Citation: 2012 TCC 235
Date: 20120629
Dockets: 2005-1631(IT)G
2005-1760(IT)G
BETWEEN:
POTASH CORPORATION OF SASKATCHEWAN INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR ORDER
Hershfield J.
[1] The Appellant brings a Motion for an
enhanced cost award of 80% of solicitor and client costs incurred after July
13, 2009 in respect of its successful appeal of an assessment denying certain
expenses claimed by it in respect of each of its 1997 and 1998 taxation years.
[2] The Motion relies
primarily on a proposed amendment to the Tax Court of Canada Rules (General Procedure) (the “TCC Rules”) which will allow for
such an enhanced cost award where a party has made a written settlement offer
and obtains a judgment as or more favourable than the terms of the offer.
[3] In this case, the Appellant
did make a written settlement offer well before the hearing of the appeal. More
specifically, the offer was made on January 27, 2009. The two day hearing of the appeal commenced on September 30,
2010 and Judgment in the Appellant’s favour was rendered on April 20, 2011. The Judgment corresponded
with the settlement offer and meets the requirement for applying the proposed
enhanced cost provision.
[4] The relevance of the July 13, 2009 date as
the starting point to assess the enhanced costs amount is that it was the date
that the Respondent clearly rejected the offer. During the 14 months or so between
that rejection and the commencement of the hearing of the appeal, no counter-offer was ever made and except in
a very limited context that I will address later in these Reasons, no argument
was advanced that the offer was ever withdrawn or had expired.
[5] The enhanced costs
amount claimed is $234,458.00 being 80% of the solicitor and client costs of $293,072.00
incurred by the Appellant between July 13, 2009 and September 30, 2010. The
tariff amount for services performed during this period would be $7,900.00.
[6] The issue at trial
was the deductibility of professional
fees incurred in respect of a reorganization of the Appellant’s subsidiary
holdings undertaken in order to increase its cash flow on repatriated foreign
subsidiary earnings by reducing foreign withholding taxes. The expenses were
claimed as a deduction from income. That claim was pursued at trial and, in the
alternative, it was argued that they qualified as eligible capital expenditures
(ECE).
[7] The Judgment of the Court allowed the
appeal on the basis that the professional fees incurred did, in fact, qualify
as ECE.
[8] The offer to accept ECE treatment allowed
that the expenses in question were capital in nature subject to the deduction
restriction in paragraph 18(1)(b) of the Income Tax Act (the “Act”).
That concession was rejected as a basis for settlement at a pre-hearing
conference (which was acknowledged to be a settlement conference) both in a pre-hearing
conference brief (settlement conference brief) and verbally at the settlement
conference itself.
[9] The Respondent, initially at least, did not
take issue with the offer having been discussed and rejected at a settlement
conference. Indeed, in a letter dated January 18, 2012 it was acknowledged that
the parties were in agreement that the settlement conference documentation
could be unsealed at the Court’s leisure. Moreover, the settlement conference briefs
were submitted by the Respondent, in response to the Motion, as part of an
affidavit of a lawyer from the Department of Justice which set out the record
of events preceding the trial including reference to matters discussed at the
settlement conference (the “Affidavit”).
Issues Concerning the Settlement Conference
[10] Three preliminary
issues arise in this case in relation to the settlement conference. The first
concerns opening the Court’s settlement conference file; the second concerns
the reference in the Appellant’s submissions to the comments made by the
settlement conference judge; and, the third concerns the settlement conference
briefs and the Affidavit that includes a recounting of discussions at the settlement
conference.
[11] During argument, Respondent’s counsel acknowledged that the
agreement to unseal the settlement conference file was made prior to knowing of
the January 10, 2012 decision in CIBC World Markets Inc. v. Canada, 2012
FCA 3. Nonetheless, having already provided the Court with the Affidavit and settlement
conference briefs, the Respondent agreed that all the material provided to the
Court relating to the settlement conference would not be retracted. On that
basis, it was agreed that the sealed file need not be opened.
[12] The Respondent did, however, expressly object
to any references to any remarks made by the judge presiding at the settlement
conference in respect of settlement prospects. One could hardly disagree with
that. Indeed, that was expressly dealt with in CIBC World Markets. In
that case, the Minister of National Revenue (the “Minister”) asked that the judge’s
comments at a pre-trial hearing be expunged from the appellant’s motion record
and the Federal Court of Appeal agreed.
[13] The Federal Court of Appeal in CIBC World Markets
agreed with the rationale
developed in Bell Canada v. Olympia & York Developments Ltd., 1994
O.J. No. 343 (Ont. C.A.). In that case, the settlement opinions of the
pre-trial judge were found to be irrelevant to proceedings that followed and
the consent of the parties could not justify a court acting on them in a
subsequent proceeding.
Accordingly, I have effectively expunged all references in the Appellant’s
submissions to the settlement conference judge’s comments at the settlement
conference.
[14] It is also noteworthy that the procedure rule
in Bell Canada was identical to section 128 of the TCC Rules which provides:
No Disclosure to the Court
128. No communication shall be made to the
judge presiding at the hearing of the appeal or at a motion in the appeal with
respect to any statement made at a pre-hearing conference, except as
disclosed in the memorandum or direction under section 127.
