Wickman
believed
the
notes
were
in
Young's
hand
writing,
but
had
no
recollection
of
having
any
discussions
during
which
time
he
passed
on
the
information
contained
in
the
planning
notes
to
Young.
Young
identified
the
planning
notes
as
having
been
prepared
by
him
but
could
not
recall
the
circumstances
in
which
the
notes
were
prepared.
Young
also
testified
that
he
did
not
recall
having
any
conversations
with
either
Penner
or
Garritsen.
He
had
no
involvement
in
structuring
the
transaction
and
was
unaware
of
who
did.
O'Connor
stated
that
the
notes
show
that
it
was
Young's
impression
that
the
wind-up
of
the
#
co.
was
to
be
made
concurrently
with
its
acquisition.
However,
he
admitted
they
knew
after
the
fact
that
the
windup
was
not
done
concurrently
and
that
it
had
not
taken
place
in
the
presence
of
the
investors.
With
all
of
the
“amnesia”
surrounding
the
planning
document,
I
cannot
legitimately
rely
on
its
contents
to
support
the
view
that
the
plaintiffs
knew
of
or
had
planned
the
wind-up
of
the
#
co.
Further,
O'Connor
conceded
that
it
would
have
been
possible
that
Ward
may
have
thought
of
the
wind-up
on
his
own
and
did
not
tell
the
investors.
The
first
issue
to
be
determined
is
whether
the
plaintiff,
the
#
co.
and
Olds
Ag-
Tech
were
acting
at
arm's
length
in
connection
with
the
negotiations
and
completion
of
the
transaction
at
issue.
As
I
indicated
earlier
in
my
reasons,
the
question
of
whether
the
parties
were
dealing
at
arm's
length
for
the
purposes
of
paragraph
251(b)
of
the
Act
is
a
question
of
fact
to
be
determined
based
on
all
the
evidence.
Although
the
parties
disagree
on
the
application
of
the
facts
to
the
law,
they
agree
on
the
principles
applicable
to
the
determination
of
the
issue.
In
Peter
Cundill
&
Associates
Ltd.
v.
Canada,
[1991]
1
C.T.C.
197,
91
D.T.C.
5085
(F.C.T.D.),
at
page
203
(D.T.C.
5090),
Cullen
J.
stated
some
of
the
factors
to
be
considered
in
determining
whether
or
not
dealings
are
at
arm's
length:
In
Interpretation
Bulletin
IT-419
Revenue
Canada
suggested
the
following
factors
will
determine
whether
or
not
dealings
are
at
arm's
length:
(a)
the
existence
of
a
common
mind
which
directs
the
bargaining
for
both
parties
to
a
transaction,
(b)
parties
to
a
transaction
acting
in
concert
without
separate
interests,
and
(c)
de
facto
control.
The
criteria
enunciated
in
IT-419
have
also
been
the
criteria
consistently
considered
by
the
courts.
In
this
case,
it
appears
the
factor
that
will
illuminate
the
situation
is
determining
the
controlling
mind
of
these
two
corporations.
If
the
"mind"
acting
for
one
party
is
the
same
"mind"
directing
the
second
party,
then
they
cannot
really
be
said
to
be
dealing
at
arm's
length.
(Oryx
Realty
Corp.
v.
M.N.R.,
[1972]
C.T.C.
35,
72
D.T.C.
6018
(F.C.T.D.).
Further,
as
Cattanach
J.
noted
in
Merritt
Estate
v.
M.N.R.,
[1969]
C.T.C.
207,
69
D.T.C.
5159
(Ex.
Ct.),
at
page
217
(D.T.C.
5165):
In
my
view,
the
basic
premise
on
which
this
analysis
is
based
is
that,
where
the
“mind”
by
which
the
bargaining
on
behalf
of
one
party
to
a
contract
is
the
same
"mind"
that
directs
the
bargaining
on
behalf
of
the
other
party,
it
cannot
be
said
that
parties
are
dealing
at
arm's
length.
In
other
words
where
the
evidence
reveals
that
the
same
person
was
"dictating"
the
“terms
of
the
bargain”
on
behalf
of
both
parties,
it
cannot
be
said
that
the
parties
were
dealing
at
"arm's
length".
As
noted
by
the
plaintiff
the
"common
mind"
test
was
enunciated
and
then
expanded
upon
in
the
cases
of
Sheldons
Engineering
Ltd.
v.
