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Tax Court Introduces Common Books of Authorities Project

The Tax Court has implemented a new common books of authorities program for its Toronto courtrooms that will eliminate the need for taxpayers to print copies of certain frequently-cited (and lengthy) authorities. The pilot project will apply only to general procedure appeals in which both parties are represented by counsel.

Parties will not be required to include in their book of authorities those cases that are included in the Court’s list of 27 commonly-cited decisions (i.e., those on statutory interpretation, source, onus of proof, capital/income, GAAR, CPP/EI, etc.). However, the Court will require the parties to include in their book of authorities printed copies of the passages from those cases on which they intend to rely (rather that the entire decision). A list of the cases included in the Court’s common books of authorities is detailed on the Court’s Notice to the Public and the Profession (March 31, 2016).

The Tax Court stated that this pilot project may be expanded to other cities in the future.

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Tax Court Introduces Common Books of Authorities Project

Kruger: Appeal Allowed … Crown Awarded Costs

How should the Tax Court award costs where the taxpayer’s appeal was allowed but no changes were made to the assessment at issue?

This unusual situation was considered by the Tax Court in Kruger Incorporated v. The Queen (2016 TCC 14).

In the main appeal (2015 TCC 119, under appeal to the Federal Court of Appeal (A-296-15)), the Tax Court had allowed the taxpayer’s appeal on the basis that certain foreign exchange option contracts should be valued in accordance with subsection 10(1) of the Income Tax Act (see our previous post here). However, success in the appeal was divided because certain of the taxpayer’s other foreign exchange option contracts were to be valued on a realization basis, as assessed.

The Tax Court asked the parties to provide submissions on costs.

The taxpayer asked for costs on the basis that the appeal had been allowed. The Crown asked for costs on the basis that the result of the proceeding was substantially in its favour as to the amounts in issue and the determination of the issue.

Interestingly, after the Court’s decision allowing the appeal, the parties discovered that the underlying assessment would not change. The Tax Court called this an “anomaly”.

The Tax Court stated that, despite its decision allowing the appeal, the Crown was the successful party. The case law on costs cautions against awarding amounts based on the success of particular arguments (see, for example, General Electric Capital Canada Inc. v. The Queen (2010 TCC 490)). However, the Tax Court noted that this was not a case in which a party won a Pyrrhic victory, as each party had been successful to different degrees.

The Court considered the factors listed in section 147 of the Tax Court of Canada Rules (General Procedure), including the amounts in issue, the volume of work, the complexity of the matter, and the conduct of the parties. The Court noted that two of the Crown’s witnesses were of significant assistance to the Court.

The Court concluded that no rule prohibits a judge from distributing costs between the parties, although this is not encouraged. In this case, it was appropriate to recognize the Crown’s success.

The Court awarded costs to the Crown in respect of two witnesses, and 50 percent of all other costs. In the Court’s view, this was an unconventional but reasonable award.

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Kruger: Appeal Allowed … Crown Awarded Costs

Tax Court Establishes Motion Days in Toronto

The Tax Court of Canada has established a pilot project for regular motion days in Toronto for the period of February to September 2016. The Court will review the initiative in September 2016. The project may be expanded to other cities.

The first motion day is scheduled for Monday February 22, 2016, followed by Monday March 21 and Tuesday March 29. Subsequently, motions will be scheduled every first and third Monday through to the end of September. If the motion day falls on a statutory holiday, the motion day will be scheduled the following week.

The Court also reminded the public and counsel of the Court’s practice for the requirements and scheduling of motions under the General Procedure, as described in the Court’s Practice Note No. 2 (amended).

Tax Court Establishes Motion Days in Toronto

Tax Court: CRA Employee May Not Testify as Expert

In HLP Solution Inc. v. The Queen (2015 TCC 41 ) the Tax Court held that a CRA employee lacked the necessary impartiality to testify as an expert witness because of her prior involvement in auditing the taxpayer.