[Emphasis added]
[15] Section 127
of the TCC Rules provides:
Memorandum or Direction
127. (1) At
the conclusion of the conference,
(a) counsel may sign a
memorandum setting out the results of the conference, and
(b) the judge conducting
the conference may give such direction as the judge considers necessary or
advisable with respect to the conduct of the hearing,
and the memorandum or direction binds the parties unless the judge
presiding at the hearing of the appeal directs otherwise.
(2) [Repealed,
SOR/2007-142, s. 14]
[16] However, Practice Note
No. 17 proposes to amend both sections 127 and 128 of the TCC Rules:
Memorandum or Direction
127.
(1) At the conclusion of a litigation process conference under Rules 125, 126.1
or 126.2:
(a) counsel may sign a memorandum
setting out the results of the conference, and
(b) the judge conducting the
conference may give such direction as the judge considers necessary or
advisable with respect to the conduct of the appeal or the appeal hearing.
(2) Any memorandum executed by counsel or
direction given by the judge binds the parties unless the judge presiding at
the hearing of the appeal directs otherwise.
No disclosure to the
Court
128. No communication shall be made to the
judge presiding at the hearing of the appeal or at a motion in the appeal with
respect to matters related to settlement or settlement discussions at any
of the litigation process conferences.
[Emphasis added]
[17] The proposed wording
of section 128 clearly differs from that of its present wording in at least two
respects:
- it broadens the non-disclosure requirement
beyond communications made at a settlement conference to include communications
made at any litigation process conference; and
- it changes the non-disclosure requirement
from communications with respect to statements made to matters discussed.
[18] What is constant, however,
is that the non-disclosure requirement relates to communications made to the
judge presiding at the hearing of the appeal or at a motion in the appeal.
While I am tempted to suggest that a motion for costs made after the hearing of
an appeal and after a judgment has been rendered is a motion in respect of an
appeal but not a “motion in the appeal”, such suggestion would appear to fly in
the face of the authorities.
[19] Consider the reasoning in CIBC
World Markets:
[9] … Pre-hearing conferences are in
camera matters and statements made in them should not be used in
submissions concerning costs: Morrissey v. Canada, 2011 TCC 373 at
paragraphs 59 and 60. The rationale is well-said in Bell Canada v. Olympia
& York Developments Ltd., [1994] O.J. No. 343 at pages 144-145 (C.A.), cited in Morrissey:
Pre-trials were designed to provide the
court with an opportunity to intervene with the experience and influence of its
judges to persuade litigants to reach reasonable settlements or refine the
issues. None of that would be possible without assurance to the litigants that
they can speak freely, negotiate openly, and consider recommendations from a
judge, all without concern that their positions in the litigation will be
affected.
[10] Typically, in
pre-hearing conferences, parties assert positions and make proposals for
compromise, and often presiding judges offer views and suggest proposals. After
a pre-hearing conference, there is nothing wrong with a party communicating its
own positions and proposals, for instance in an offer of settlement, and those
positions and proposals can mirror the ones discussed in the pre-hearing
conference. The settlement offer can be disclosed for the purposes of later
costs submissions.
[11] Where, as here, a
party seeks an enhanced level of costs, what is forbidden is the bare
recounting of discussions, positions and proposals made by the parties in the
pre-hearing conference and not embodied in later settlement offers, or
disclosure of the comments and opinions of the justice presiding at the
pre-hearing conference. All of these remain protected from disclosure.
[12] It
was permissible for CIBC World Markets to include in its motion record the
letter setting out its settlement offer. However, the references in this letter
to the Tax Court judge’s comments and opinions should have been blacked out. I
shall disregard those references. [Emphasis Added]
[20] These views make it
clear that
where a settlement offer is made after a settlement conference, it can reflect
discussions, positions and proposals made at the settlement conference provided
they are embodied in that settlement offer. I might presume that they would be embodied
only as terms necessary to resolve issues in dispute so as to avoid further
litigation if accepted. That appears to leave little or no room to recount discussions
and positions that are one’s reasons for rejecting a settlement offer that arose
from a settlement conference. However, that very narrow view, although seemingly unqualified, might
best be understood in a broader context.
[21] While a settlement offer speaks for itself whenever
made, the reasons for its rejection need to be told in a hearing for enhanced
costs. If the reason for rejecting the offer is a
legal impediment, as was, for example, the
case in CIBC World Markets, then as that case
necessarily suggests, that issue needs to be in front of the judge at a cost
hearing even if it is a reiteration of a discussion and position taken at the
settlement conference. Recounting one’s own position from the time of receipt
of the offer throughout the time it was open for acceptance cannot be barred
because it reiterates a position taken at a prior settlement conference whether
receipt of the offer was after or, as in the present case, before the
settlement conference.
[22] Further, recounting one’s own position does not strike
me as necessarily offending the rationale for in camera conferences
which is to ensure parties speak and negotiate freely. The bar to disclosure relates
largely to communications of the other party’s settlement statements, positions
and arguments. Indeed, if one was barred from raising reasons for rejecting an offer at a cost
hearing because they were raised at a settlement conference, one might be less
inclined to speak freely at such a conference.