M.N.R.,
[1955]
S.C.R.
637,
[1955]
C.T.C.
174,
55
D.T.C.
1110,
and
Merritt
Estate,
supra.
I
agree
with
the
plaintiff
that
these
cases
gave
rise
to
the
principle
that
where
the
same
mind
directs
or
dictates
the
terms
for
both
sides
of
a
transaction,
the
parties
to
a
transaction
will
not
be
at
arm's
length.
It
seems
that
in
determining
whether
a
directing
mind
exists,
the
courts
have
looked
to
whether
the
other
parties
have
demonstrated
a
lack
of
independent
judgment
or
independent
interest,
Kirby-
Maurice
Co.
v.
M.N.R.,
[1958]
C.T.C.
41,
58
D.T.C.
1033
(Ex.
Ct.),
and
Rolka
v.
M.N.R.,
[1962]
C.T.C.
637,
62
D.T.C.
1394
(Ex.
Ct.).
The
"acting
in
concert
test"
was
enunciated
in
the
case
of
Swiss
Bank
Corp.
v.
M.N.R.,
[1971]
C.T.C.
427,
71
D.T.C.
5235
(Ex.
Ct.);
aff'd
[1974]
S.C.R.
1144,
[1972]
C.T.C.
614,
72
D.T.C.
6470.
This
case
expanded
the
directing
mind
concept
to
apply
to
groups
of
persons,
whether
natural
or
corporations,
acting
in
concert
and
in
the
same
interest,
to
direct
the
conduct
of
another.
Therefore,
as
noted
by
the
plaintiff,
the
acting
in
concert
test
was
an
adaptation
of
the
directing
mind
test
as
it
applied
to
a
group
of
persons.
However,
the
Court
in
Swiss
Bank
noted
that
notwithstanding
that
two
or
more
persons
may
be
acting
in
concert
to
direct
the
mind
of
another,
if
one
or
more
of
those
persons
has
a
separate
interest,
the
fact
of
their
acting
in
concert
will
not
necessarily
result
in
a
finding
that
their
dealings
are
not
at
arm's
length.
The
de
facto
control
has
been
applied
in
cases
where
the
court
has
found
that
one
of
the
parties
directly
or
indirectly
controlled
the
other,
and
in
such
cases
where
one
party
could
demonstrate
to
have
the
power
to
exercise
such
control,
whether
or
not
such
power
was
in
fact
exercised,
Pender
Enterprises
Ltd.
v.
M.N.R.,
[1965]
C.T.C.
343,
65
D.T.C.
5202
(Ex.
Ct.),
and
Robson
Leather
Co.
v.
M.N.R.,
[1977]
C.T.C.
132,
77
D.T.C.
5106
(F.C.A.).
The
defendant's
view,
as
outlined
in
the
evidence,
was
that
the
following
factors
were
taken
into
account
in
Revenue
Canada’s
determination
that
the
relationship
was
not
at
arm's
length:
1.
de
facto
control,
based
on
the
intent
of
the
plaintiffs
not
to
hold
the
shares;
2.
the
existence
of
a
common
mind
which
directed
the
bargaining
for
both
parties;
and
3.
Olds
Ag-Tech
did
not
receive
independent
advice
as
to
the
structure
of
the
transaction.
There
is
no
doubt
in
my
mind
that
the
plaintiff
and
Ward
were
driven
by
a
desire
to
take
advantage
of
a
tax
incentive
which
was
likely
to
disappear
on
them
in
a
very
short
time.
Each
would
benefit
from
the
transaction
if
it
could
be
completed
before
May
23,
1985.
It
is
clear
that
as
a
result
of
the
moratorium,
Ward's
requirements
as
set
out
in
his
letter
of
May
2,
1985
were
no
longer
possible
or
viable.
A
new
structure
had
tobe
put
in
place.
Penner
and
Garritsen
came
up
with
a
new
way
to
structure
the
transaction
whereby
the
plaintiffs
would
still
obtain
the
SRTCs
by
selling
a
“fully
funded"
corporation
to
Olds
Ag-Tech
as
a
vehicle
through
which
Olds
Ag-Tech
would
conduct
prospective
research
and
development
activities.
As
I
indicated
earlier,
I
am
satisfied
that
Penner
and
Garritsen
did
not
contemplate
that
previous
research
would
be
used
or
that
the
research
would
be
conducted
by
Olds
Ag-Tech.
A
corporation
was
established
for
that
purpose,
namely
the
H
co.