Background

The taxpayer was a software company that claimed Scientific Research and Experimental Development (SR&ED) tax credits for the 2009 taxation year. The CRA reassessed to deny the SR&ED credit claims.

In the Tax Court, the taxpayer challenged the qualification of the CRA’s expert witness on the basis that she did not have the necessary impartiality to testify as an expert witness in the appeal. The Tax Court held a voir dire to determine whether the Crown’s proposed expert witness could testify in the appeal.

The proposed expert witness held a doctorate in computer science and was employed with the CRA as a Research and Technology Advisor (RTA). The taxpayer’s allegation of impartiality was not based on the fact that the proposed expert witness was employed with the CRA. Rather, the taxpayer argued that it was the proposed expert witness’s involvement in every stage of the file that impugned her impartiality.

The Crown submitted that it is rare for a court to refuse to hear the testimony of an expert witness, and that there must be clear evidence of bias, which, according to the Crown, was not present in this case. Moreover, the Crown submitted that it was in the capacity as an expert that the opinion was given, irrespective of whether this occurred at the audit stage, objection stage, or during appeal.

Analysis

In analyzing whether to admit the evidence by the Crown’s witness, the Tax Court reviewed the leading case on the admission of expert evidence, the Supreme Court of Canada decision R. v. Mohan ([1994] 2 SCR 9), in which the Court set out the criteria for determining whether expert evidence should be admitted, namely: relevance, necessity in assisting the trier of fact, the absence of an exclusionary rule, and a properly qualified expert.

In Mohan, the Supreme Court established that the question of relevancy is a threshold requirement for the admission of expert evidence and a matter to be decided by the judge as a question of law. There must first be logical relevance in order for the evidence to be admitted. The judge must then perform a cost-benefit analysis to determine whether the value of the testimony is worth the costs, in the sense of its impact on the trial process.

The Tax Court also reviewed R. v. Abbey (2009 ONCA 624), in which the Ontario Court of Appeal applied Mohan but also distinguished between the preconditions to admissibility and the judge’s role as a gatekeeper. The Ontario Court of Appeal noted that while the inquiry into the preconditions to admissibility is a rules-based analysis that tends to yield “yes” or “no” answers, the gatekeeper function does not involve the application of bright line rules and frequently requires the exercise of judicial discretion. The gatekeeper function is more subtle and involves weighing the benefits of the probative value of the evidence against the prejudice associated with admitting the evidence.

In HLP, the Tax Court held that it was preferable to disqualify the expert at the qualification stage. The Court based its conclusions on many of the taxpayer’s allegations, including the following:

  • the proposed expert witness was involved with the audit and objection;
  • the proposed expert witness delivered the opinion (the technical review report) that served as the basis for the assessment;
  • following the taxpayer’s representations, the proposed expert witness also wrote an addendum to the technical review report in which she maintained the same position;
  • the proposed expert witness participated in every meeting with the taxpayer as the CRA’s representative;
  • the proposed expert witness confused her role as an RTA with that as an expert witness; and
  • the proposed expert witness reproduced word-for-word paragraphs from her technical review report.

The Tax Court was careful to note that it was not disqualifying the expert on the basis of her employment with the CRA but rather on the basis of her close involvement throughout the audit and objection stages of the file.

The Tax Court allowed the Crown to submit a new expert report.

The Tax Court’s decision in HLP will have a direct impact on future cases in which proposed expert witnesses were involved in the audit and objection processes as CRA employees. Such employees – though they may have the required professional qualifications to testify as an expert witness – cannot be qualified as expert witnesses because they lack the necessary impartiality to testify.

