Citation: 2008 TCC 693
Date: 20081223
Docket: 2005-1804(IT)G
BETWEEN:
JOLLY FARMER PRODUCTS INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR ORDER
Boyle, J.
[1]
The taxpayer has brought a motion
requesting an order for costs in excess of the amount provided for in the tariff
to the Tax Court Rules.
[2]
The trial and its preliminary motion
were heard and decided by the former Chief Justice of our Court. Chief Justice
Bowman allowed the taxpayer’s appeal (2008 DTC 4396) and awarded
costs in favour of the taxpayer. The taxpayer had been entirely successful at
trial. The trial lasted five days. The taxpayer called two experts and the
Crown called one expert. Both the taxpayer and the Crown were represented by
two counsel throughout the hearing.
[3]
Chief Justice Bowman is a person
with what even Voltaire would agree is an uncommon amount of common sense. It
is clear from his reasons that he did not consider this a close case and was of
the view that the issue involved did not warrant such a long trial – perhaps no
trial at all. I believe it is also fair to say that his reasons fixed the blame
for this squarely on the Respondent. Three paragraphs out of his reasons are of
particular import:
13 . . . Here, I think the CRA has become fixated
(counsel for the appellant used the word “mesmerized”) on two things — the fact
the employees are shareholders, and the fact that they profess and adhere to
certain basic Christian beliefs reminiscent of the early Church. These facts
are, in my view, of no significance. Once we get rid of these two red herrings
and focus on the fact that the appellant provides its employees with living and
other facilities, the provision of those facilities becomes a perfectly normal
and ordinary cost of carrying on the appellant’s business.
14 I think the Minister’s approach to this problem
results from a confusion between (or perhaps a melding of) two or more
concepts. An individual cannot deduct in computing his or her income “personal
or living expenses”. The Minister seems to think, I gather, that the cost to an
employer of providing to its employees living amenities (or the capital cost of
property used for that purpose) falls equally within that prohibition. Moving
on from this fallacious inarticulate premise the Minister then seeks to require
the employer to show that its business decision to provide accommodation to its
employees is commercially justifiable and is a better way of doing business
than some other method. In this way the fallacy of the original premise is
compounded and is exacerbated by the fact that the Minister, in some way that I
cannot fathom, throws into the mix the fact that the employees are also
shareholders and also have strong religious beliefs. Then, even after the
employer, Jolly Farmer Products Inc., overwhelmingly demonstrates
(unnecessarily in my view) that its business organization results in a
resounding commercial success, the Minister still hangs on with the tenacity of
grim death to his original error and argues that the appellant should have
adopted a way of doing business that the Minister finds more palatable, even
though it is less economic. Mit der Dummheit kämpfen Götter selbst vergebens.
. . .
24 This case is an excellent example of the CRA
seeking to substitute its business judgment for that of the taxpayer. The
alternatives suggested by the respondent would have made the operation far less
profitable. The way in which the appellant chooses to carry on its highly
successful commercial operation is a business decision and the Minister of
National Revenue has no right to substitute his business judgment and advance
other alternatives that are more palatable to him. (See for example Gabco
Limited v. M.N.R., 68 DTC 5210.)
[4]
The taxpayer is asking for a fixed
counsel fee in the amount of $97,750 along with the fees actually paid to its
experts, as well as the photocopying disbursements paid to its counsel. The
taxpayer’s actual legal fees for the litigation were approximately $400,000.
The counsel fee under the tariff for one senior counsel and one junior counsel
is approximately $20,000.
[5]
The Respondent takes the position
that:
(i)
no amount beyond tariff is
warranted;
(ii)
the taxpayer should only get a fee
for one counsel since the junior counsel did not lead any evidence or argue any
part of the case;
(iii)
the expert’s fees should not be
reimbursed by way of costs because they were unnecessary;
(iv)
costs should be awarded for only
three of the five days of trial because the evidence of the taxpayer’s main
witness included too much detail about the business history and operations of
the corporate taxpayer, because the experts were unnecessary, and because a
half-day was lost due to the taxpayer’s witness scheduling problems; and
(v)
the photocopying charges were
excessive.