With
respect,
I
disagree
with
the
defendant's
view
that
there
was
no
bargaining
as
to
price.
On
the
evidence
I
am
satisfied
that
the
purchase
price
of
$162,500
was
negotiated
as
the
purchase
price
payable
by
Olds
Ag-Tech
to
the
investors
for
their
shares
of
the
#
co.
As
I
commented
earlier,
the
negotiations
could
not
be
considered
long
or
arduous,
however
there
was
some
negotiating.
In
this
regard,
I
note
that
an
established
price
range
had
become
relatively
common
regarding
the
sale
of
SRTC
instruments
and
I
agree
with
the
plaintiff's
submission
that
it
was
clearly
in
the
interests
of
each
party
to
negotiate
the
best
price
within
this
accepted
range.
I
have
also
determined
from
the
evidence,
that
Ward,
who
conducted
the
negotiations
on
behalf
of
Olds
Ag-Tech
was
familiar
with
the
financing
of
research
and
development
activities
and
as
indicated
by
Martinson,
perfectly
capable
of
holding
his
own
with
Penner
and
Garritsen.
Further,
I
agree
with
the
plaintiffs’
submission
that
the
transaction
reflected
"ordinary
commercial
dealings
between
parties
acting
in
their
separate
interests".
I
accept
that
for
tax
purposes
the
parties
bargained
for
the
following
economic
results:
1.
By
injecting
$250,000
into
the
#
co.,
and
selling
its
shares
to
Olds
Ag-Tech
for
$162,500
the
plaintiffs
would
initially
be
out
of
pocket
$87,500.
However,
the
SRTC
designation
made
by
the
#
co.
in
favour
of
the
plaintiffs
would
ultimately
give
rise
to
a
saving
of
about
$125,000
of
tax.
As
a
result
the
plaintiffs
would
realize
a
"net
profit"
of
approximately
$37,500
ignoring
any
time
value
considerations.
2.
Through
its
acquisition
of
the
#
co.
for
a
cost
of
$162,500,
Olds
Ag-Tech
would
be
gaining
access
to
$250,000
of
cash
funding
for
prospective
research
and
development
activities
to
be
conducted
by
the
#
co.
By
conducting
research
in
the
#
co.
so
as
to
discharge
its
Part
VIII
tax
liability,
Olds
Ag-Tech
would
be
required
to
forgo
the
tax
benefits
which
would
otherwise
become
available
by
it
directly
incurring
$250,000
of
research
expenses.
I
agree
with
the
plaintiff's
submission
that
the
facts
of
this
case
do
not
support
a
conclusion
that
a
common
mind
existed
which
directed
the
bargaining
for
both
parties
to
the
transaction.
Further,
the
above,
in
my
view,
is
consistent
with
the
object
and
spirit
of
the
SRTC
provisions
of
the
Act,
which
were
enacted
to
permit
research
companies
to
effectively
renounce
their
tax
benefits
in
favour
of
investors
who
purchased
qualifying
securities.
Further,
I
am
not
persuaded
by
the
evidence
that
either
party
to
this
transaction
did,
or
had
the
power
to
exert,
de
facto
control
over
the
other.
Essentially
the
defendant's
position
that
the
plaintiff,
the
#
co.
and
Olds
Ag-
Tech
were
not
dealing
at
arm's
length
is
based
on
the
assumption
that
Penner
and
Garritsen
planned
old
Ag-Tech's
use
of
the
#
co.'s
funds
to
finance
the
purchase
payable
in
respect
of
the
#
co.'s
shares.
I
believe
the
basis
for
this
assumption
comes
from
Smith's
notes
that
Penner
and
Garritsen
expressed
it
was
no
concern
of
theirs
where
Olds
Ag-Tech
obtained
the
funds
and
they
did
not
need
to
determine
if
Olds
had
sufficient
funds
or
a
source
of
funds.
Given
the
flaw
in
Smith's
notes
and
both
Penner
and
Garritsen's
testimony
that
yes
they
were
not
concerned
where
Olds
Ag-tech
got
the
funds
provided
that
Olds
Ag-Tech
did
not
obtain
the
funds
from
the
#
co.,
which
I
have
accepted,
I
have
serious
doubts
about
the
basis
for
the
defendant's
view.