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Tax Court: CRA Employee May Not Testify as Expert

Tax Court Continues “New Approach” to Cost Awards

The Tax Court’s approach to cost awards has evolved significantly in recent years. The Court’s interpretation and application of the factors under subsection 147(3) and the new settlement offer rules in subsections 147(3.1) to (3.8) of the Tax Court of Canada Rules (General Procedure) indicate that the Court continues to formulate a “new approach” to costs that is much closer to the manner in which other Canadian courts use cost awards to compensate successful parties and control the conduct of the parties during litigation.

The Tax Court’s new approach can be traced to the costs decision in Velcro Canada Inc. v. The Queen (2012 TCC 273) (see our previous blog post here), in which the Court articulated an approach to costs that provided for a reduced role for the “Tariff” amounts (see in Tariff B of Schedule II of the General Procedure Rules) and much greater emphasis on and consideration of the factors under subsection 147(3). Further, the new settlement offer rules in subsections 147(3.1) to (3.8) create a default entitlement to substantial indemnity costs (i.e., 80% of solicitor and client costs) after the date of a settlement offer for a successful party that achieved a result in the appeal that was as good or better than the settlement offer.

This new approach is a welcome development in that it creates a fair system in the Tax Court for compensating a winning party, and raises the stakes for both parties to an appeal.

Three recent costs decisions of the Tax Court provide good examples of the Court’s analysis and awards under this new approach.

Repsol Canada Ltd. 

In Repsol Canada Ltd. v. The Queen (2015 TCC 21) (under appeal), the Tax Court allowed the taxpayer’s appeal and held that certain of the taxpayer’s assets were Class 43 assets for the purposes of the capital cost allowance provisions in the Income Tax Act. The Court awarded costs to the taxpayer.

On its motion for increased costs, the taxpayer asked for substantial indemnity costs under new subsection 147(3.1) of the General Procedure Rules for legal fees incurred after the issuance of its settlement offer, an additional 10% of legal fees incurred after the issuance of its settlement offer, 75% of its legal fees incurred before the issuance of its settlement offer, and reasonable disbursements.

The Tax Court (2015 TCC 154) refused to reduce the taxpayer’s costs that would be subject to the substantial indemnity rule in subsection 147(3.1), held that the substantial indemnity rule applies to the legal fees for a costs motion, and refused to grant additional costs above the substantial indemnity amount for fees incurred after the issuance of its settlement offer.

The Court awarded post-settlement offer costs at 80% of solicitor-client costs ($264,334), pre-settlement offer costs at 50% of solicitor-client costs ($262,051), disbursements ($35,308), and 80% of solicitor-client costs plus reasonable disbursements for the costs motion.

The Crown has appealed the costs decision to the Federal Court of Appeal.

Standard Life Assurance Company of Canada

In Standard Life Assurance Company of Canada v. The Queen (2015 TCC 97) (under appeal), the Tax Court dismissed the taxpayer’s appeal and held that the taxpayer was not entitled to a bump in the cost base of certain insurance properties. The Court awarded costs to the Crown.

On its motion for increased costs, the Crown asked for substantial indemnity costs under new subsection 147(3.1) of the General Procedure Rules for legal fees incurred after the issuance of its settlement offer, 50% of legal fees incurred before the issuance of its settlement offer, and reasonable disbursements throughout.

The Tax Court (2015 TCC 138) held that the Crown’s settlement offer was a valid settlement offer that contained an element of compromise (see also the earlier case of Mckenzie v. The Queen (2012 TCC 329)). Accordingly, the taxpayer was entitled to substantial indemnity costs incurred after the issuance of the settlement offer.

The Tax Court made a minor adjustment for the hourly rate of junior counsel and awarded a lump sum amount of $474,663 (which included $37,818 in disbursements).

Sun Life Assurance Company of Canada

In Sun Life Assurance Company of Canada v. The Queen (2015 TCC 37), the Tax Court allowed the taxpayer’s appeal and held that the taxpayer was entitled to certain input tax credits. The Court awarded costs to the taxpayer.

On its motion for a enhanced costs, the taxpayer asked for a lump sum amount of $200,000, which approximated 80% of counsel fees of $157,430, plus taxes of $20,465 and disbursements of $21,365.