[23] This is what I am faced with in accepting the Affidavit
and its inclusions for consideration in my dealing with this Motion for
enhanced costs. The Respondent’s settlement brief included as part of the
Affidavit contemplates and responds to an offer already made. The Affidavit traces the sequence of events preceding the trial and
recounts the Crown’s position in respect of the offer including positions taken
and discussed at the settlement conference. I see nothing about my consideration
of these inclusions that frustrates the principle set out in CIBC World Markets. If they reflect the same or evolving position
of the parties after the settlement conference as before it or during it, then
having them submitted at a motion for enhanced costs is not a betrayal of the in
camera nature of the settlement conference. Accordingly, aside from effectively redacting
comments made by the settlement conference judge as set out in the Appellant’s
written submission, I have accepted the settlement conference briefs and the Affidavit and its inclusions
as submitted and agreed to by the parties.
[24] That said, if it
needs repeating in the context of the present or proposed TCC Rules set out
above, I am not of the view that the non-disclosure provisions in the TCC Rules
can be applied to give a different result. As well, I see little difference, in
this case at least, between a signed memorandum setting out the results of a
settlement conference (which is allowed under the TCC Rules set out above) and
a post conference agreement as to what material dealt with at the settlement conference
could be put before a judge at a subsequent proceeding. In the case at bar,
such an agreement was struck.
[25] The remaining issue then
is simply whether the Appellant is entitled to enhanced costs based on having
made a settlement offer that was as favourable
as the judgment of the Court.
The Appellant’s Arguments
[26] The Appellant relies on Practice Note No. 18
which sets out a proposed rule in subsection 147(3.1) of the TCC Rules which
provides that where an appellant has made a written offer and obtains a
judgment as favourable as or more favourable than the terms of the offer to
settle, the appellant shall be 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.
[27] As well, in the alternative, the Appellant
relies on subsection 147(1) and paragraph 147(3)(d) of the TCC Rules.
They provide as follows:
COSTS
General Principles
147(1) The
Court may determine the amount of the costs of all parties involved in any
proceeding, the allocation of those costs and the persons required to pay them.
147(3) In
exercising its discretionary power pursuant to subsection (1) the Court may
consider,
…
(d)
any offer of settlement made in writing,
[28] The relevant portion of the proposed subsection
147(3.1) of the TCC Rules which is set out in full in Practice Note No.
18 reads as follows:
(a) Unless otherwise ordered
by the Court and subject to paragraph (c), where an Appellant makes a written
offer to settle and obtains a judgment as favourable as or more favourable than
the terms of the offer to settle, the Appellant 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.
…
(e) For the purposes of
this section "substantial indemnity" costs means 80% of solicitor and
client costs.
[29] Reliance
is placed on Barrington Lane Developments Limited v. The Queen, 2010 TCC
476 where, at paragraph 13, Justice Pizzitelli wrote:
13 There is no disputing that while a settlement
offer is only one of the factors to consider under Rule 147(3)(d) above,
it has taken on the role of one of the more important factors, as alluded to in
the decisions of this Court in Langille, Donato v. R., 2010 TCC
16, 2010 CarswellNat 44, 2010 DTC 2788, and Campbell v. R.,
2010 TCC 323, 2010 CarswellNat 1701, 2010 DTC 3619, all of which
refer to the practice in many jurisdictions to award costs on a
solicitor/client basis where the unsuccessful party rejects a settlement offer
which is at least as favourable as the outcome of the hearing. In addition, the
growing importance of the settlement offer is mentioned by both Woods J. and
Boyle J. in Donato and Langille respectively, where reference was
made to the recent endorsement of the Rules Committee of the Court of an
increase in costs when a written settlement offer has been made that is no less
favourable than the actual outcome and the new Practice Note 17 issued by Rip
C.J. of this Court stressing the importance of settlement and the awarding of
solicitor/client costs to encourage settlement.
The Respondent’s Arguments
[30] The Respondent maintains that at the time
of rejecting the offer, on July 13, 2009, there remained a factual dispute as
to whether the expenses claimed were incurred by the Appellant and, if so, for
what purpose. It was not until just prior to the trial that quantum issues were
resolved and until then they created a legal impediment to accepting the offer.
Further, there was the underlying problem that the Appellant had never
satisfied the Respondent that the expenses claimed were incurred to earn income
from its own business as required under the Act. That is, the Respondent
maintains that the offer was incapable of being accepted and relies on the
Federal Court of Appeal decision in CIBC World Markets to support the
position that enhanced costs should not be allowed in this case.
