Litigating parties must consider cost implications at every stage in litigation, which generally requires a cost-benefit analysis of starting litigation in the first place, proceeding with litigation at any given stage, and negotiating towards settlement. In tax litigation, the cost-benefit analysis is often the same, and can be a comparatively simple exercise, requiring an analysis of anticipated costs of litigation, chance of success at trial or on appeal, consideration of the assessed amount in dispute, and the effect of a judicial decision on the taxpayer’s position going forward. Court costs have generally not factored into this analysis, since they have historically been negligible.
Things are changing.
Three recent cost awards by the TCC to successful taxpayers on GST/HST appeals (each, in unique circumstances) seem to suggest that the TCC is adopting an approach which will reward a successful taxpayer with true proper cost awards, reflecting at least a substantial part of the actual legal costs.
In Invesco (2015 TCC 92), the Appellant brought a motion for 60% of its actual costs arising out of its successful TCC appeal regarding the correct value of consideration paid by various mutual fund trusts to the Appellant for management services. The Crown argued for costs in accordance with the tariff or alternatively, 15-20% of the Appellant’s actual costs. The TCC concluded the matter by indicating that the tariff amounts requested by the Crown were an unsatisfactory starting point, particularly since the tariff would only generally provide for a small percentage of the taxpayer’s actual costs. Instead, the TCC exercised its discretion to award costs in light of the factors in Rule 147(3) of the TCC Rules – including (1) the large amount at stake in the appeal and in pending appeals for later periods (almost $24 million with interest and penalties); (2) the moderate complexity of the matter and significant volume of work, given the number of funds involved; (3) the lack of inordinate delays or improper conduct by the Crown; and the (4) lack of settlement offers to consider. The first two factors favoured a high award; the last two factors favoured a more moderate award. In the end, the TCC awarded the Appellant 40% of its actual costs.
In Sun Life (2015 TCC 171), the Appellant brought a motion for 80% of its actual costs from the date of its settlement offer arising out if its successful appeal regarding whether its ITC allocation methodology for leased office space was “fair and reasonable”. The settlement offer was for about $1 million and included an explanation for the amount based on a proposed allocation methodology. The Appellant obtained judgment at trial for over $1.25 million worth of reversed assessments. The TCC concluded the matter by noting the existence of the settlement offer, and Rules 147(3.1) to (3.8), which operated to create a default rule for a costs award of 80% of solicitor and client costs. While the Court indicated that it had the discretion to deviate from awarding such costs in “unusual (in the sense of exceptional or extraordinary) circumstances”, given the absence of such unusual circumstances, the TCC employed these rules to award costs at the default 80% level. Notably, the “actual costs” number was reduced by the Court because of the excessive (contingency based) legal rates proposed by the Appellant.
In Ford (2015 TCC 185), the TCC considered written submissions on costs arising out of the Crown’s failed motion to strike portions of the Appellant’s appeal on the basis that the Notice of Objection did not reasonably or sufficiently describe the issue or question to be decided, as required by the “Specified Persons” rules. The Appellant requested $50,000 in costs, which were approximately 80% of its actual costs for the motion. The Crown again took the position that tariff costs were appropriate, given there was “no reprehensible, scandalous or outrageous conduct on its part…” The TCC concluded the matter by somewhat perfunctorily rejecting the Crown’s assertion that “tariff costs” were an appropriate starting point, and awarded the Appellant $40,000 in costs (i.e., 63% of the actual costs), plus additional costs related to the Appellant submissions on the costs matter itself (which were seemingly occasioned by the Crown’s intransigence to consider any costs amounts above tariff costs). In doing so the TCC observed that the tariff is not the default cost award anymore in the TCC, and that the Rule 147(3) factors ought to be taken into account. In coming to the $40,000 cost award, the TCC emphasized that: (1) jurisprudence working against the Crown’s position on the dismissed motion was consistent, clear and recent; (2) the amount of work for the Appellant was exacerbated by the Crown’s failure to provide written submissions in advance of the motion (or at all) to potentially narrow the issues (despite that the Crown Counsel had “clearly and unequivocally committed at least twice to file written submissions” at a case management conference); and (3) the Crown was trying to use the Specified Persons rules opportunistically as a sword and not as the protective shield they were intended and designed to be.
In our view, there has been a sea change in the TCC’s willingness to consider costs awards. The trilogy of decisions above are welcomed decisions, and ought to reduce the chilling effect on taxpayers considering appeals in the TCC. This is primarily borne through an application of the settlement offer rules that is directly in line with their purpose and a willingness to award a legitimate percentage of costs actually incurred to successful taxpayers where the Crown took a position clearly contrary to existing law and/or otherwise improperly conducted itself during litigation.
Certainly, the approach should assist in the settlement of matters on fair and reasonable terms, thereby reducing legal costs and the use of court resources. Taxpayers ought also to take advantage of the fairly recently enacted settlement offer rules (Rules 147(3.1) to (3.8)) by providing principled settlement offers wherever practical.
One also wonders – however – whether the TCC will be as willing to award costs against taxpayers appealing issues to the TCC on an unsuccessful basis. One can see a number of policy reasons supporting a more moderate approach to cost claims against taxpayers, but only time will tell how the TCC deals with that shoe on that other foot.
A version of this article was published in the October 2015 edition of Canadian Tax Highlights.