The Tax Court (2015 TCC 171) considered the taxpayer’s settlement offer, and concluded that it was a valid settlement offer that was capable of being accepted by the Crown (see also the earlier case of CIBC World Markets Inc. v. The Queen (2012 FCA 3)). Accordingly, the taxpayer was entitled to substantial indemnity costs incurred after the issuance of the settlement offer.

However, the Court reduced the amount of legal fees that would be subject to the 80% substantial indemnity rule because there was no evidence that the client had agreed to pay its counsel’s hourly fees (rather the fee charged to the client was a percentage of the amount recovered). Also, the taxpayer had not provided a detailed breakdown of the fees incurred before and after the issuance of the settlement offer.

Accordingly, the Court awarded substantial indemnity costs of $91,792, plus $1,050 for the Tariff amount for services rendered prior to examination for discovery, plus HST on these amounts (less any amount recoverable as an input tax credit), and disbursements of $21,356.

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Tax Court Continues “New Approach” to Cost Awards

New Judges Appointed to the Tax Court of Canada and the Federal Court of Appeal

A new judge has been appointed to the Tax Court of Canada.

From the news release published by the Department of Justice:

The Honourable Peter MacKay, P.C., Q.C., M.P. for Central Nova, Minister of Justice and Attorney General of Canada, today announced the following appointment:

The Honourable Guy R. Smith, a sole practitioner in Ottawa, is appointed a judge of the Tax Court of Canada to replace Mr. Justice J.E. Hershfield, who elected to become a supernumerary judge as of June 1, 2015.

Mr. Justice Smith received a Bachelor of Arts from the University of Manitoba (Collège universitaire de St-Boniface) and a Bachelor of Arts (History) (cum laude) from the University of Ottawa in 1982. He received a Bachelor of Laws (French Common Law Program) in 1985.

Mr. Justice Smith had been a sole practitioner since 2014. Previously, he had been the Judicial Affairs Advisor for the Federal Minister of Justice and Attorney General of Canada from March 2009 to July 2014. In December 2005, he became an investment advisor with ScotiaMcLeod and in June 2007 he joined CANNACORD Capital, where he worked until 2009. He practised administrative law, constitutional law and litigation with Perley-Robertson, Hill & McDougall LLP from 1997 to 2005 and as a sole practitioner from 1991 to 1997. After he was admitted to the Bar of Ontario in 1988, he practised with the Law Office of Coderre, Smith, Barristers and Solicitors until 1991.

Mr. Justice Smith was a member of the Carleton County Law Association, the Canadian Tax Foundation and the Canadian Club of Ottawa.

Appointments to the country’s Superior Courts not only reflect the rich and diverse social fabric of our country, but also take into consideration the merit and legal excellence of each individual jurist. Through these appointments, the Government of Canada has demonstrated an awareness of the need to bring greater gender balance to the bench, to help ensure that the judiciary is more representative of Canadian society.

This appointment is effective immediately.

Additionally, two new judges were appointed to the Federal Court of Appeal:

The Honourable Peter MacKay, P.C., Q.C., M.P. for Central Nova, Minister of Justice and Attorney General of Canada, today announced the following appointments:

The Honourable Yves de Montigny, a judge of the Federal Court in Ottawa, is appointed a judge of the Federal Court of Appeal to replace Mr. Justice R. Mainville, who was appointed to the Court of Appeal of Quebec on July 1, 2014.

Mr. Justice de Montigny was appointed to the Federal Court in 2004. Prior to his appointment, he had held various positions in the Department of Justice Canada, including those of Chief of Staff to the Minister, Senior Advisor to the Deputy Minister, and Chief Legal Counsel, Public Law Group. He had also been Director General of Constitutional Strategy and Plans at the Privy Council Office. As well, he served as Special Advisor to the Executive Council of the Government of Quebec and Counsel in the Quebec Ministry of Justice. His main areas of practice included constitutional law, administrative law, criminal law and international and public law. He had been a professor at the University of Ottawa, Faculty of Law (1982-1997), and a lecturer at the École du Barreau du Québec and the Faculty of Law and Faculty of Continuing Education of the Université de Montréal.

