BETWEEN:
THE STANDARD LIFE ASSURANCE
COMPANY
OF CANADA,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS
RESPECTING SUBMISSIONS ON COSTS
Pizzitelli J.
[1]
The Respondent has made a request for an
increased cost award following complete success, with costs, on the merits at
trial. The Respondent requests a total cost award of $529,163, consisting of
$491,345.61 in fees and $37,818 in disbursements, be awarded against the Appellant
based on 80 percent of the Respondent’s solicitor and client costs from
January 27, 2014 being the date of its offer of settlement and 50 percent of
its solicitor and client costs before that date, plus all reasonable
disbursements throughout.
[2]
Judgment was rendered on April 20, 2015 (the “Judgment”) following 4 full days of trial in
October 2014, written argument by both parties and two days of oral argument at
the end of March, 2015, which found entirely in the Respondent’s favour on all
issues before me and costs were awarded to the Respondent with a proviso that
if any party was not satisfied with such decision on costs, they could make
written submissions to me on costs within 30 days of my decision for my
reconsideration. The Court received submissions from both, with the Appellant
suggesting costs of $125,000 including a maximum of $25,000 for disbursements if
I determine a lump sum is in order.
[3]
The Appellant has requested, in its covering
letter enclosing its cost submissions to the Court, that since it has appealed
my decision, the issue of costs be held in abeyance and that this Court defer
its consideration of the submissions pending disposition of the appeal. I do
not agree. The Appellant may appeal my decision on costs if it so chooses and
thus allow the Court of Appeal to deal with both issues on appeal at the same
time, rather than entertain two appeals at different times, while the same
relevant facts and issues that affect both are before it.
[4]
There is no dispute that Rule 147(1) of the Tax
Court of Canada Rules (General Procedure) grants the Court discretion to
determine the amount of costs, their allocation and the persons required to pay
them. There is also no dispute that Rule 147(3) sets out the factors the Court
may consider in exercising the aforesaid discretion and Rule 147(4) allows the
Court to fix costs with or without reference to the tariff and in a lump sum.
Rule 147(3) reads as follows:
147. (3) In
exercising its discretionary power pursuant to subsection (1) 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,
(i.1) whether the
expense required to have an expert witness give evidence was justified given
(i) the nature
of the proceeding, its public significance and any need to clarify the law,
(ii) the number,
complexity or technical nature of the issues in dispute, or
(iii) the amount
in dispute; and
(j) any other
matter relevant to the question of costs.
[5]
While I intend to review the factors in more
detail shortly, I will first deal with the issue of the settlement offer. While
Rule 147(3) provides that the Court may consider a written offer of settlement
in exercising its general discretion as to costs, a fairly new Rule 147(3.2) grants
a successful respondent substantial indemnity costs after the date of its offer
to settle, defined in Rule 147(3.5) to mean “80% of
solicitor and client costs”, if the appellant obtains a judgment as
favourable as or less favourable than the terms of the offer of settlement and
Rule 147(3.4) places the burden on the respondent to prove there is a
relationship between the terms of the offer and judgment and that the judgment
is as favourable as or less favourable than the terms of the offer to settle.
Rules 147(3.2) to (3.5) read as follows:
147. (3.2) Unless otherwise ordered by
the Court, if a respondent makes an offer of settlement and the appellant
obtains a judgment as favourable as or less favourable than the terms of the
offer of settlement or fails to obtain judgment, the respondent is entitled to
party and party costs to the date of service of the offer and substantial
indemnity costs after that date, as determined by the Court, plus reasonable
disbursements and applicable taxes.
(3.3) Subsections (3.1) and (3.2) do not apply unless the offer of
settlement
(a) is in writing;
(b) is served no
earlier than 30 days after the close of pleadings and at least 90 days before
the commencement of the hearing;
(c) is not
withdrawn; and
(d) does not
expire earlier than 30 days before the commencement of the hearing.
(3.4) A party who is relying on subsection
(3.1) or (3.2) has the burden of proving that
(a) there is a
relationship between the terms of the offer of settlement and the judgment; and
(b) the judgment
is as favourable as or more favourable than the terms of the offer of settlement,
or as favourable or less favourable, as the case may be.
