In Canada, legal costs are generally awarded to the successful litigant in a tax appeal (or in most civil cases for that matter) based on actual costs incurred, but are often a mere fraction of the actual costs that a litigant has incurred. As such, the first thing that many taxpayers contemplate when deciding whether to appeal a CRA assessment is whether or not it is worth it, particularly where it appears likely that the costs of a tax appeal will probably exceed the amount of tax in dispute.
While the decision on whether or not to appeal a tax assessment should be made on a case by case basis, the Tax Court of Canada (“TCC”) in Ike Enterprises Inc. v. The Queen, 2017 TCC 160 (“Ike Enterprises”) recently confirmed that in appropriate circumstances, a taxpayer can be awarded legal costs that exceed the amount of tax in dispute. In fact, the CRA was ordered to pay costs equal to approximately 140% of the amount in dispute!
In Ike Enterprises the taxpayer was awarded a $38,685 refund. While this was less than the $63,949 that the taxpayer was seeking, the amount awarded was at least as favourable as a settlement offer that the taxpayer had served on the CRA prior to the trial. This meant that under TCC Rules 147(3.1) & (3.5) the taxpayer was entitled to “substantial indemnity costs” (also known as “solicitor and client costs”) equal to 80% of its legal costs incurred after the date of the settlement offer.
Based on the time docketed and the rates generally charged by the lawyers who worked on the file, the taxpayer submitted a Bill of Costs totaling $114,002 and claimed substantial indemnity costs of $90,882 (80% of its solicitor and client costs incurred after the date of the settlement offer).
Despite a CRA objection to the amount of costs being sought which were approximately 140% of the amount in dispute and a whopping 233% of the refund that the taxpayer was actually awarded, the TCC ordered the CRA to pay the taxpayer's legal costs in the amount of $90,000!
In reaching its conclusion the TCC rejected the CRA’s argument that the Bill of Costs was unreasonable simply because it exceeded the $63,949 in dispute. On this point, the TCC stated that if the only consideration in assessing the reasonableness of costs was the quantum of a potential tax refund, the CRA could simply reject all settlement offers with impunity, deploy its vast resources where it felt that policy considerations dictated, and then, if ultimately unsuccessful, argue that it should not be expected to pay substantial indemnity costs exceeding the comparably small amount in dispute.
From a taxpayers’ perspective, the decision in Ike Enterprises is a welcome decision because it confirms that in appropriate cases a tax appellant can recover most of the legal costs that it has incurred to successfully challenge a CRA assessment, even if those costs exceed the actual amount in dispute.
That said, the Ike Enterprises decision is absolutely the exception, not the rule. In most cases a successful tax litigant will recover only a fraction of the legal costs that it has incurred. As such, the costs vs potential benefits of a successful tax appeal should remain a key consideration in determining whether or not to appeal a CRA assessment.
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