Further,
both
Smith
and
O'Connor
testified
that
when
they
informed
Penner
and
Garritsen
that
the
#
co.'s
funds
were
used
by
Olds
Ag-tech
to
pay
the
purchase,
Penner
and
Garritsen
expressed
surprise.
Also,
I
believe
that
Penner's
and
Garritsen’s
understanding
that
the
#
co.'s
funds
would
not
be
used
to
pay
for
the
shares
is
justified
because
of
the
existence
of
the
escrow
agreement.
The
purpose
of
the
escrow
agreement
was
to
ensure
that
the
escrow
funds
would
only
be
released
to
the
#
co.
upon
completion
of
a
satisfactory
amount
of
research
by
the
#
co.
The
evidence
is
that
of
the
$250,000
transferred
to
Martinson’s
trust
account,
$125,000
was
escrowed.
All
conceded
that
the
escrowed
funds
could
not
be
released
unless
certain
conditions
were
met.
Martinson,
who
acted
as
escrow
agent
under
the
escrow
agreement,
conceded
that
he
erred
in
releasing
$37,500
of
the
escrow
funds
to
enable
Olds
Ag-Tech
to
pay
the
purchase
price
for
the
#
co.'s
shares.
It
was
also
conceded
by
O'Connor
that
it
was
reasonable
for
Penner
and
Garritsen
not
to
expect
the
provisions
of
the
escrow
agreement
not
to
be
breached.
Further,
O'connor
indicated
that
Revenue
Canada
had
not
concluded
that
Penner
and
Garritsen
consented
to
the
provisions
of
the
escrow
agreement
being
ignored.
In
my
view,
the
evidence
does
not
support
the
assumption
that
Penner
and
Garritsen
planned,
yet
alone
knew
that
Old
Ag-Tech
would
use
part
of
the
escrowed
funds
to
finance
the
purchase
of
the
shares.
The
defendant
indicated
during
argument
that
the
case
before
me
would
turn
on
the
non
arm's
length
issue.
As
I
understand
it,
the
defendant's
position
is
that
at
the
time
the
shares
were
issued,
given
the
evidence,
namely
what
the
plaintiffs
had
said,
there
was
a
reasonable
expectation
that
the
#
co.
would
be
amalgamated
or
wound
up
into
Olds
Ag-Tech
and
that
Olds
Ag-Tech,
the
company
which
was
doing
the
research
was
going
to
do
the
research.
To
that
end
the
question
of
the
use
of
past
expenditure
becomes
important.
The
defendant
has
referred
me
to
Martinson's
evidence
regarding
use
of
past
expenditures.
In
my
view,
Martinson’s
evidence
is
too
vague
to
be
of
much
assistance,
he
either
could
not
recall,
was
not
present
or
did
not
participate.
The
defendant
noted
that
Garritsen
and
Penner
were
put
on
their
inquiry
that
Ward
wanted
to
use
past
expenditures
which
had
been
incurred
in
this
transaction
and
that
it
was
the
plaintiff
that
conducted
research
relating
to
a
wind-up
of
the
#
co.
and
movement
of
the
Part
VIII
liability
to
the
parent
company,
Olds
Ag-Tech.
The
question
of
previous
expenditures
was
clearly
a
concern
for
Ward.
In
my
view
the
evidence
shows
that
in
the
course
of
planning
the
proposed
transaction
prior
to
the
May
16th
meeting,
Garritsen
noted
and
advised
Penner
that
under
section
88
of
the
Act,
a
company
could
be
wound
up
and
that
it
appeared
that
its
Part
VIII
tax
liability
would
pass
to
the
parent
company
as
a
consequence
of
the
wind-up.
Penner
did
not
pass
this
information
to
Ward
or
any
of
his
advisors.
However,
I
am
satisfied
that
sometime
between
May
16
and
May
22
completion
date
of
the
transaction,
Garritsen
did
discuss
the
possibility
or
a
wind-up
with
Ward
in
the
context
of
what
would
happen
to
the
company
being
acquired
by
Olds
Ag-Tech
after
it
spent
the
research
funds
and
there
was
no
longer
any
reason
to
maintain
a
separate
company.
Garritsen
indicated
to
Ward
that
if
the
company
to
be
acquired
by
Olds
Ag-Tech
was
unsuccessful
in
performing
all
of
the
required
research
within
its
first
fiscal
year,
it
might
be
possible
to
wind
up
the
company
into
Olds
Ag-Tech.
Penner
admitted
that
they
had
contemplated
a
wind-up,
but
did
not
expect
a
wind-up
to
occur
until
after
the
research
was
completed.