[6]
It should be noted that the
taxpayer is not making a request for costs on a solicitor/client basis. There
was no suggestion that there has been any conduct on the part of the Respondent
in the course of the trial which would warrant even considering such an
exceptional order.
[7]
The Court has full discretionary
power over the awarding of costs. Rule 147(3) provides that in exercising
its discretionary power, the Court may consider:
(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,
(j) any other matter relevant to the question of costs.
[8]
The Court need not slavishly
adhere to the tariff. However, the Court must exercise its discretion on proper
principles, such as the considerations enumerated in Rule 147(3), and not
capriciously. The mere fact that a case is novel, unique, complex, difficult,
or involves a large sum of money is not reason for departing from the tariff:
see McGorman et al. v. HMQ, 99 DTC 591, at paragraph 13
per Bowman J. as he then was. Nor is the mere fact that the party’s actual
legal fees greatly exceed the tariff amount reason to award costs in excess of tariff.
In Continental Bank of Canada et al. v. HMQ, 94 DTC 1858,
Bowman ACJ wrote:
It is obvious that the amounts provided in the tariff were never
intended to compensate a litigant fully for the legal expenses incurred in
prosecuting an appeal. The fact that the amounts set out in the tariff appear
to be inordinately low in relation to a party's actual costs is not a reason
for increasing the costs awarded beyond those provided in the tariff. I do not
think it is appropriate that every time a large and complex tax case comes
before this court we should exercise our discretion to increase the costs
awarded to an amount that is more commensurate with what the taxpayers' lawyers
are likely to charge. It must have been obvious to the members of the Rules
Committee who prepared the tariff that the party and party costs recoverable are
small in relation to a litigant's actual costs. Many cases that come before
this court are large and complex. Tax litigation is a complex and specialized
area of the law and the drafters of our Rules must be taken to have known that.
Similarly,
as stated by Justice Layden-Stevenson in Aird v. Country Park Village Property
(Mainland) Ltd., [2004] F.C.J. No.
1153 (QL):
Costs should
be neither punitive nor extravagant. It is a fundamental principle that an
award of costs represents a compromise between compensating a successful party
and not unduly burdening an unsuccessful party. . .
[9]
With this summary of principles in
mind, I will turn to the considerations relevant in this case.
I. Settlement Offers
[10]
The taxpayer’s first settlement
offer in 2006 included a detailed twenty plus page statement of the legal
position and analysis consistently taken by the taxpayer. The Respondent was from
this point on fully aware of the taxpayer’s case in a much more extensive
manner than simply from a Notice of Appeal. At the time of this settlement
offer, there were also about 70 shareholder/employee reassessments under appeal
and this settlement offer only proposed to settle the taxpayer’s appeal in this
case at the same time as settling the shareholder/employee appeals. For this
reason, I do not think it is the type of settlement offer that would justify an
increased costs award. It was not on terms at least as favourable to the Respondent
as the trial outcome as this offer required the Crown to compromise its reassessments
of the shareholder/employees.
[11]
On the day of the Court ordered
pre-hearing and settlement conference in 2007, the taxpayer’s counsel delivered
to the Crown a further settlement offer. By this time the shareholder/employees’
appeals had already been resolved. Based upon my review of the settlement offer
interpreted in a reasonable manner, it was at least as favourable to the Crown
as its complete loss at trial. While the offer does refer to the shareholder/employee
benefit aspects of the case, that issue continued to be relevant to the
taxpayer/employer on a going forward basis even though the shareholder/employee
tax appeals had been resolved. I do not see how that can be interpreted as
making the settlement offer in this case contingent on the resolution of other
matters. Indeed, it would appear from the reasons of Chief Justice Bowman
that, as a practical matter, his findings similarly impact those issues for the
taxpayer/employer. While
the Crown’s interest in upholding the integrity and principles of the Income
Tax Act requires it to consider settlement offers differently than private
parties, and requires it to think beyond the dollars directly involved, there
does not appear to be any policy or consistency issue raised in this case.
Chief Justice Bowman did not identify any in his reasons, nor did the Crown
identify any on this motion.