Mr. Justice de Montigny received a Bachelor of Laws in 1978 and a Master of Laws in 1979, both from l’Université de Montréal. As well, he holds a Masters in Political Philosophy from Oxford University. He was admitted to the Bar of Quebec in 1983.

The Honourable Mary J.L. Gleason, a judge of the Federal Court in Ottawa, is appointed a judge of the Federal Court of Appeal to fill a new position created by Bill-C36.

Madam Justice Gleason was appointed to the Federal Court in 2011. Prior to her appointment, she had been a senior partner with Norton Rose LLP (formerly Ogilvy Renault LLP), where she practised labour and employment law in Ottawa after being admitted to the Bar of Ontario in 1986. Madam Justice Gleason held a number of management positions within her firm, including that of co-managing partner of its Ottawa office and Ottawa Chair of its Employment and Labour Group. She frequently guest lectured at the University of Ottawa and taught a course in employment law at the Faculty of Law of the University of Ottawa. She has written numerous articles and regularly presented papers to conferences hosted by a variety of organizations, including the Law Society of Upper Canada, the Canadian Bar Association, Insight, Lancaster House, the Council of Industrial Relations Executives of the Conference Board of Canada and the Canadian Association of Counsel to Employers (CACE), an association of Canadian management-side labour and employment practitioners. Justice Gleason was a founding member and past president of CACE. She also was active in the Canadian Bar Association and the Ottawa Human Resource Professionals’ Association, where she held the portfolio of Government Affairs Liaison on its Board of Directors for a number of years. Prior to her appointment she was a member of the Canada Industrial Relations Board’s Client Consultation Committee and the Federal Court Labour Law, Human Rights, Privacy and Access Review Liaison Group. She was recognized as a leading labour and employment practitioner by Best Lawyers in Canada, L’Expert, PLC Which Lawyer?, Guide to the World’s Leading Labour and Employment Lawyers, and Canadian HR Reporter’s Canada’s Employment Law Directory.

Madam Justice Gleason, from Regina, Saskatchewan, lived most of her earlier years in Calgary and then pursued her studies in Ottawa and Halifax. She received a Bachelor of Arts (Honours) in History (summa cum laude) from the University of Ottawa in 1981and a Bachelor of Laws from Dalhousie University in 1984.

Appointments to the country’s Superior Courts not only reflect the rich and diverse social fabric of our country, but also take into consideration the merit and legal excellence of each individual jurist. Through these appointments, the Government of Canada has demonstrated an awareness of the need to bring greater gender balance to the bench, to help ensure that the judiciary is more representative of Canadian society.

These appointments are effective immediately.

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New Judges Appointed to the Tax Court of Canada and the Federal Court of Appeal

Two New Judges Appointed to Tax Court of Canada

Two new judges have been appointed to the Tax Court of Canada.

From the news release published by the Department of Justice:

The Honourable Peter MacKay, P.C., Q.C., M.P. for Central Nova, Minister of Justice and Attorney General of Canada, today announced the following appointments:

The Honourable Don R. Sommerfeldt, a counsel with Dentons Canada LLP in Edmonton, is appointed a judge of the Tax Court of Canada, to replace Madam Justice G. Sheridan who resigned effective May 1, 2014.

Mr. Justice Sommerfeldt received a Bachelor of Arts and Science from the University of Lethbridge in 1972 and a Bachelor of Laws from the University of Alberta in 1977.  He also received a Master of Arts from Brigham Young University in 1974 and a Master of Laws from Cornell University in 2004.  He was admitted to the Bar of Alberta in 1978 and to the bar of New York in 2004.