[31] As well, the Respondent set out in detail
the pre-trial issues that were or needed to be addressed to fully consider the
settlement offer and narrow the issues in preparing for trial. For example,
such steps included:
·
In respect of each year
(1997 and 1998) the invoices that documented the subject expenses needed to be
clarified as some were invoiced to entities other than the Appellant or were
invoiced by reference to “LLC matters” or “various taxation matters” and in one
instance a significant amount was evidenced only by summary of accounting
entries without an invoice per se. Such issues were not fully resolved until
the commencement of the trial;
·
No jurisprudence was
provided at the settlement conference by the Appellant supporting its position that
the subject expenses could be considered ECE;
·
On August 27, 2010, the
Crown served on the Appellant a request to admit facts and documents. The
factual admissions sought by the Crown and agreed to by the Appellant, or not
denied, formed the basis for the Partial Agreed Statement of Facts. As well,
the admission of the authenticity of documents formed the basis of the Joint
Book of Documents submitted at the trial;
- The Crown called no witnesses at the trial and
agreed with the Appellant as to the material conclusions of the expert in
an Expert Witness Report prepared for the Appellant in order to obviate the
need to submit the report and have the expert called to testify at trial.
[32] As well, the Respondent maintains that the
request for enhanced costs should fail since it is grounded on a proposed rule
which has no force of law and cannot, as drafted, have retroactive application
to the matter at hand. The Respondent cites several authorities for this
position including Miller v. R., 2003 DTC 6 and further asserts that the
Court cannot assume that the proposed rule will be adopted without amendment.
Further and in any event, the offer and rejection were made prior to the
Practice Note No. 17 announcement on January 13, 2010 of the proposed rule.
Further still, the proposed rule was amended under Practice Note No. 18 which
provided for an effective date of January 31, 2011. Even accepting that the new
rule will have force as of that date, even though that would precede its adoption
by the Governor in Council, it cannot be applied retroactively to an offer made
in 2009.
[33] In this limited
context the Respondent suggests that the settlement offer would have to have
been renewed after the effective date of the new rule to fall within its scope.
[34] In any event, the
Respondent also pointed out
that in CIBC World Markets, the Federal Court of Appeal applied the
existing paragraph 147(3)(d) without comment on the proposed new rule
even though CIBC endeavoured to rely on it.
[35] Referring to that subsection 147(3), the
Respondent noted that the Appellant has not made submissions in respect of
other criteria to be taken into account in awarding costs. The Respondent, on
the other hand, made submissions with respect to such other criteria.
[36] For example, the
Respondent credits the Appellant with no actions that shortened the
proceedings. Further still,
the Respondent argued that none of: the volume of the work, the complexity of
the issues, their importance as a matter of public policy, or, the tax savings
amount that the judgment achieved, warranted an award of enhanced costs. As to
the tax savings that the Appellant achieved by having judgment in favour of ECE
treatment, it was referred to as de minimus relative to the cost of the
proceedings.
[37] It is also submitted that the Appellant did
not succeed in having the subject expenses treated as ECE because of any
arguments it advanced orally or in its written submissions.
[38] Other comments made in the Respondent’s submissions
include the unreasonableness of the counsel fees. It was pointed out, as well,
that no allegations were made by the Appellant that the conduct of the Crown
could be described as improper or unnecessary or being excessively cautious or
the like.
[39] The Respondent also asserted that the
Appellant has failed to produce evidence of disbursements claimed.
The Appellant’s Answer to the Respondent’s Submissions
[40] The Appellant challenges the Respondent’s
submission that the quantum issues were not agreed to until just prior to trial
as well as the
statements in the Respondent’s submissions referring to the de minimus tax
savings resulting from the treatment as ECE relative to the cost of the
proceedings. The Appellant asserts that the Respondent has unduly minimized the
amount at issue and the legal significance and complexity of the issues raised
by the appeal.
[41] The Respondent should
not be able to rely on a so-called legal impediment to accept an offer when it
begs the question as to why it would waste the Court’s time to make a joint
request for a settlement conference.
[42] Further, as to the
Respondent’s position that there was a legal impediment to settlement, it is
suggested that this attempted justification for not being able to settle cannot
withstand scrutiny given the concessions made at trial and the Court’s decision.
[43] The Appellant also
asserts that it was inappropriate for the Respondent to use the current forum
to dispute a quantum of disbursements that the Appellant never sought from the
Respondent before this Court. The disbursements, if challenged, should be dealt
with by the taxation officer regardless of the outcome of this Motion.
[44] Ultimately, the
Appellant insists that the principle that it relies on is that greater relative
weight must be afforded to settlement offers in determining whether or not the successful
party is entitled to enhanced costs.
Analysis
[45] My analysis can be
dealt with under separate headings:
A.
Applying Practice Note No. 18
B. Was There a Legal Impediment to Settlement?
C. Other Considerations
D. The Numbers
E. Conclusions
A. Applying Practice Note No. 18
[46] I agree with the
Respondent’s submissions on this issue. That is, I agree with the Respondent
that invoking Practice Note No. 18 as the centrepiece of an analysis of a motion
for enhanced costs is premature. We do not know if the proposed rule it relates
to will be promulgated as proposed. Accordingly, the basis of the Motion is
reduced to reliance of paragraph 147(3)(d) of the TCC Rules.