In
my
view,
the
contemplation
of
a
wind-up
after
the
research
is
completed
makes
sense,
in
that
after
the
research
is
completed
there
is
no
longer
a
reason
for
the
company
to
exist.
With
respect
to
Garritsen's
conversation
with
Wickman,
I
am
relying
on
Garritsen’s
evidence
in
this
regard,
as
Wickman
has
no
recollection
of
any
conversation.
My
understanding
of
the
conversation
is
that
Garritsen
answered
Wickman's
questions
regarding
the
wind-up
provision
in
the
Act.
At
page
194
of
the
transcript,
Garritsen
stated:
The
purpose
of
the
call
was
to
review
the
accounting
type
entries
that
would
be
necessary
to
reflect
these
transactions
within
Olds
Agtech
and
within
the
numbered
company,
and
during
that
conversation
I
believe
he
asked
me
the
question
as
to
the
wind
up
provisions,
and
I
believe
I
might
have
discussed
it
with
him
briefly.
But
again
in
the
same
context
of
it
happening
at
the
end.
And
I
believe
in
all
cases
also
we
would
have
discussed
the
necessity
for
the
investors'
consent
for
that
to
happen.
I
certainly
had
no
intent
nor
understanding
that
the
wind-up
would
take
place
immediately.
In
fact,
had
that
happened—its
another
circumstance
that
would
have
caused
me
not
to
want
to
do
the
closing.
I
accept
the
above
as
a
fair
statement,
as
the
evidence
clearly
shows
that
Penner
and
Garritsen
had
no
idea
that
immediately
after
their
meeting
of
May
22,
Ward
was
going
to
wind
up
the
#
co.
I
would
also
like
to
add
that
from
the
evidence
presented
I
have
some
concerns
regarding
whether
the
requirements
of
subsection
203(2)
of
the
Alberta
Business
Corporations
Act
[S.A.
(1981)
c.
B-15]
were
met
when
Martinson
prepared
the
documentation
which
caused
the
#
co.
to
be
dissolved.
I
am
also
satisfied
that
at
the
time
of
Garritsen's
discussions
with
Ward
regarding
the
possibility
of
a
wind-up,
Garritsen
had
no
reason
to
believe
that
$250,000
of
research
expenses
could
not
be
incurred
in
the
company
which
Olds
Ag-Tech
was
to
acquire
from
the
investors.
They
had
information
from
Ward
that
he
had
research
programs
in
place
that
would
expend
at
least
that
much.
Moreover,
according
to
the
accounting
documents
Olds
Ag-Tech
incurred
approximately
$186,000
in
research
expenditures
from
May
15,
1985
to
November
30,
1985,
the
later
part
of
Olds
Ag-Tech's
1985
fiscal
year.
One
again
there
was
some
reliance
placed
on
the
notes
taken
by
Smith,
relating
to
the
wind-up,
which
reflect
that
Young
had
the
impression
that
the
wind-up
of
the
#
co.
was
to
be
made
concurrently
with
its
acquisition.
I
noted
earlier
my
difficulty
with
relying
on
Smith's
notes.
Smith
admitted
that
she
was
aware
that
Young
never
had
a
conversation
with
Garritsen
and
had
no
knowledge
as
to
whether
the
planning
notes
reflected
the
views
of
Garritsen.
Further,
Smith
could
not
point
to
any
facts
which
would
support
a
finding
that
the
plaintiff
was
responsible
for
creating
an
impression
on
Young
that
the
#
co.
would
be
wound
up
concurrently
with
or
shortly
thereafter
of
the
closing
of
the
transaction.
The
defendant
referred
to
Martinson’s
perception
of
the
events
which
occurred
at
the
closing,
specifically
his
perception
that
it
was
understood
that
he
was
using
the
money
which
had
been
transferred
to
buy
the
shares.
I
have
difficulty
accepting
this
evidence,
given
that
the
parties
present
could
proceed
on
the
assumption
of
a
certain
degree
of
knowledge
and
competence
of
the
escrow
agent.
In
my
view,
there
was
no
need
on
the
part
of
Garritsen
to
inform
a
solicitor
that
he
or
she
should
not
use
escrowed
or
trust
funds
to
purchase
the
shares
in
the
#
co.