(3.5) For the purposes of this section,
“substantial indemnity costs” means 80% of solicitor and client costs.
[6]
It should be noted that there was no dispute as
to the applicability of the requirements of the settlement offer to be in
writing and served and not withdrawn, nor that it did not expire earlier than
30 days before the commencement of the hearing, pursuant to Rule 147(3.3) above,
so it is not necessary for me to deal with same.
[7]
The Respondent’s settlement offer of January 27,
2014 contained the following:
a)
The Standard Life of Canada, Bermuda branch, was
not carrying on an insurance business in Bermuda in 2006;
b)
The Standard Life of Canada, Bermuda branch, was
carrying on an insurance business in Bermuda in 2007;
c)
Subsection 138(11.3) first applies to Standard
Life of Canada’s 2008 year; that is 2008 is the first year that Standard Life
of Canada had designated property in the preceding taxation year; and
d)
Each party shall bear their own costs.
[8]
The issues at trial were directly and my
decisions were directly related to the terms of the settlement offer above. The
Appellant had sought to obtain a decision that provided it was carrying on
business in Bermuda via its Bermuda branch, SLAC, in both 2006 and 2007 and
that subsection 138(11.3) of the Income Tax Act (the “Act”) first applied to its 2006 year,
effectively arguing it did not have to carry on business in Bermuda in 2005 as
a precondition to the applicability of that provision in 2006.
[9]
The Judgment clearly found that the Appellant
was not carrying on business in Bermuda in either of 2006 nor 2007 and that in
effect the earliest the Appellant would be able to avail itself of the
provisions of subsection 138(11.3) was in 2009. The settlement offer granted
the Appellant the relief it sought to confirm it was carrying on business in
Bermuda in 2007. Accordingly it is abundantly clear to me that the Appellant
has proven, by the results, that the Judgment was less favourable than the
terms of the settlement to offer.
[10]
The Appellant argues in its submissions on costs
that the offer to settle contains no element of compromise and is effectively a
demand that the other party abandon the appeal and that an offer not to seek
costs is not sufficient to constitute a “compromise”
under the jurisprudence, relying on Mckenzie v The Queen, 2012 TCC 329,
2012 DTC 1291, a decision of Boyle J. of this Court, to conclude the offer of
the respondent would not attract the consequences of Rule 147(3.2) or 147(3)(d)
above.
[11]
Unlike in Mckenzie above, the settlement
offer in question does not just contemplate that only costs would be waived.
The Respondent’s settlement offer contemplated allowing the Appellant to
participate in the subsection 138(11.3) regime fully one taxation year earlier
than my decision allows it to do at the earliest by agreeing the Appellant was
carrying on business in 2007, the latter as argued by the Appellant. This alone
takes the settlement offer beyond a cost waiver only type of offer.
[12]
The Appellant suggests that this is not enough,
that it does not otherwise affect the reassessment for the 2006 and 2007
taxation years and so it is not a compromise. I do not agree. In my view, the
evidence of the Appellant was that it continued to operate in Bermuda and still
does, accordingly, having regard to the substantially large tax savings it
would have achieved over the next 5 years had it been successful in this
appeal, somewhere between $200,000,000 to $250,000,000 by the admission of its
own witness, accessing the regime as a multi-national one year earlier had the
possibility of generating a clear benefit to the Appellant, one largely within
its control to decide whether and to what extent it wished to utilize it. I am
quite satisfied from the evidence in the trial that the ability to access the
application of the multi-national regime contemplated by subsection 138(11.3)
of the Act during that 5 year period contemplated to produce the tax savings
by the Appellant itself, is proof enough that the offer was more generous than
my decision on this matter. The mere fact the settlement offer conceded it was
carrying in business in Bermuda in 2007 is enough in and of itself.
[13]
In any event, based on the clear wording of Rule
147(3.2), the Respondent needs only establish that the Judgment was as
favourable as the terms of the settlement offer to succeed. It won completely
on all the issues before the Court, so clearly a Judgment acknowledging same prima
facie meets that threshold test.