Mr. Justice Sommerfeldt has been with Dentons Canada LLP (formerly Fraser Milner Casgrain LLP) since 2000.  Prior to that, he practised taxation, estate planning and pensions with Edward A. Zelinsky Professional Corporation; Cruickshank Karvellas; Milner Fenerty; the Department of National Revenue (Rulings Directorate) while on secondment from Milner & Steer.

Mr. Justice Sommerfeldt is a member of the following associations: the Canadian Tax Foundation and is a past governor; the Society of trust and Estate Practitioners, the Canadian Bar Association; the Canadian Association of Law Teachers; the International Fiscal Association; and the New York State Bar Association.

The Honourable Henry A. Visser, a lawyer with McInnes Cooper in Halifax, is appointed a judge of the Tax Court of Canada, to replace Madam Justice D. Campbell, who elected supernumerary status as of June 19, 2015.  This appointment is effective June 19, 2015.

Mr. Justice Visser received a Bachelor of Commerce from Dalhousie University in 1988 and a Bachelor of Laws from the Dalhousie Law School (now the Schulich School of Law) in 1994.  He was admitted to the Bar of Nova Scotia in 1995 and to Prince Edward Island in 1998.

Mr. Justice Visser has been a lawyer with the firm McInnes Cooper since 1997 and became a partner in 2003.  His main areas of practice were tax law, corporate law, commercial law, labour law and employment law.  He was employed with Martin Visser and Sons, farming and export business, from June 1995 to May 1997.

These appointments are effective immediately, unless indicated otherwise.

Two New Judges Appointed to Tax Court of Canada

Ironside: TCC Orders Hearing of Question on Rule 58 Motion

In Ironside v. The Queen (2015 TCC 116), the Tax Court allowed the Crown’s Rule 58 motion for a determination of a question of law before the hearing, namely whether the taxpayer was estopped from litigating an issue that had been adjudicated in an earlier Tax Court decision.

In the prior case (Ironside v. The Queen (2013 TCC 339)), the taxpayer had incurred legal and professional fees to defend himself against allegations of committing improper disclosures after being charged in June 2001 by the Alberta Securities Commission. The taxpayer sought to deduct such fees in the 2003 and 2004 tax years.

The Tax Court concluded that the taxpayer’s legal and professional fees had not been incurred to gain or produce income from his chartered accounting business, rather such expenses were personal in nature and were incurred to protect his reputation in the oil and gas industry. The Tax Court dismissed the taxpayer’s appeal.

Subsequently, the taxpayer sought to make the same deductions in the 2007, 2008 and 2009 tax years. The CRA reassessed to deny the deductions, and the taxpayer again appealed to the Tax Court.

In its Reply, the Crown raised the issue of whether “the appeal or a portion of it is barred by application of the doctrine of issue estoppel or is otherwise an abuse of the process of the Court”. The Crown then brought a motion for an order pursuant to Rule 58 of the Tax Court of Canada Rules (General Procedure) for a determination of a question prior to the appeal:

Whether the Appellant is barred from litigating within proceeding 2014-1619(IT)G whether the legal and professional fees paid to defend himself in Alberta Securities Commission proceedings and the subsequent appeal are deductible as amounts incurred to gain or produce income from a business or property, on the basis that the characterization of such fees has been previously adjudicated upon and therefore the doctrines of issue estoppel and or abuse of process operate to bar re-litigation of the issue.

The Tax Court noted that Rule 58 contains a two-step process. At the first stage, the Tax Court must determine whether the question posed by the moving party is an appropriate one that should be heard in a subsequent hearing (the second stage).

At the first stage, three elements must exist:

  1. The question proposed must be a question of law, fact, or mixed fact and law;
  2. The question must be raised in the pleadings; and
  3. The determination of the question may dispose of all or part of the appeal, may substantially shorten the hearing, or may result in substantial cost saving.

