Citation: 2012 TCC 273
Date: 20120723
Docket: 2007-1806(IT)G
BETWEEN:
VELCRO CANADA INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
ORDER AND REASONS FOR ORDER
Rossiter A.C.J.
[1] After rendering
Judgment in this matter, I invited both parties to speak to or make written
submissions on costs, and both parties have done so.
Positions of the Parties:
[2] (a) Appellant’s
position:
The Appellant submits that an
elevated costs award is appropriate in the circumstances of the case, mainly
due to the following:
·
the
Appellant was entirely successful in the appeal;
·
the
amount at issue was in excess of $9 million;
·
the
issues raised in the appeal were of national and international importance; and
·
the
novelty of the issues dictated that the Appellant spend a substantial amount of
time and resources in preparing for and presenting the appeal.
The Appellant is of the view that
the Court should award the Appellant lump sum costs in excess of the Tariff and
in doing so provide particulars with respect to their solicitor-client account
including disbursements.
(b) Respondent’s position:
The Respondent takes the position
that the Appellant’s costs ought to be assessed by the taxing officer in
accordance with Tariff B of Schedule II of the Tax Court of Canada Rules
(General Procedure) (the “Rules”). The Respondent is of the view
that the issue was already determined in Prévost Car Inc. v. Canada,
2008 TCC 231, affirmed in 2009 FCA 57 (“Prévost Car Inc.”), and that the
Appellant did not substantiate by way of evidence the work and effort put into
the appeal. The Respondent submits that exceptional circumstances do not exist
that would justify the Court exercising its discretion to award costs beyond
the Tariff, and relies upon the decision of former Chief Justice Bowman in Continental
Bank of Canada et al v. R., [1994] T.C.J. No. 863 (“Continental Bank”)
.
Analysis:
[3] In recent years,
costs have played a more significant role in tax litigation. Tax cases are
becoming more complex, taking longer to prepare with detailed case management
and larger amounts in dispute – all contributing to what appears to be more
resources being used to litigate appeals. One issue that arises constantly is
the application of the Tariff versus awards in excess of the Tariff, lump sum
awards, the circumstances where the Tariff is not applied, and the analytical
process in awarding and fixing costs.
[4] There seems to be
some confusion with respect to the Respondent’s understanding of the authority
of the Tax Court of Canada to award costs under the Rules. The
Respondent appears to be of the view that former Chief Justice Bowman’s
comments in Continental Bank were meant to express that the Court is
unable to award costs above Tariff barring exceptional circumstances such as
misconduct or undue delay. In Continental
Bank, the Appellant sought an Order for costs on a party-and-party scale,
as well as for costs in excess of the amounts in Tariff B of Schedule II for
services and disbursements reasonably incurred. In evaluating the Appellant’s
request for amounts above Tariff, former Chief Justice Bowman considered the
role of the Tariff and the amounts listed there, stating in part:
[9] 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.
[10] In the normal course the tariff is to be
respected unless exceptional circumstances dictate a departure from it. Such circumstances
could be misconduct by one of the parties, undue delay, inappropriate
prolongation of the proceedings, unnecessary procedural wrangling, to mention
only a few. None of these elements exists here.
[5] This statement was
referred to by Justice Hogan in General Electric Capital Canada Inc. v.
Canada, 2010 TCC 490 (“General Electric”). Justice Hogan also
referred to the fact that lump sum costs were awarded by Associate Chief
Justice Bowman, as he then was, in Lau v. R., 2003 TCC 74 which was affirmed
by the Federal Court of Appeal at 2004 FCA 10. He noted that Respondent’s
counsel in General Electric was arguing strenuously that he should
adhere to the principle that the Court should not depart from the Tariff absent
special circumstances justifying solicitor-client costs relating to the conduct
of the parties during the litigation. Justice Hogan again quoted Bowman, J., as
he then was, in McGorman v. Canada, 99 D.T.C. 591 (T.C.C.) at paras.
13-14 (“McGorman”) as follows:
[23] Counsel for
the Respondent argued strenuously that I should adhere to the principle
enunciated previously in some of the judgments of my current and former
colleagues, namely that this Court should respect the principle that there
should be no departure from the tariff, absent special circumstances justifying
solicitor-client costs relating to the conduct of the parties or their counsel
during the litigation.[9] As stated by Bowman J., as he then was, in McGorman
et al. v. The Queen, 99 DTC 591 (TCC):
13 I shall
endeavour to set out briefly my views on how the costs should be awarded in
these cases. Obviously, the court has a fairly broad discretion with respect to
costs, but that discretion must be exercised on proper principles and not
capriciously. For example, the mere fact that a case is novel, unique, complex
or difficult, or that it involves a great deal of money is not a reason for
departing from the tariff, which, generally speaking, should be respected in
the absence of exceptional circumstances. I shall not repeat what I said about
awarding solicitor and client costs in Continental Bank of Canada et al. v.
The Queen, 94 DTC 1858 at page 1874.
14 Do exceptional
circumstances exist here that would justify an award of solicitor and client costs?