[47] However, before
taking the analysis in that direction, an observation is required in respect of
the Respondent’s position that for the proposed rule to apply, the offer needed
to be renewed after the announced effective date of the proposed new rule. At
common law an offer is generally extinguished once it is rejected. While I acknowledge then that
arguably the offer should have been extended again to avoid the possibility of this
result having an impact on the application of the new rule, I am troubled by
the broader implications of what might be seen as the Respondent’s implied reliance
on this common law principle.
[48] I do not intend, in
these Reasons, to expound on such concerns other than to say I do not regard this
common law principle as influencing a determination of costs under either
paragraph 147(3)(d) of the TCC Rules or the proposed rule. This would be
particularly true where the parties acknowledge that an offer has not been
withdrawn or expired. Otherwise, assessing
costs on a basis that gives weight to offers would be meaningless since in
every enhanced cost case where an offer is being assessed in light of a
particular judgment, that offer would have been rejected. To insist that it be
re-extended in this context would lead to a never-ending cycle and frustrate
the purpose of considering the offer in the first place. Further, a complete
analysis of the common law might lead one to conclude that the application of
the principle of rejection causing an offer to terminate might well depend on:
the issue to which the principle is sought to be applied; the circumstances of
each case; the understandings of the parties; or, whether the rejection is in
the nature of an enquiry for more information.
[49] That said, I return
to my conclusion that the basis of the Motion is reduced to reliance on
paragraph 147(3)(d) of the TCC Rules with recognition of this Court’s recent
leanings to substantial indemnity in circumstances described by the proposed rule. In this context, my references
to substantial indemnity and enhanced costs shall mean nothing more than a
reference to a lump sum or fixed cost award that is substantially higher than
tariff.
[50] This recognition
should not only underline this Court’s leanings, but it should also underline
the continued role that the exercise of discretion plays. Even the proposed rule,
if it comes into force as written, is subject to the wider discretion of the
Court. The proposed substantial indemnity provision is prefaced by “Unless
otherwise ordered by the Court”. As well, subsections 147(1) and (5) recognize
the broader discretionary powers of the Court in fixing costs.
[51] These elements of
discretion together with the general rule in section 9 that the Court can
dispense with any rule, lead to far too many possibilities as to how the
proposed rule will be applied to speculate how the jurisprudence on its
application will evolve once it comes into force. Consider the following
passage in Bell Canada at page 140 which might, for example, temper its
use:
The courts must also be careful not to become too
paternalistic with litigants or to unnecessarily discourage recourse to the
trial as a forum for the resolution of disputes. Concern is properly directed
to unreasonable conduct in the
course of litigation which leads to unnecessary or prolonged trials.
However, the judicial system is here to serve the public and no barriers to
access should be imposed by warnings as to cost consequences arising from the
court’s assessment of how litigants should conduct their business.
[52] This brief extract
speaks loudly, in my view. A substantial indemnity provision should not serve
to bar access to this Court. It cannot unreasonably punish a party who has
rejected a settlement offer in order to obtain judicial clarification of an
issue where that quest is not unreasonable and where requiring the other party
to participate in that exercise at its cost is not unreasonable in the
circumstances. On the other hand, tariffs under the TCC Rules are inordinately
low and beyond the ability of this Court to control other than by the exercise
of its discretion. As such, conduct in the course of litigation which leads to a
trial where there was a reasonable basis for settlement as evidenced by a
judgment will frequently justify costs approaching, if not equal to,
substantial indemnity (as defined in the proposed rule) where an equivalent or
better offer was made and rejected. This trend has clearly been set already. As
demonstrated in Barrington Lane, Langille
and Donato this Court will not hesitate to grant substantial cost awards in appropriate
settlement offer cases that go far beyond the guidance of other authorities
that mandate a requirement for reprehensible, scandalous or outrageous conduct
during litigation before costs on, or approaching, a solicitor and client basis
will be considered.
[53] In any event, my task
is to determine a cost award pursuant to paragraph 147(3)(d) of the TCC Rules
which balances these considerations and recognizes, to the extent justified, this
Court’s leanings to a higher cost award in circumstances described by the
proposed rule. Application of this rule however, unlike the proposed rule, does
not operate in a vacuum. It is only one factor that must be considered and balanced
in determining a cost award under subsection 147(3). Still, being the basis of
the Motion, it will serve as a convenient focal point in my analysis. That is,
my analysis will be largely structured around paragraph 147(3)(d) of the
TCC Rules and consideration of the settlement offer.
B. Was There a Legal
Impediment to Settlement?
[54] The question of the
reasonableness of rejecting a settlement offer starts with the question of
whether there is a legal impediment to accepting it.
[55] I do not agree with the
Respondent that there were legal impediments to the acceptance of the
settlement offer that prevented settlement over the period that it was
acknowledged to have been on the table.
[56] The so-called legal
impediments that the Crown relies on are:
a)
the
subject expenses could not be recognized until the Crown was satisfied who incurred
the expense on whose behalf and in what amounts; and
b) the
subject expenses could not be recognized until they could be attributed to
a business carried on by the Appellant.
a) Who
Incurred the Expense on Whose Behalf and in What Amounts?