[12]
One troubling aspect of this 2007 settlement
offer is the affidavit of a Department of Justice paralegal who states that the
Crown appears to have no record of having received that written offer. I make
the observation, without need for any finding, that the affidavit of the
paralegal refers only to there being no record. It does not say that she
informed herself of whether anyone recalled the offer. I am satisfied on a
balance of probabilities that this offer was in fact delivered. The reason for
this is that in his email several days later when counsel were trying to narrow
the issues for trial, the taxpayer’s counsel expressly referred to this
settlement offer by date to the effect that it is unfortunate the Crown did not
refer to it. In any event, if the settlement had not been received by the
Crown, certainly this email put it on notice that such an offer had been made
and the Crown should have searched to locate its copy or asked for a copy if
none had been received or it had been misplaced. Parties should take seriously
their obligations to consider settlement offers carefully or run the risk of costs
if they are not more successful at trial.
[13]
The Tax Court’s Rule 147, unlike
the rules in several other courts, does not say that if an unsuccessful party
has not accepted a more favourable settlement offer, that party is responsible
for substantial indemnity or solicitor/client costs from the date of the offer
through to the end of the trial. However, in this case I am satisfied that some
increase from tariff is warranted as a result of the Crown having not accepted
the offer, either because they found its terms unacceptable or because they did
not pursue obtaining a copy of it to review.
II.
Was the trial unduly lengthened?
[14]
It is clear from his reasons that
the trial judge thought that the Respondent’s position was unfounded. Indeed he
uses the word fallacious on two occasions, stupid in his German exclamatory, and
describes the Minister being fixated on an unfathomable
position.
[15]
Further, the Respondent’s position
on what are called the Religious Assumptions in the preliminary motion kept
changing significantly throughout. Even though the trial judge found the taxpayer’s
evidence in defence of its shareholders’ religious motivations for the business
model adopted by it was unnecessary, it was clearly entirely reasonable for the
taxpayer to have to address the issue in clear and detailed fashion in the
appeal.
[16]
The Religious Assumptions issue
was not raised by the Respondent as part of the reassessment process. The Religious
Assumptions were raised for the first time by the Crown in its Reply. The
taxpayer’s motion was to strike them on the ground they were irrelevant. The
motion was hotly contested by the Crown. The motion’s judge,
Chief Justice Bowman, was not prepared to strike assumptions that
were in fact made whether they were irrelevant or not, nor was he prepared to
decide they were not relevant although he expressed considerable doubt: see Jolly
Farmer Products Inc. v. HMQ, 2008 DTC 4396. Thereafter, on
discovery of the Respondent’s representative, the Respondent significantly downplayed,
if not denied, that the Religious Assumptions influenced its position or were
relevant to it. However, the Appeals Officer in his evidence at trial said that
a reason, if not the reason, for the reassessments was the choice of the
taxpayer’s shareholders to live separate and apart from the community.
[17]
It was the Respondent’s shifting position on the Religions
Assumptions from relevant to unimportant and back to decisive, especially when
considered in light of the fact that they were ultimately irrelevant, together
with their relevance having been strongly questioned by the Court in the motion
to strike, that unnecessarily lengthened the proceedings. The Respondent’s
approach clearly increased the burden on the taxpayer to meet the case against
it and left the taxpayer with little choice but to put in the case it did. This
included dealing with the Religious Assumptions aspects as well as the economic
benefits aspects. This undoubtedly lengthened the trial and, in my opinion,
also warrants some increase from tariff in setting costs.
III.
Experts
[18]
I do not accept that the evidence
of the taxpayer’s two experts was an unnecessary frill. The taxpayer had the
onus to fully meet the case of the Respondent regardless of how weak the
taxpayer thought it or the judge in the end found it to be. It should be noted
the Respondent similarly called an expert to testify to the economic benefits
of the taxpayer’s chosen business model.
[19]
The reassessments appealed from
involved a significant amount of money relating to a core issue to the
taxpayer’s business. The outcome of the appealed reassessments would carry
forward into its tax liability for future years as a practical matter and would
apply to other expenses of the business.
[20]
The evidence of the economic
benefits of having the employees live on site was clearly put forward to
reasonably respond to the Minister’s position that the expenses of providing
on-site accommodation to its employees were not laid out by the taxpayer to
earn income.