If all of these elements are present, the Court may set a hearing of the proposed question before a motions judge prior to the hearing of the appeal.

In the present case, the Tax Court held that all three requirements were satisfied. The Court stated,

[12] Clearly, there is the potential that a determination of this question may, according to the materials I have before me and the submissions I heard, dispose of part of the appeal and I need only be satisfied that it “may” so dispose of some of the appeal. I do not have to be absolutely convinced that it will do so in order to refer the question to a Stage Two determination prior to the hearing. If part of the appeal is disposed of, it follows that the proceeding will be substantially shortened. This is precisely the type of question that Rule 58 is meant to target.

The Tax Court ordered that the Crown’s question be set down for a hearing for determination by a motions judge and that certain evidence be presented at the determination (i.e., the pleadings from both appeals, and the Tax Court’s decision in Ironside v. The Queen (2013 TCC 339)).

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Ironside: TCC Orders Hearing of Question on Rule 58 Motion

FCA: TCC Erred in Awarding Costs on Basis of Pre-Appeal Conduct

The Tax Court has in recent years demonstrated a willingness to use cost awards to control the parties’ conduct. This includes awarding lump-sum amounts, which may depart markedly from the “tariff” amounts described in Tariff B of Schedule II of the Tax Court’s General Procedure Rules. Further, the Court has wrestled with the weight – if any – that the parties’ conduct prior to an appeal should carry in respect of a cost award.

In Martin v. The Queen (2013 TCC 38), the taxpayer successfully challenged a section 160 assessment in respect of certain amounts paid to her by her spouse. There was evidence the auditor had deliberately misled the taxpayer during an audit, and the taxpayer had spent considerable time and money enduring the audit and objection process before her ultimate success in the Tax Court.

On the issue of costs, the taxpayer asked for (i) solicitor-client costs, or (ii) a fixed amount under Rule 147, or (iii) the tariff costs. The Crown argued that only tariff costs should be awarded. Describing the case as “very unusual, difficult, and hopefully exceptional, case”, the Tax Court considered the pre-appeal conduct of the CRA (among other factors) and awarded the taxpayer a lump sum amount of $10,635 (2014 TCC 50).

The Tax Court repeated its view that costs may be awarded against the Crown where it pursues a meritless case in the Tax Court:

[21] … There are perhaps some arguments and some cases that the Canada Revenue Agency just should not pursue. The Crown is not a private party. By reassessing a taxpayer and failing to resolve its objection, the Crown is forcing its citizen/taxpayers to take it to Court. If the Crown’s position does not have a reasonable degree of sustainability, and is in fact entirely rejected, it is entirely appropriate that the Crown should be aware it is proceeding subject to the risk of a possibly increased award of costs against it if it is unsuccessful.

The Crown appealed and the taxpayer cross-appealed.

The Federal Court of Appeal noted that a discretionary cost award should only be set aside if the judge made an error in principle or if the award is plainly wrong (see Hamilton v. Open Window Bakery (2004 SCC 9) and Sun Indalex Finance LLC v. United Steelworkers (2013 SCC 6)).

In the Court of Appeal, the Crown alleged that the Tax Court judge had made an error of fact  (i.e., the finding that the CRA auditor had been deceitful in providing incorrect information), and an error of law (i.e., relying on the auditor’s deceitful conduct as a basis for awarding increased costs).

On the first issue, the Court held there was no error of law because the Crown admitted the auditor had engaged in deceitful behavior. On the second issue, the Court noted that conduct that occurs prior to a proceeding may be taken into account if such conduct unduly and unnecessarily prolongs the proceeding (see Merchant v. Canada (2001 FCA 19) and Canada v. Landry (2010 FCA 135)). However, the Court stated that the audit and objection stages are not a “proceeding”, which is defined in section 2 of the Rules as an appeal or reference. Accordingly, the Court stated, “the Judge erred in principle in allowing an amount incurred in respect of costs unrelated to the appeal which were incurred at the objection stage. Those expenses, by definition, were not incurred as part of the appeal ‘proceeding'”.