[14]
Moreover, I have some concerns as to the
Appellant’s reliance on the broad principle enunciated in Mckenzie.
Justice Boyle made it clear that his decision was based on the circumstances of
that case. In paragraph 14 thereof, he stated:
In the circumstances of this case, even had
the application for increased costs been timely, the settlement offer relied
upon does not constitute the type of settlement offer warranting consideration
for the purposes of Rule 147(3)…nor, in my view, should it for the purposes of
proposed Rule 147(3.1) if enacted as worded.
[15]
In paragraph 15, Boyle J. commented that “the only basis for the appellant’s request for increased
costs set out in the Notice of Motion is the settlement offer.” He went
on to comment that “…I would not think that, in the
overall circumstances of this case, costs beyond tariff are warranted after
considering the relevant factors enumerated in Rule 147(3)” and
discussed how in that trial no material facts were in issue, the evidence was
straightforward, the respondent did not call any witnesses and the issue was
not particularly complex.
[16]
When considering the relevant factors in Rule
147(3), I am strongly of the view that the circumstances of this case support a
basis for increased costs in favour of the Respondent and refer to the relevant
factors by their paragraph in the Rule below:
(a) The
Respondent was 100 percent successful on all the issues in dispute, including
the issue of who bore the burden of establishing whether the Appellant carried
on business in Bermuda, having regard to the Appellant’s position that the Respondent
did not assume it did not carry on business, which I disagreed with, as well as
the issues of interpretation of subsection 138(1), which the Appellant suggested
automatically meant the Appellant was carrying on business in Bermuda and which
I also disagreed on.
(b) The amounts in
issue were in my opinion extremely large. The Appellant sought to bump up the
cost base of certain of its assets by over $1.16 billion dollars, save over $12
million in taxes for 2006 and save over $200-250 million over a 5 year period.
(c) The Appellant
suggested the importance of the issues was limited to the taxpayer and is of
interest only to the small community of life insurers. This is quite a bald
assertion in my view and no evidence was presented to back it up. I would think
it is common knowledge that life insurers in the country are generally large
corporations, many of them multi-national, that are major players in our
country’s financial, investment and insurance industries and the interpretation
of provisions that deal with both the reserves they carry, as well as their
contribution to the country’s tax base, are in my view of interest to the
general public as well, not to mention the Respondent. I would also think the
development of jurisprudence on whether one “carries on
business” is of wide import.
From a legal
perspective, this appears to be the first decision to interpret and apply
subsection 138(11.3) in its modern context, as well as one of the few cases
dealing with the essential elements test in determining whether a party carried
on business, particularly in another jurisdiction as a branch, so it has
potential for precedential value. In this regard, I fail to see how it
substantially differs from the importance of the transfer pricing issues in General
Electric Capital Canada Inc. v The Queen, 2010 TCC 490, 2010 DTC 1353, decided
by Hogan J. that too would affect the small community of multinational
corporations relative to the larger community of taxpayers, but which as stated
by the Appellant in its submissions on costs at paragraph 19 as being of “...widespread interest to the tax and business communities
in Canada”.
(d) I have already
discussed the offer of settlement of the Respondent and my view is that it
meets the threshold of consideration for substantial indemnity. However, in the
context of this factor alone, and in the circumstances of this case, I must say
that the settlement offer was frankly as reasonable and principled as the Respondent
could make in these circumstances. The Respondent clearly evaluated the
strength of its case relative to that of the Appellant and made a settlement
offer that went beyond mere cost waiving, both on an issue of timing of the
application of the provision that could benefit the Appellant in the future as
well as conceding the factual requirement agreed by the Appellant that it
carried on business in Bermuda in 2007. The evidence demonstrated to me that
the Respondent took great pains to investigate and evaluate the strength of its
position, both in follow-up on discovery and in the number of witnesses it subpoenaed
and called.
While I take note of
the criteria for evaluating settlement offers where only costs are waived and
the concerns on the settlement process such approach may have, having regard to
Boyle J’s comments in Mckenzie, I also take note of the need to evaluate
the merits of a settlement offer in the context of the circumstances of each
case, including the relative merits of the parties’ arguments and their reasonableness
in the circumstances. I am satisfied in this case, the Respondent was being
reasonable in its offer to settle the question.