[21]
No reason was advanced on this
motion as to why experts’ fees, if they were to be the subject of the costs
award, should not be fully reimbursed. The Crown retained its own expert and I
will assume it was on relatively similar terms or I would have heard
otherwise. Accordingly, the experts’ fees of the taxpayer are to be fully
reimbursed by the Respondent.
IV.
Should a multiplier be applied to the tariff rates?
[22]
The taxpayer’s position on the
motion was to ask for a fixed counsel fee equal to five times the tariff amount.
There does not appear to be any precedent for taking this approach to the fixing
of costs. Nor do I find it an attractive approach. I do not accept a
multiple of five, nor any lesser multiple, as an appropriate exercise of my
discretion in this case.
V.
Junior Counsel Fee
[23]
I see no basis for the Crown’s
position that a junior counsel fee should not be awarded because the junior
counsel did not lead evidence or argue. He was present, gowned and assisting
throughout. The Crown had two counsel. The Court routinely awards multiple
counsel fees and our tariff contemplates it, even though it is always the case
that only one counsel per party will be on their feet or talking at a time. The
presence and contribution of both of the taxpayer’s counsel are being
considered in my fixing of costs in this matter.
VI.
Witness Scheduling
[24]
The scheduling of the taxpayer’s
witnesses meant that a half-day was lost when the Court adjourned for the
afternoon. Under the tariff, this would not be an issue because it provides for
an amount per day or part day. I agree with the Crown that, in fixing costs in
excess of tariff, I need be mindful of this delay and the resulting undue
lengthening by the successful party entitled to costs.
VII.
Photocopying
[25]
The Crown’s position is that
$11,000 for photocopying disbursements is excessive. Approximately 35,000 pages
were copied. To those uninitiated in lengthy complex litigation this will sound
like a lot. However, a week-long hearing with six witnesses, half of whom were
experts, preceded by at least one contested motion, lengthy discoveries, productions
and undertakings, a court ordered pre‑hearing conference, and ending with
written outlines of argument and books of authorities, in which copies are made
for two counsel, the witness, the other side, the Court and the judge, is not a
process that was designed to save the trees. Indeed, as I pointed out at the
hearing, there was 18 inches of paper in front of me just on this motion. I
am allowing the taxpayer its actual outsourced copying disbursements and $0.25
per page for all of its counsel’s in-house photocopying except for that related
to the motion in which the Respondent was awarded costs.
VIII.
Conclusion
[26]
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 is not a private party and
tax litigation is not a dispute like others between two Canadians. This is the
government effectively pursuing one of its citizens. There will be many times
when the Crown will lose cases in circumstances where prior to the hearing the
Crown was not fully aware of the taxpayer’s evidence or could not test its
credibility, or could not fully understand the taxpayer’s position. There will
be times when the Crown unsuccessfully pursues new or novel arguments. None of
those appear to have been the case here. The essential facts do not appear to
have been in dispute and there had been lengthy discovery of the taxpayer. As
mentioned, the taxpayer’s first settlement letter included a detailed analysis
of the taxpayer’s legal position.
[27]
I am mindful of the fact that one
of the reasons advanced for this Court’s relatively modest tariff is the prospect
that individual Canadians pursuing their tax appeal who find themselves
unsuccessful should not in the ordinary course find themselves subject to large
costs awards as well at the same time. There is concern that if I fix costs in
excess of tariff in this case, symmetry may require that in other cases where
the Crown is successful, losing taxpayers should be similarly exposed to risks
of increased costs awards beyond the tariff. I am confident that our Court’s judges
can exercise their discretion appropriately and their discretion will not be fettered
by my decision in this case. Indeed, it may be that any risk that the threat of
costs deters individual Canadians from pursuing tax appeals where they perceive
injustice can be addressed by judges taking a separate approach to awards of
costs in excess of tariff in appropriate circumstances where the parties are
all well represented.
[28]
In these circumstances, I am
fixing counsel fee at $42,500, plus the full amount of experts’ fees of the
taxpayer, plus $9,328.69 in respect of photocopying disbursements.
[29]
This fixed counsel fee is
inclusive of the taxpayer’s entitlement to costs on this motion.
Signed at Ottawa, Canada,
this 23rd day of December
2008.
"Patrick Boyle"
Email this Content