[57] The exercise of becoming
satisfied as to who incurred expenses, on whose behalf and in what amounts is a
fact finding one. It is incumbent on the Crown, in considering a settlement
offer, to assess on a balance of probability what a judicial forum might on a
balance of probability conclude. The exercise is an ongoing one requiring an
open posture to resolving factual concerns.
[58] While these could be
all or nothing issues on an invoice by invoice basis, that is not necessarily
always the case. Considerable room might well exist in settling which invoices
in what amounts could, on a balance of probability, be found to have been
incurred by or on behalf of the claimant. There is nothing in the Federal Court
of Appeal decision in CIBC World Markets that suggests that the Crown is
not at liberty to accept factual resolves on the basis of probability which
should afford the Crown considerable leeway. As well, a concession might
reflect appropriate recognition of proportionality. Even the Crown might, in
some circumstances, properly consider the need to concede a fact that only has
a marginal chance of being proven to the satisfaction of a judge, where the
cost of such concession is small relative to the cost of having the question
litigated.
[59] If this were not
the case, the Crown could justify never settling anything. In other words, I
agree with the Appellant on this point. There was no legal impediment to
settling the issues of who incurred expenses, on whose behalf and in what
amounts.
[60] Further, that the
Crown ultimately conceded these issues demonstrates that there was ultimately
no legal impediment on these points. The question might then only relate to the
weight to be given in a cost award to delays in making such concessions.
[61] Simplistically, if
nothing changes from an evidentiary point of view from the time of the offer to
the time of acceptance, then prima facie there is no apparent reason not
to settle such issues earlier. In such case, some enhanced cost award might be
considered under paragraphs 147(g) or (h) of the TCC Rules
relating to delays and refusals to admit. However, claiming enhanced costs on
this basis puts the onus on the Appellant, who made the claim in this case, to identify
the point at which the evidence was sufficient to permit admission of the
requisite facts. The Respondent, in essence, argues that that point was not
reached until shortly before the day the hearing of the appeal commenced. I
agree with the Respondent on this point.
[62] On July 13, 2009 at the settlement conference, the
Respondent clearly rejected the Appellant’s settlement offer on the basis that
there remained a significant factual dispute regarding the extent to which the
Appellant incurred the consulting fees in respect of the reorganization. The
factual dispute issues as set out in the Respondent’s submissions were as
follows:
a)
in respect of $157,696.00 in
dispute in 1997:
(i)
$60,624.82 invoiced, was to an
entity other than PCS;
(ii)
$67,808.57 invoiced, referred to
“LLC Matters” without any specificity about the nature of the legal or
accounting services rendered;
(iii)
$4,262.00 was an internal
allocation done by PCS in respect to $49,194.15 invoiced for “Various Taxation
Matters”, and;
b)
in respect of $1,928,967.00 in
dispute in 1998:
(i)
$7,386.31 invoiced, was to a
entity other than PCS;
(ii)
$167,926.39 was unsupported by
invoices and was evidenced only by a summary of accounting entries;
(iii)
$905,505.43 invoiced, refers to
“LLC Matters” without any specificity about the nature of the legal or
accounting services rendered; and
(iv)
$51,494.06 was an internal
allocation done by PCS in respect to $248,135.22 invoiced for “Various Taxation
Matters”.
[63] The Respondent
asserts that the Appellant refused to provide detailed billing records claiming
privilege thus preventing the Crown from resolving these issues. However, post-settlement
conference correspondence confirms that the Respondent had agreed at the
settlement conference to work with the Appellant to resolve these issues. A
letter, dated October 8, 2009 from the Appellant’s counsel confirms that at a
meeting in September, 2009, the Respondent agreed to the approach to be taken,
namely by affidavit. The letter sets out in detail what the affidavit will
address including the quantum of invoices related to the reorganization that
were paid by the Appellant.
[64] However, the
affidavit was not actually signed and affirmed until August, 2012. That
affidavit submitted at that time was the required piece of evidence that the
Respondent needed to make the concession made even though it essentially
confirmed the numbers set out in the September 2009 letter and what the
Appellant had agreed to at examinations for discovery.
[65] Accordingly, I do not
find that the Respondent should be responsible for enhanced costs for a delay
in making the concession made. It is not unreasonable to require receipt of
this evidence in the form agreed upon prior to agreeing to the concession. Further,
the costs incurred by the Appellant to get the concession saved the Appellant
trial costs. It would not be reasonable to expect the Respondent to reimburse
the Appellant for the cost of achieving such saving.
[66] As well, it must be
recognized that unless a settlement of all issues appears possible, there is a
tendency to put off the final touches on issues that can be settled to a time closer
to the steps of the Court. That is what the Appellant did knowing that ECE
treatment was not acceptable to the Respondent and that a trial was inevitable.
Again, it would not be reasonable to expect the Respondent to reimburse the
Appellant for such delays.
[67] That leads me to the
second question.
b) Were
the Subject Expenses Incurred to Earn Income From a Business Carried on by the
Appellant?
[68] It must be recognized
that considerations such as consistency and transparency must weigh into the
Crown’s ability to accept an offer. Seeking judicial clarification of a
provision of the Act can be a bona fide reason to reject an
offer. However, not all such considerations should logically frustrate the
taxpayer’s right to an enhanced cost award if they do not constitute a legal
impediment to settlement.