Frankly, there may
well be circumstances where a waiver of costs and the threat of seeking greater
costs alone would be reasonable as well, so caution must be applied in
suggesting Mckenzie and the cases referred to therein pre-empt any such
possibility. Clearly, in cases where a respondent has a reasonable basis to
rely on assumptions involving fraud, sham, window dressing or other serious
conduct of an appellant, a settlement offer involving a waiver of costs may
seem extremely principled and appropriate. In the case at hand the Respondent
assumed window dressing.
(e) With respect
to the volume of work, there were clearly multiple issues involved in this
appeal, including at least two interpretive law issues dealing with the
interpretation of subsection 138(1) and 138(11.3), which imported the interpretation
of other provisions in section 138. In addition the issues of whether the Appellant
carried on business in Bermuda in different years, coupled with reference to
Bermuda laws added to the volume of work involved in this appeal. Although
there were only 4 days of actual trial, the volume of evidence was large and
frankly included review of multiple detailed documents evidencing the Appellant’s
business plans and resolutions, and the written arguments were lengthy and
detailed. Moreover, I found that the Respondent was required to call more
witnesses and fill in the factual blanks the Appellant itself failed to do,
including dealing with the duties of the Appellant’s first manager in Bermuda
whom the Appellant failed to call as a witness yet relied on her activities as
a basis for argument in support of it carrying on business.
In my opinion from all
the evidence at trial, the Respondent’s volume of work on this file was far disproportionate
to that of the Appellant, which seemed to take a minimalist view to the
presentation of its evidence and expect the Court to fill in the blanks,
consistent with its wrongly held position that the onus of establishing the Appellant
did not carry on business in Bermuda was on the Respondent.
(f) The
complexity of the issues factor supports the Respondent’s award for greater
costs. The Appellant takes the position that this case was not as complicated
as General Electric above which Hogan J. noted “raised
numerous and extremely complex issues”. I find it incredulous that the
same Appellant who in opening argument classified the special rules pertaining
to multinational insurers as extremely complex, now rates their complexity only
in comparison to the complex but completely different issues of transfer
pricing provisions. I am of the view that the complexity and detail of the
provisions found in section 138: Insurance Corporations, in Division F of Part
I of the Act titled “Special Rules Applicable in
Certain Circumstances” are frankly on their face and in practice as complex
or more complex than the section 247 provisions. The fact it did not serve as a
lead case as did General Electric does not define its complexity nor
necessarily its importance. This case involved complex issues of interpretation
as well as detailed facts pertaining to them, including textual and contextual
and purposive analysis, all required due to the Appellant’s positions.
(g) The conduct
of the parties that tended to shorten or lengthen unnecessarily the duration of
the proceeding is a factor with mixed results. I agree with the Appellant that
the parties worked to agree on a Joint Book of Documents and an Agreed
Statement of Facts and presented written arguments in addition to the oral
arguments which in my opinion streamlined the presentation of the case.
It should be noted
that the greatest dispute as to the facts between the parties dealt with those
applicable to determining whether or not the Appellant was carrying on a branch
business in Bermuda in those years and almost the entire trial was dedicated to
the presentation of evidence relevant to that issue, so while the Agreed
Statement of Facts was of assistance, particularly with respect to background
and ancillary facts, it was of limited assistance in determining those
significant issues.
While I certainly
agree the trial itself was conducted in an efficient and professional manner by
both sides, I cannot ignore that my decision found that the Appellant’s actions
led me to conclude that it was engaged in window dressing to enable it to argue
it met the factual criteria of the judicial tests for carrying on business when
it did not; to give the illusion of doing so as the Respondent pleaded and
argued. While this type of conduct is different than the type of conduct
referenced in Merchant v The Queen, [1998] TCJ No. 278, 98 DTC 1734,
relied upon by the Appellant, which awarded solicitor and client costs where
the Appellant therein did “everything possible to
obstruct the Crown from putting its case forward in an orderly way”, the
conduct of the Appellant in acting in such a manner as to create the illusion
it did, which it relied upon to make and further its appeal, is nonetheless
conduct that is, in my view, reprehensible and should be discouraged. In the
case at hand of course, the Respondent is only seeking a percentage of
solicitor and client costs, a position that I feel is quite reasonable on its
part having regard to such conduct.