In respect of the cross-appeal, the Court of Appeal considered whether the lower court had erred in declining to award solicitor-client costs. The Court held there was no error because such costs could not include pre-appeal costs, and even if such costs could be awarded, solicitor-client costs are awarded only where there has been reprehensible, scandalous or outrageous misconduct connected with the litigation (see also Scavuzzo v. The Queen (2006 TCC 90)).

The Court allowed the appeal, dismissed the cross-appeal, set aside the lower court’s cost award and substituted a cost award of $4,800 plus disbursements and taxes (2015 FCA 95).

The Court of Appeal decision in Martin may have failed to address all relevant provisions of Rule 147, which arguably provide for very broad discretion for awarding costs. For example, paragraph 147(3)(j) of the Tax Court Rules states the Court may consider “any other matter relevant to the question of costs”.

The Court of Appeal’s decision also raises an issue regarding the circumstances in which deceitful pre-appeal conduct may unduly or unnecessarily prolong a proceeding – wouldn’t such a hindrance follow in every case of deceitful conduct by a party?

Further, the Court of Appeal appeared particularly concerned that the taxpayer’s pre-appeal expenses could not be addressed in the cost award, but it seems clear that the Tax Court had exercised its discretion to award a lump sum based not only on the quantum of the pre-appeal costs but on the existence of the auditor’s deceitful behavior and the Crown’s obstinate approach and refusal to resolve – at any stage – an uncomplicated tax dispute.

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FCA: TCC Erred in Awarding Costs on Basis of Pre-Appeal Conduct

Two New Judges Appointed to Tax Court of Canada

Two new judges have been appointed to the Tax Court of Canada.

From the news release published by the Department of Justice:

OTTAWA, February 6, 2015 – The Honourable Peter MacKay, P.C., Q.C., M.P. for Central Nova, Minister of Justice and Attorney General of Canada, today announced the following appointments:

The Honourable Dominique Lafleur, a lawyer with KPMG in Montreal is appointed a judge of the Tax Court of Canada to replace Madam Justice L. Lamarre, who has been appointed Associate Chief Justice of the Tax Court of Canada.

Madam Justice Lafleur received a Bachelor of Laws from the University of Montréal in 1989 and a Master’s degree in Taxation from the University of Sherbrooke in 1993. She was admitted to the Bar of Quebec in 1990.

Madam Justice Lafleur had been a lawyer with KPMG in Montreal since 2014. Prior to that, she had been counsel with Heenan Blaikie LLP, LLC in Montréal (1996-2014) and with Mendelson Rosentzveig Schacter (1991-96) working in the area of taxation. She had been a member of the consultative committee and Chair of Taxation and Public Finance at the University of Sherbrooke since 2006 and had been a speaker at study sessions and conferences on taxation for the Canadian Tax Foundation.

The Honourable Sylvain Ouimet, a lawyer with the Department of Justice Canada in Ottawa and Montreal is appointed a judge of the Tax Court of Canada to replace Mr. Justice P. Bédard, who resigned effective August 31, 2014.

Mr. Justice Ouimet received a Bachelor in Business Administration (Finance) from l’Université du Québec à Montréal in 1993 and a Bachelor of Laws from l’Université de Montréal in 1997. He also earned a “Certificat en initiation au droit français” from l’Université de Poitiers in France in 1996. He was admitted to the Bar of Quebec in 1999.

Mr. Justice Ouimet had been a lawyer with the Department of Justice’s Ottawa and Montreal offices working in the area of taxation since 2002. Previously, he had been a competition law officer for Industry Canada in Gatineau (2001-02) and an analyst for Laboratoires Abbott Limitée in Montreal (2000).

These appointments are effective immediately.

Two New Judges Appointed to Tax Court of Canada