[69] I do not accept in
this case that there was a legal impediment to acceptance of the offer. The Canada
Revenue Agency (“CRA”) could have accepted the line of cases referred to in the
Appellant’s settlement brief, namely: BJ Services Co. Canada v. R., 2004 DTC 2032 (T.C.C.) and International Colin Energy Corp. v. R., 2002
DTC 2185 (T.C.C.). Indeed,
contrary to the Respondent’s assertions, a reasonable legal basis for accepting
the settlement offer was put forward by the Appellant based on such line of
cases.
[70] This line of cases
would have permitted the CRA to allow that the business needs of the Appellant
where advanced by the subject expenditures and that for the purposes of either
paragraphs 18(1)(a) or (b), that was sufficient. Indeed, my
decision clearly found that applying the principles set out in those cases allowed
for the deductions sought even though the income derived from the business of
the Appellant was only indirectly enhanced by the expenditure. That is, the settlement offer
could have been accepted on a principled basis even though this line of cases clearly
expanded the traditional requirement of a more direct relationship between the
expenditure and the income earning process of a particular business carried on
by the taxpayer. Further, that my decision may have been less predictable in
seeming to apply that line of cases more readily to an ECE outlay does not
suggest that there was legal impediment to accepting the offer in this case.
The settlement offer was capable of acceptance on the basis of an existing line
of authorities.
[71] However, this finding
does not mean that the Respondent should have accepted the offer. It was a
principled approach for the Respondent to refuse the settlement offer given the
apparent need for further clarification of the law in light of the BJ
Services line of cases.
[72] That takes me to my
previous comment. The cost of litigation cannot unreasonably punish a taxpayer
whose settlement offer has been rejected to enable the Crown to obtain judicial
clarification of an issue even where neither that quest, nor requiring the
taxpayer to participate in it, is unreasonable in the circumstances. That is,
even in such circumstances, the Crown’s refusal to accept a settlement offer may
still justify giving considerable weight to the offer and the outcome of the
appeal in awarding costs. Taxpayers should not necessarily bear the cost of the
CRA working out its required assessing practises. To the CRA there is a “test
case” aspect to wanting to proceed to litigation. However, this appeal was as
much, if not more, a case of the Appellant knowingly and aggressively pushing
for an assessing position beyond the predictable response of the CRA. This is
less a case of the CRA paying the cost of a guinea pig as it is of a lion
paying the cost of a better meal.
[73] While the foregoing “test
case” analogy strikes me as an eminently reasonable way to approach fixing an
enhanced cost award, for example by way of application of paragraph 147(3)(c)
which brings into consideration the importance of the issues, it is a view that
would appear to fly in the face of the authorities cited and relied on by the
Respondent.
[74] The Respondent,
perhaps anticipating my awarding costs on the basis of the offer being rejected
in order to test the boundaries of the BJ Services line of cases, cited
cases such as Brown v. R., 2002 DTC 1925 where this Court suggested that
notwithstanding that an appeal may help resolve an assessing issue or refine an
assessing practise of the CRA, that is not a reason to require the Minister to
absorb an appellant’s costs as if it were a test case. While the analogy that I
have drawn is in contradiction to the principle enunciated in Brown, I
am not persuaded that the Brown line of cases should always govern in
assessing the weight to be given to a rejected settlement offer that is as good
or better than the judgment obtained.
[75] In Brown, the Court discussed increased cost awards for test
cases and relied on the definition of a test case set out in Vriend v.
Alberta, (1996), 141 D.L.R. (4th) 44 (Alta C.A.). At paragraph
29 of Vriend, a test case was said to be a case where the parties
seek primarily to settle a point of law and where the impact of that rule on
the parties is of secondary importance to the settlement of the rule
itself. That definition, contemplating mutuality of emphasis on settling a
point of law, precludes consideration of an award of enhanced costs based on “test
case” analogy where the CRA refused a settlement offer in order that it
can settle a point of law. While I do not find, in this case, that the CRA
refused the settlement offer primarily to settle or clarify a point of
law, I note that there may be a fine line in some cases between recognizing what
I have by analogy called a test case, and, giving weight to an offer under
paragraph 147(3)(d) as a factor favouring an enhanced cost award to a
successful taxpayer where the rejection of that offer was based on the
respondent’s principled need to clarify a point of law. The same reasoning can, in my view, be applied to the
finding in Canderel Ltd. v. R., 94 DTC 1426 (T.C.C.) that a test case
does not per se entitle a litigant who succeeds in it to an increased
cost award. That is, giving considerable weight to a rejected offer as a factor
favouring an enhanced cost award to an appellant taxpayer under paragraph
147(3)(d) where the rejection is based on the respondent’s need for
settling or clarifying a point of law, is not reliance on the appeal being a
test case per se.
[76] Regardless, given my
finding in this case that the Appellant knowingly and aggressively pursued an
assessing position beyond the predictable response of the CRA and my conclusion
that the CRA cannot be said to have
refused the settlement offer primarily to settle or clarify a point of
law, I have
not given any weight to this “test case” analogy in my determination of an
enhanced cost award.