(h) The Respondent
argues that the Appellant’s witness denied the tax motivation of the Appellant
was the sole reason for its foray into Bermuda on examination for discovery
while effectively admitting on cross‑examination it was the only reason
in his view, should be a factor to consider. Frankly, while I effectively
agreed with that sole reason in my decision, I would not be prepared to find
the witness actually denied this motivation in discovery nor refused or
neglected to state such. On effective cross-examination the Respondent was able
to obtain such admission, but it was qualified that it was his opinion as a
director of taxation, not necessarily that of the Appellant, so the weight to be
given to such evidence was clearly mine to decide.
(i) This factor
is not applicable as it was not argued that any stage of the actual proceeding
was improper in any way.
(i.1) As this factor
reads it is not applicable as no expert witness gave evidence, however the
Respondent has sought expert fees for hiring an insurance industry actuarial
expert to assist it in understanding and exploring various issues relating to
the insurance business which I will deal with as another matter below.
(j) The Appellant
has raised a few other matters relevant to the question of costs. Firstly, it
argues that the Respondent should not be given credit for expert fees of
$16,622.79 as no expert witness was called by the Respondent to testify at
trial thus evidencing the Respondent did not need assistance in understanding
the various issues of reinsurance, longevity and mortality risk and other
industry specific issues. While I agree no expert witness was called to testify
nor prepared a report for the Court and so the Respondent should not be given
expert fees pursuant to the factor listed in (i.1) above, that does not
preclude reasonable expenses where the Court may find them warranted. In this
case, the provisions under section 138: Insurance Corporations are special
rules that I have determined are complex and a great deal of the Appellant’s
evidence was spent explaining the concepts of mortality and longevity risk and
their contradictory actuarial effects. These concepts were referred to in the Appellant’s
pleadings as well. Having regard to the complexity of the provisions, their
applicability to a specialized industry and the Appellant’s reliance on the
various actuarial concepts, it seems entirely reasonable that the Respondent
should seek expert assistance to understand them so it could properly conduct
its case in a more efficient manner. While I appreciate there was no breakdown
in the expert fees, the fact fees were only $16,622.79 in relation to the cost
base bump up of over $1.16 billion sought by the Appellant that would have
saved it between $200-250 million hardly seems unreasonable. The Respondent is
entitled to those fees.
The Appellant also
objects to the hourly rate charged by the Respondent for its junior lawyer, one
Mr. S.O. at $219.60 per hour as well as the necessity of him travelling to
Montreal with the Respondent’s two main counsel after January 27, 2014 to meet
with witnesses. The Appellant also suggests he did not lead evidence or make
any submissions at trial and was not even present for the second day of oral argument
and hence his time spent on the file was unnecessary duplication and charged at
an excessive rate, which the Appellant says should be closer to $140 per hour.
In reviewing the
Respondent’s Bill of Costs, it seems evident that Mr. S.O. was heavily involved
in the discovery and trial preparation and in fact dedicated more time than his
two more senior counsel in preparation of the written submissions. It appears
the Respondent utilized his talent and lower rate extensively which clearly reduced
overall costs of the Respondent, something that is commendable and that should
be encouraged. Having regard to his extensive participation prior to the trial
at all stages, including discovery, I do not find it unreasonable that he
attended with co-counsel to meet with witnesses in Montreal nor that he was
present at trial to assist co-counsel notwithstanding that he did not present
to the Court. I note the Appellant had a higher number of counsel present at
trial itself. The fact Mr. S.O. appears to have been the major contributor to
the preparation of written submissions suggests to me that the Respondent was
being as efficient and cost effective as possible in the circumstances. As I
indicated, all steps a party takes to reduce costs should be applauded and so I
am not prepared to reduce credit for Mr. S.O.’s hours spent on this matter,
other than to cut his trial attendance time by one-half to 20 hours as he did
not present but was there to be available for assistance only to his co-counsel.