The
defendant
raised
a
number
of
concerns
under
the
heading
of
"due
diligence"
with
respect
to
the
fact
that
Penner
did
not
attempt
to
satisfy
himself
that
Olds
Ag-Tech
had
the
independent
source
of
funds
which
was
essential
to
the
transaction.
With
respect,
I
can
not
accept
that
Penner
had
to
make
further
inquiries
after
being
told
by
a
reputable
business
person
that
he
had
his
own
source
of
funds.
There
is
no
indication
that
Penner
had
any
reason
not
to
believe
Ward.
Regarding
the
fact
that
Garritsen
did
nothing
further
to
acquaint
himself
with
the
affairs
of
Olds
Ag-Tech
other
than
to
look
at
brochures,
it
should
be
noted
that
the
Revenue
Canada
auditors
were
satisfied
that
the
research
was
legitimate.
Further,
although
I
agree
that
Garritsen
was
concerned
that
the
purchase
price
for
the
shares
came
from
Olds
Ag-Tech,
he
did
not
care
how
Olds
Ag-Tech
obtained
the
funds,
subject
to
the
proviso
that
the
funds
not
come
from
the
#
co.
Some
mention
was
made
of
the
fact
that
if
an
independent
source
of
funding
was
so
important
to
the
plaintiff,
one
would
expect
to
see
a
reference
to
it
in
the
letter
of
May
16
or
plainly
stated
to
Martinson.
With
all
due
respect,
the
purpose
of
the
letter
of
May
16
was
to
set
out
the
structure
of
the
transaction,
the
funding
was
understood.
As
such,
I
can
find
nothing
wrong
with
any
of
the
plaintiffs’
action
or
inaction
noted
above.
Therefore,
an
examination
of
all
the
evidence
in
this
matter
leads
me
to
the
conclusion
that
the
plaintiff,
the
#
co.
and
Olds
Ag-Tech
were
dealing
at
arm's
length.
I
am
also
satisfied,
having
regard
to
all
the
relevant
circumstances,
Penner
and
Garritsen
could
not
have
reasonably
expected
the
wind-up
of
the
#
co.
to
occur
when
it
did
or
within
the
fiscal
year.
The
defendant
advanced
an
argument
that
it
could
be
reasonably
expected,
at
the
time
the
#
co.
shares
were
issued
to
the
plaintiff,
that
the
#
co.
or
Olds
Ag-
Tech
would
reduce
the
paid-up
capital
in
respect
of
such
shares.
As
I
understand,
this
argument
is
based
on
the
assumption
that
a
wind-up
or
dissolution
of
a
corporation
results
in
a
reduction
of
its
paid
up
capital
for
the
purposes
of
subsection
192(6)
of
the
Act.
The
plaintiff
submitted
and
I
agree,
that
if
it
is
found
that
the
plaintiff
had
no
knowledge
and
did
not
participate
in
the
wind-up,
the
timing
of
the
wind-up
is
relevant
only
to
the
arm's
length
issue.
Once
it
is
found
that
the
parties
are
dealing
at
arm's
length,
wether
or
not
there
was
a
reasonable
expectation
of
a
possibility
of
a
wind-up
down
the
road,
or
the
mere
contemplation
of
a
possibility
of
a
windup
down
the
road,
is
all
immaterial
for
the
purposes
of
the
disposition
of
this
appeal
because
the
wind-up
does
not
result
in
the
reduction
of
paid
up
capital
for
the
purposes
of
subsection
192(6)
of
the
Act.
Pursuant
to
clause
192(6)(c)(iii)(A),
a
share
is
not
a
qualifying
share
if,
at
the
time
the
share
was
issued,
it
could
be
reasonably
expected
that,
within
two
years,
the
share
would
be
redeemed,
acquired,
or
cancelled
by
the
corporation
issuing
the
share
or
by
the
person
with
whom
such
corporation
does
not
deal
at
arm's
length.
Pursuant
to
clause
192(6)(c)(iii)(B),
a
share
is
also
not
a
qualifying
share
if,
at
the
time
such
share
was
issued,
it
could
have
been
reasonably
expected
that,
at
any
time
thereafter
without
reference
to
the
two-year
time
period,
the
paid-up
capital
of
the
corporation
in
respect
of
such
share
would
be
reduced.
Although
I
do
not
think
it
is
necessary
for
the
purpose
of
this
appeal
to
deal
with
the
question
of
reduction
of
paid
up
capital,
the
defendant
has
raised
the
argument
and
I
will
therefore
address
it.