[77] Still, some enhanced
costs are necessary here. A bona fide offer was made and judgment
coincided with the offer. There was no legal impediment to accepting it. This
was an important issue to both parties. It had its subtle difficulties and
complexities that required a high degree of expertise and therefore a higher cost
to put the issue before the Court.
[78] The award, however,
will not be on the indemnity basis sought by the Appellant. By not applying the
proposed rule in subsection 147(3.1), I am required to consider all of the
factors set out in subsection 147(3) of the current TCC Rules. Looking at those
factors not already dealt with, I note that the volume of work done by
Appellant’s counsel, although significant, was not such that the Crown might
have reasonably expected the type of cost award requested by the Appellant. Further,
the Respondent’s cooperative approach assisted in keeping the duration of the
proceedings shorter than they might otherwise have been and certainly there can
be no finding that the Respondent, in any way, acted improperly. In such
circumstances, but for the operation of the new rule which I am not applying, anything
approaching costs on a solicitor and client basis would be unduly severe.
Indeed, the Respondent cites cases like Lyons v. R., 1995 CarswellNat
2123 (T.C.C.) in support of the position that in such circumstances no enhanced
costs should be awarded at all.
[79] While more recent
cases, as referred to earlier, suggest a different trend, I am satisfied that an
award of costs in this case must be tempered by all the factors set out in
subsection 147(3) of the TCC Rules. That is, even considering that I have already
said that paragraph 147(3)(d) should be applied with recognition of this
Court’s emphasis on assessing substantial costs in cases where the new rule
would apply if it were in place and in force, I am not inclined to go as far
as some other cases have gone.
[80] That leaves me to a
few last considerations.
C. Other
Considerations
[81] The Respondent has
raised the question of proportionality. A large sum was spent to get an income
deduction. The value of an income deduction relative to the legal costs
incurred was material. However, the value, relatively, of the ECE allowance afforded
by my decision, in and by itself, was not. That the Crown required the
Appellant to incur increased legal fees to get what it was willing to take
earlier, does not address the fact that the increased fees were paid for the
considerable upside of being forced to litigate by the refusal of the Crown to
accept the settlement offer – an upside that it lost.
[82] On the other hand,
the amount at issue is the same even though the value of the recognition of the
subject expenses is diminished by ECE treatment. More importantly, that the
value was less than sought after by the Appellant does not change the fact that
it was the Crown’s refusal to accept even the lower valued deduction that
forced the litigation.
[83] That said, overall, I
do not find the Crown’s argument on this point to be totally persuasive. That
is, while the relative value of the Appellant’s success might be seen as
modest, that the Respondent forced the litigation still favours some measure of
enhanced costs to the Appellant.
D. The Numbers
[84] I asked the Appellant
for billing records and received unchallenged representations of such records
that reflect legal fees since the offer was rejected of $293,072.00.
[85] As far as I can discern, aside from what I noted above
regarding the quantum issues, nothing much happened between the settlement
conference and August 27, 2010 when the Respondent served on the Appellant a
Request to Admit Facts and Documents. That was replied to by the Appellant on
September 13, 2010 and on September 24, 2010 the Partial Agreed Statement of
Facts filed with the Court at the hearing was completed.
[86] Having already concluded that the resolution of the
quantum issues do not warrant an enhanced cost award, I am left to consider a
solicitor and client fee calculated from mid-September, 2010 to the end of the
hearing of the appeal. That amount is in excess of $124,000.00.
[87] While I believed the
billing records that revealed this number would be of assistance, I am now of
the view that the determination of a lump sum cost award does not start and end
by calculating hours times an hourly rate. As found by the Ontario Court of
Appeal in Boucher v. Public Accountants Council for the Province of Ontario the objective is to fix an
amount that is fair and reasonable for the unsuccessful party to pay in the
circumstances. In my view, a time billing for the period in question of
$125,000.00 does not reflect the efficiencies that might have been expected and
may even reflect some duplication of work done prior to mid-September, 2000
including the preparation of the offer and the settlement conference brief. Indeed,
the case presented to support the offer at the settlement conference was
essentially the case presented at the appeal.
[88] That is, the amount that is fair and reasonable for the
Respondent to pay in this case, in my view, is considerably less than the solicitor
and client costs as reflected by my calculation of fees incurred from mid-September
to the end of the hearing of the appeal.
E. Conclusions
[89] My conclusion then is to award fixed costs pursuant to
subsection 147(3) of the TCC Rules that reflect the views expressed herein.
[90] All things considered
including the Crown having agreed to facts that limited the hearing of the
appeal to the examination of one witness, albeit somewhat late in the case of
an expert witness, the Appellant having made a reasonable settlement offer which
was rejected, the importance and potential benefits to both parties to securing
a successful outcome by proceeding to litigation, I fix representation costs at
$40,000.00, including costs of the Motion. Such fixed cost award is in addition
to costs payable as per the applicable tariff up to September 13, 2010. Disbursements
shall be taxed in the normal course.
Signed at Ottawa, Canada this 29th day of June 2012.
"J.E. Hershfield"
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