I do agree that junior
counsel’s fees should be lower. His hourly rate was about two-thirds that of
his more senior counsel, about $220 per hour and in keeping with the rate for
junior counsel expressed in General Electric, I would reduce his hourly
rate to $140 per hour, a roughly 35 percent decrease. The Respondent made no
submissions to justify a higher rate so I am awarding the lower rate above.
The total hours of Mr.
S.0. claimed by the Respondent were 649.5 hours which should be reduced to
629.5. At a reduced rate of $140 per hour the Respondent may claim a total of
$88,130 instead of the $142,630.20. Accordingly the Respondent’s fees are
reduced by $54,500.20.
[17]
On the whole, having regard to the factors set
out in Rule 147(3) I find that the Respondent has justified its request for
increased costs beyond the initial tariff costs awarded in my Judgment. The
Respondent was 100 percent successful in a matter involving extremely large
sums of taxes in issue that dealt with very complex multiple issues requiring a
large volume of work for the parties, particularly the Respondent, in
circumstances where the Appellant’s personal conduct was found to have been for
the purpose of creating window dressing to give the illusion it conducted
business in Bermuda for the purposes of obtaining what its own counsel described
as a wind-fall tax benefit; to which it claimed it was nonetheless entitled
based on its unsuccessful interpretation of the law. In my opinion the
circumstances of this case justifies the level of costs requested by the
Respondent. Frankly, the Respondent has only sought 50 percent of its
costs prior to the date of settlement, a very generous and reasonable position
in my view having regard to the circumstances of this case which I am convinced
would have merited more. Needless to say, the circumstances clearly support the
Respondent’s request for 80 percent of costs on a solicitor and its own client
basis, for which the Respondent relies on Rule 147(3.2) to obtain, but which I
believe it would have been entitled to nevertheless.
[18]
Finally, I wish to address the Appellant’s
suggestion that notwithstanding the Court’s discretion to award costs beyond
the tariff, cost awards under Rule 147(3) are not intended to compensate
litigants for their actual litigation costs, even in complex cases and even
with complete success. The Appellant relied on Velcro Canada Inc. v The
Queen, 2012 TCC 57, 2012 DTC 1100 at paragraphs 9 and 29, Continental
Bank of Canada v The Queen, [1994] TCJ No. 863 at paragraph 9 and Jolly
Farmer Products Inc. v The Queen, 2008 TCC 693, 2009 DTC 1040 at paragraph
8. While all of these cases deal with requests to depart from tariff and the
requirement of special circumstances to do so, all of these cases predate the
amendment to the General Procedure Rules in 2014 that created Rules 147(3.1)
to 147(3.5) dealing with awards on a substantial indemnity basis with respect
to settlement offers.
[19]
Bowman J. made reference to the statement relied
upon by the appellant in Continental Bank of Canada above, also referenced
in Jolly Farmer at paragraph 8, that “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.” However, he went on to say in the same paragraph that “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.”. It is equally
clear to me that the drafters of the Rules were aware that the new Rules
involving substantial indemnity costs would result in compensating litigants
for 80 percent of their costs after the settlement offer date in issue where
such Rules applied and they do.
[20]
I find those Rules, in particular 147(3.2) to
apply here to as to give the Respondent 80 percent of its solicitor and client
fees after the date of its settlement offer of January 27, 2014, subject to the
reduction above.
[21]
Moreover, as Hogan J. found in General
Electric, the Rules Committee was also aware of the fact that numerous
factors set out in Rule 147(3) can also warrant moving away from the tariff. As
I referred to above, granting the Respondent 50 percent of its solicitor and
client costs for the pre-settlement offer time period is also justified in the
circumstances under Rule 147(3) and further support granting the Respondent 80
percent after the settlement offer date.
[22]
Accordingly, I exercise my discretion to depart
from the tariff and apply the new Rules pertaining to settlement offers so as
to award a lump sum in costs to the Respondent equal to $474,663 in total, being
the $529,163 claimed less the deduction of $54,500 regarding junior solicitor
fees.
Signed at Ottawa, Canada,
this 5th day of June 2015.
“F.J. Pizzitelli”
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