As
I
understand
the
defendant's
argument,
the
defendant
contends
that
it
could
reasonably
be
expected
at
the
time
the
#
co.
shares
were
issued
to
the
plaintiff,
the
#
co.
or
Olds
Ag-Tech
would
reduce
the
paid
up
capital
in
respect
of
such
shares.
In
this
respect,
the
wind-up
or
the
dissolution
of
a
corporation
results
in
a
reduction
of
its
paid-up
capital
for
the
purposes
of
subsection
192(6),
in
other
words
the
shares
would
not
be
considered
qualifying
shares.
Counsel
for
the
plaintiff,
noted
that
paragraph
89(1
)(c)
of
the
Act
states
in
simplest
terms
that
paid
up
capital
is
to
be
determined
without
reference
to
the
Income
Tax
Act.
Further,
clause
89(1
)(c)
makes
no
reference
to
adjustment
dealing
with
or
providing
for
a
reduction
of
paid
up
capital.
Therefore,
the
starting
point
for
paid
up
capital
for
income
tax
purposes
is
the
relevant
corporate
law
statute
under
which
the
particular
company
in
question
is
governed,
in
the
case
before
me
the
Alberta
Business
Corporations
Act.
According
to
the
plaintiff,
stated
capital
is
used
in
the
Alberta
statute
for
example,
in
connection
with
the
tests
for
the
payment
of
dividends
by
a
corporation,
as
well
as
the
provision
of
financial
assistance
with
respect
to
section
42
of
the
above
noted
Act.
I
agree
with
the
plaintiff's
submission
that
the
concept
of
stated
capital
is
a
relevant
concept
in
respect
of
an
on
going
corporation.
As
I
understand,
in
Alberta
a
corporation
can
only
be
wound
up
pursuant
to
the
liquidation
and
dissolution
proceedings
contained
in
part
17
of
the
corporate
statute.
Under
the
provisions
of
part
17
the
liabilities
of
a
dissolving
corporation
must
be
dissolved
in
full.
I
accept
the
plaintiff's
contention
that
since
the
liabilities
of
a
liquidating
and
dissolving
company
must
be
discharged
in
full,
the
concept
of
stated
capital
ceases
to
have
any
particular
relevance
for
corporate
law
purposes.
A
review
of
section
36
and
37
of
the
Alberta
Business
Corporation
Act
supports
such
a
proposition.
The
plaintiff
further
submitted
that
as
a
matter
of
corporate
law
ordinary
usage
of
the
term
reduction
of
paid
up
capital
is
meant
to
refer
to
a
special
resolution
being
adopted
to
reduce
the
stated
capital
of
the
corporation
otherwise
than
in
connection
with
a
wind-up,
redemption
or
an
acquisition
by
the
corporation
of
its
own
shares.
Counsel
for
the
plaintiff
then
referred
me
to
section
84
of
the
Income
Tax
Act.
Subsection
84(2)
provides
for
a
deemed
dividend
in
cases
where
a
company,
business
is
wound
up,
discontinued
or
reorganized.
Subsection
84(3)
provides
for
a
deemed
dividend
in
the
cases
where
a
corporation
redeems,
acquires
or
cancels
its
own
shares
and
subsection
84(4)
provides
for
deemed
dividends
in
situations
where
a
corporation
reduces
its
paid-up
capital
otherwise
than
by
way
of
a
redemption
or
cancellation
of
its
shares,
and
otherwise
than
by
way
of
a
wind-up.
Section
84
clearly
contemplates
that
for
the
purposes
of
the
Act,
a
redemption,
acquisition,
cancellation
or
distribution
on
wind-up
results
in
a
reduction
of
paid
up
capital.
The
Act
also
contemplates
that
a
corporation
may
reduce
its
paid
up
capital
otherwise
than
by
way
of
redemption,
acquisition,
cancellation
or
distribution
on
winding
up,
per
subsection
84(4).
In
this
regard,
I
agree
with
the
plaintiff's
submission
that
the
reference
to
a
reduction
of
paid
up
capital
in
clause
192(c)(iii)(B)
can
only
have
been
intended
to
contemplate
a
reduction
of
paid
up
capital
to
which
subsection
84(4)
was
applicable.
The
plaintiff
argued
that
clause
192(6)(c)(iii)(B)
is
incapable
of
being
interpreted
as
encompassing
every
event
that
results
in
a
reduction
of
paid
up
capital.
