Recent Costs Awards in the Tax Court of Canada

As a general principle of litigation, an unsuccessful party at the Tax Court usually pays a portion of the legal costs of the successful party.

In a series of judgments decided late November awarding costs to the Appellant, the Tax Court has provided useful guidance on important principles in the context of costs awards.  It is important to note that section 147(3) of the Tax Court of Canada Rules (General Procedure) lists the following factors the Court may consider when determining the amount of costs to award:

(a) the result of the proceeding,

(b) the amounts in issue,

(c) the importance of the issues,

(d) any offer of settlement made in writing,

(e) the volume of work,

(f) the complexity of the issues,

(g) the conduct of any party that tended to shorten or to lengthen unnecessarily the duration of the proceeding,

(h) the denial or the neglect or refusal of any party to admit anything that should have been admitted,

(i) whether any stage in the proceedings was,

(i) improper, vexatious, or unnecessary, or

(ii) taken through negligence, mistake or excessive caution,

(i.1) whether the expense required to have an expert witness give evidence was justified given

(i) the nature of the proceeding, its public significance and any need to clarify the law,

(ii) the number, complexity or technical nature of the issues in dispute, or

(iii) the amount in dispute; and

(j) any other matter relevant to the question of costs.

The decisions below do in fact consider many (if not, all) of the factors above in awarding costs.

1) Aitchison Professional Corporation v. HMQ 2018 TCC 234

The issue in this underlying appeal[1] was whether the principal lawyer of Aitchison Professional Corporation had transferred to the Appellant the right to invoice for legal services.  The Appellant had been assessed under section 160 of the Income Tax Act for a debt owed to the CRA by Mr. James Aitchison.  The Appellant was wholly successful at trial and section 160 was found not to apply.

In his costs decision, Justice Graham found that a higher award of costs was warranted because the Appellant had been totally successful at trial, the amount at issue was over $2 million,  the and that the Minister’s position was unsupportable.  Lower costs were justified by the low volume of work, the uncomplicated nature of the issue and the fact that James Aitchison’s testimony lacked credibility.

The Appellant was awarded costs of $19,400 plus disbursements.

An important takeaway from this decision is a reminder that oral settlement offers are not contemplated by the Rules.  Rule 147(3.3)(a) allows the Court to consider only written settlement offers.

2) Alta Energy Luxembourg S.A.R.L. v. HMQ 2018 TCC 235

The main issue in Alta Energy[2] was whether the Appellant was carrying on business on immovable property.  If so, the capital gain realized on the disposition of certain shares would be exempt from tax in Canada by virtue of the applicable treaty provision.  The secondary issue was whether the General Anti-Avoidance Rule (GAAR) applied, such that the capital gain would be taxable in Canada despite the treaty exemption.  The Tax Court found for the Appellant on both issues and the capital gain was not taxable in Canada.

In awarding the Appellant $1,192,513 of total costs, the Court found most of the factors in Rule 147(3) favoured the Appellant.  Specifically, the Court found that the Appellant was entitled to most of its costs because it was wholly successful at trial, the amounts at issue was significant, the issue was important, there was a high volume of work and the issue was complex.  Perhaps the most aggravating factor militating toward a larger than usual award of costs was the conduct of the Respondent during pre-trial.  The Court found that the respondent’s conduct during discoveries caused great delays and costs to the Appellant.  Some examples include the Respondent a) requesting viva voce follow-up examinations where the practice is to do so in writing b) pursuing lines of questioning that may not have been relevant and c) requesting further discovery of a witness six months after undertakings had been exchanged.  In the Tax Court’s view, these aggravating factors justified a higher award of costs.

3) Jayco, Inc. v. HMQ 2018 TCC 239

The underlying issue in Jayco[3] was whether the Appellant was making deliveries of recreational vehicles (RV) inside or outside Canada.  If outside, the Appellant would not have been required to collect and remit GST/HST on the RVs.  The Court found that the RVs were in fact delivered outside Canada and thus the Appellant was not making a taxable supply.  However, the Appellant’s deliveries of parts were delivered or made in Canada, and it was therefore required to collect and remit GST/HST on the parts. Of note is that 98% of the assessed amount related to the RV’s.

The Tax Court awarded the Appellant total costs in the amount of $427,222.42.   The primary issue in this costs decision was whether the Appellant was entitled to the interest paid on a letter of credit provided to the Minister as security for the assessed GST/HST in the amount of $1,409,710.52.

The Appellant’s position was that the interest paid on the letter of credit resulted from CRA’s collection action, and fell within the ambit of the catch-all 147(3)(j) of the Rules, which allows the Court to consider any other matter relevant to costs.  Alternatively, it was an essential and reasonable expense, and therefore an allowable Tariff disbursement.

The Respondent’s position was that the CRA’s collection actions are not relevant to the correctness of the assessment, and that the only avenue for the Appellant to challenge those collection actions would have been a judicial review.  It further argued that that the interest was a disguised claim for damages, which is also outside the jurisdiction of the Tax Court.

The Court found the Appellant was not entitled to the interest expense, because it did not relate to the actual proceeding before the Court.  That proceeding was not concerned with the GST/HST owed, but rather, the correctness of the assessment.  Furthermore, the catch-all in 147(3)(j) must be read in light of the other enumerated factors, and ‘interest paid on a letter of credit’ is not relatable to any of the other factors.

Takeaway Summary

Settlement offers should be made in writing if the Court is to consider them for the purposes of awarding costs (Rule 147(3.3)(a) of the Tax Court of Canada Rules (General Procedure).

Pre-trial delays will, as usual, be considered when determining whether a higher award of costs is warranted.

Interest paid on a letter of credit to post security pursuant to ss. 314(2) of the Excise Tax Act will not be considered a recoverable cost in respect of a Tax Court proceeding.

[1] 2018 TCC 131

[2] 2018 TCC 152

[3] 2018 TCC 34