On January 10, 2012, the Federal Court of Appeal (the “FCA”) released its decision in CIBC World Markets Inc. v. The Queen (2012 FCA 3) on a motion by the taxpayer seeking an order for enhanced costs.  In a unanimous judgment, Justices Sharlow, Layden-Stevenson, and Stratas dismissed the taxpayer’s motion, holding that there was no legal basis upon which the Minister of National Revenue could have accepted the offer of the taxpayer to settle the claim.

The underlying litigation dealt with a claim for input tax credits (“ITC”s) under the Excise Tax Act.  Specifically, the issue was whether the taxpayer was entitled to file a second claim for input tax credits in respect of the same year (further details are available in our earlier posts on the litigation).  Litigation commenced, with the result that the taxpayer was unsuccessful at the Tax Court of Canada (2010 TCC 460) but was successful at the Federal Court of Appeal (2011 FCA 270).

At issue on the motion before the FCA was an offer of settlement made by the taxpayer before the commencement of proceedings at the Tax Court of Canada.  The offer put forward by the taxpayer would have had the Minister issue a reassessment granting 90% of the ITCs at issue.  It had no expiry date and was left open for acceptance throughout the remainder of the action.  In its motion, the taxpayer argued that because it was entirely successful at the FCA, it should be entitled to 80% of solicitor and client costs, beginning from the date of offer and ending on the judgment by the FCA (80% being the “substantial indemnity” set out in Practice Note No. 18 of the Tax Court of Canada).

The FCA first dispensed with the taxpayer’s claim for enhanced costs in respect of the FCA action, noting that an offer of settlement made before trial must be reasserted after the trial decision if the offeror intends it to be effective in respect of the FCA proceeding as well.  As the taxpayer did not do so in this case, the only matter at issue were costs between the time of offer and the judgment of the Tax Court of Canada.

In dealing with that portion of the motion, the FCA noted that the rules governing offers of settlement include an implicit and important pre-condition that the offer made must actually have been capable of acceptance to trigger cost consequences.  In this case, the Minister asserted that the offer to settle (by permitting 90% of the ITCs initially claimed) was an arbitrary compromise on quantum, and was not legally supportable under the legislation – neither the Tax Court of Canada nor the FCA could have ordered such a result.  This kind of issue was described by the Minister as a “yes-no” issue of statutory interpretation where the taxpayer’s position was either entirely correct, or would be wholly rejected. 

The FCA agreed with the Minister, relying on Galway v. Minister of National Revenue, [1974] 1 FC 600 and subsequent decisions under the Income Tax Act.  Those decisions reflect the requirement that all settlements must be made on a “principled basis”: the Minister can only accept a settlement that is consistent with the legislation and the result that the legislation would allow.  Compromise decisions and risk mitigation are impermissible if not otherwise supported by the legislation.  The FCA confirmed that this rule applies equally to the Excise Tax Act, and that “there is no legislative provision that repeals Galway”. 

The taxpayer argued that compromise settlements would help to relieve the backlog of appeals at the Tax Court of Canada and should therefore be permitted as good policy.  The Court was not persuaded by this argument, suggesting that there are many policy considerations, in favour and against compromise settlements, and that it was a matter for Parliament, not the judiciary, to decide. 

This decision affirms that Galway remains the governing law with respect to settlements, and that a “principled basis” remains a requirement for all settlements, unless Parliament takes action to change the present state of the law.  Suggestion have been offered by commentators as to what such legislative reform might look like.  For one analysis, based on a multi-jurisdictional perspective, see Carman R. McNary, Paul Lynch, and Anne-Marie Lévesque, “Tax Dispute Resolution: Is there a Better Way?,” Report of Proceedings of Sixty-Second Tax Conference, 2010 Tax Conference (Toronto:  Canadian Tax Foundation, 2011), 14:1-15.