The
plaintiff
pointed
out,
quite
correctly,
that
such
an
interpretation
would
render
the
two-year
limitation
period
referred
to
in
clause
(A)
meaningless,
since
an
expectation
that
the
shares
would
be
redeemed,
acquired
or
cancelled
at
any
time
whatsoever
would
cause
the
shares
to
be
non
qualifying
shares
pursuant
clause
(B).
Moreover,
as
the
plaintiff
noted
it
can
be
reasonably
expected,
at
the
time
the
share
is
issued
by
a
corporation,
that
such
corporation
will
be
wound
up
some
time
in
the
future
and
if
there
is
a
reduction
of
paid
up
capital
on
a
wind-up,
then
it
necessarily
follows
that
no
share
can
ever
be
a
qualifying
share
for
the
purposes
of
subsection
192(6)
of
the
Act.
The
plaintiff
also
brought
to
my
attention
that
the
possibility
of
a
wind-up
is
specifically
contemplated
by
paragraph
192(6)(b),
which
provides
that
in
order
for
a
share
to
constitute
a
qualifying
share,
such
share
must
not
have
any
preferential
entitlement
upon
a
wind-up.
I
am
therefore
satisfied,
that
the
shares
in
question
were
"qualifying
share"
for
the
purposes
of
subsection
192(6).
The
defendant
has
also
advanced
an
argument
that,
even
if
I
find
that
there
was
an
arm's
length
transaction
and
that
the
wind-up
could
not
have
been
reasonably
expected
at
the
time
the
shares
were
issued,
the
M.N.R.'s
designation
must
be
upheld
because
the
purpose
of
the
transaction
was
to
effect
a
"quick
flip”
of
the
SRTC.
With
respect
this
argument
cannot
be
supported
by
the
evidence.
As
noted
by
the
plaintiff,
the
transaction
outlined
in
the
May
16th
Letter
of
Intent
was
structured
by
Penner
and
Garritsen
to
comply
with
both
the
technical
requirements
and
the
object
and
spirit
of
the
moratorium
on
quick
flips,
announced
by
the
Minister
of
Finance
on
October
10,
1984.
The
transaction
structured
by
Penner
and
Garritsen
involved
the
sale
to
Olds
Ag-Tech
of
a
fully
funded
#
co.
to
incur
$250,000
of
research
expenditures
so
as
to
discharge
the
$125,000
Part
VIII
tax
liability
on
the
part
of
the
#
co.
which
was
created
by
virtue
of
its
SRTC
designation
in
favour
of
the
plaintiffs.
Further,
Garritsen
and
Penner
caused
$125,000
of
the
#
co.'s
funds
to
be
held
in
escrow
pursuant
to
the
escrow
agreement,
which
provided
that
such
funds
could
only
be
released
upon
the
#
co.
expending
research.
The
escrow
agreement
also
provided
that
any
funds
remaining
in
escrow
on
May
20,
1986
be
forwarded
by
the
escrow
agent
to
the
Receiver
General
of
Canada
on
account
of
the
#
co.'s
Part
VIII
tax
liability.
Penner
and
Garritsen
did
not
consent
to
the
provisions
of
the
escrow
agreement
being
ignored
by
the
escrow
agent
nor
could
they
be
reasonably
expect
that
the
escrow
agreement
would
be
breached
by
the
escrow
agent.
I
agree
with
the
plaintiff,
that
if
the
transaction
had
unfolded
in
the
manner
contemplated
by
Penner
and
Garritsen,
the
escrow
funds
would
have
been
released
to
the
#
co.
by
virtue
of
it
having
incurred
research
expenditures
or
if
the
#co
did
not
incur
sufficient
research
expenditures
the
escrow
funds
would
have
been
remitted
to
the
Receiver
General
on
account
of
Part
VIII
tax
liability.
I
also
note
that
Revenue
Canada
acknowledged
the
validity
of
the
research
which
was
conducted
by
Olds
Ag-Tech
with
the
funds
provided
by
the
plaintiffs
via
the
#
co.
Therefore,
I
am
satisfied
that
the
transaction
was
a
legitimate
one
and
was
not
made
to
thwart
either
the
spirit
or
intention
of
the
Act.
Therefore,
for
the
reasons
noted
above,
the
plaintiff's
appeal
is
allowed
and
the
matter
is
returned
to
the
Minister
of
National
Revenue
for
the
appropriate
reassessment.
Appeal
allowed.
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