It is true the cases were important and difficult and they raised a wide
variety of legal and ecclesiastical questions requiring the assistance of
experts. This in itself does not warrant solicitor and client costs
[6] I note, as Justice
Hogan did, that former Chief Justice Bowman in McGorman appears to have
been dealing with solicitor-client costs, as was the Supreme Court of Canada in
Young v. Young, [1993] 4 S.C.R. 3, where Justice McLachlin (as she then
was) held that there must be evidence of reprehensible, scandalous, or
outrageous conduct before an award of costs could be made on a solicitor-client
basis. If former Chief Justice Bowman was suggesting that the Tax Court of
Canada can only deviate from the Tariff in exceptional circumstances, then I
would beg to differ. The exceptional circumstances I believe he referred to in Continental
Bank include circumstances that might justify solicitor-client costs which
is most certainly outside the Tariff. To my mind, it does not take exceptional
circumstances to justify a deviation from the Tariff – far from it. The
authority of the Tax Court of Canada is quite clear.
[7] The Rules are
made by the Tax Court of Canada Rules Committee which is statutory in nature
pursuant to section 22 of the Tax Court of Canada Act, R.S.C. 1985, c.
T-2. The Rules are subject to the approval of the Governor in Council.
[8] The Tariff annexed
to the Rules is a reference point only should the Court wish to
rely upon it. It is interesting to note that the first of two references to the
Tariff in Rule 147 is subsection 147(4) which in and of itself gives extremely
broad authority to the Court in the awarding of costs.
[9] Notwithstanding
former Chief Justice Bowman’s comments in Continental Bank, supra at
paragraph [9], it is my view that:
1.
The
Tariff was never intended to compensate a litigant fully for legal expenses
incurred in an appeal;
2.
The
Tariff was also never intended to be so paltry as to be insignificant and play
a trivial role for litigants in dealing with their litigation. The Court’s
discretionary power is always available to fix amounts as appropriate;
3.
Costs
should be awarded by the Court in its sole and absolute discretion after considering
the factors of subsection 147(3);
4.
The
discretion of the Court must be exercised on a principled basis;
5.
The
factors in Rule 147(3) are the key considerations in the Court’s determination of
costs awards as well as the quantum and in determining if the Court should move
away from the Tariff;
6.
In
the normal course the Court should apply the factors of Rule 147(3) on a
principled basis, with submissions from the parties as to costs, and only
reference the Tariff at its discretion; and
7.
The
manner that the Tariff is referenced in Rule 147 indicates the insignificance
of the Tariff in costs considerations.
[10] A close examination
of the structure and wording of Rule 147 reveals why the Tariff is an item for
referral only if the Court so chooses. It would appear that the Rules Committee
knew exactly what it was doing in structuring the Rules the way it did.
[11] Rule 147(1) provides
the following:
The Court may determine
the amount of costs of all parties involved in any proceeding, the allocation
of the costs and the persons required to pay them.
The discretion in 147(1) is
extremely broad – it gives the Court total discretion in terms of (1) the
amount of costs; (2) the allocation of costs; and (3) who must pay them.
[12] Rule 147(3) provides
the factors to be considered in exercising the Court’s discretionary power.
After enumerating a list of factors, it specifies that the Court may consider
“any other matter relevant to the question of costs”, thereby providing the
Court with even broader discretion to consider other factors it thinks relevant
on a case by case basis. Such other factors that may be relevant could include,
but are not limited to:
1.
the
actual costs incurred by a litigant and their breakdown including the
experience of counsel, rates charged, and time spent on the appeal;
2.
the
amount of costs an unsuccessful party could reasonably expect to pay in
relation to the proceeding for which costs are being fixed; and
3.
whether
the expense incurred for an expert witness to give evidence was justified.
[13] The factors to be
considered by the Court in exercising its discretionary power to award costs
are extremely broad, they are specific to every appeal before the Court and as
noted, the Court may consider any other matter relevant to the question of
costs.
[14] There is no mention
of the Tariff until Rule 147(4) which provides:
The Court may fix all or part of the costs with or
without reference to Schedule II, Tariff B and, further, it may award a lump
sum in lieu of or in addition to any taxed costs.
[15] Rule 147(5) goes even
further saying:
Notwithstanding any other provision in these rules,
the Court has the discretionary power,
(a)
to award or refuse
costs in respect of a particular issue or part of a proceeding,
(b)
to award a percentage
of taxed costs or award taxed costs up to and for a particular stage of a
proceeding, or
(c)
to award all or part
of the costs on a solicitor and client basis.
Note that there is no reference to the
Tariff in Rule 147(5).
[16] Under the Rules,
the Tax Court of Canada does not even have to make any reference to Schedule
II, Tariff B in awarding costs. The Court may fix all or part of
the costs, with or without reference to Schedule II of Tariff B
and it can award a lump sum in lieu of or in addition to taxed costs. The Rules
do not state or even suggest that the Court follow or make reference to the
Tariff. If the Tax Court of Canada Rules Committee had felt the Tariff was
so significant, the Rules could easily have said that the Tariff shall
be applied in all circumstances unless the Court is of the view otherwise. The
Rules Committee did not do this, not even close. In fact, it is hard to imagine
how the Tax Court of Canada’s discretionary power could be broader for awarding
costs given the wording in Rules 147(1), (3), (4) and (5). These particular
provisions of Rule 147 really make reference to Schedule II, Tariff B a totally
discretionary matter.
[17] It is my view that in
every case the Judge should consider costs in light of the factors in Rule
147(3) and only after he or she considers those factors on a principled basis
should the Court look to Tariff B of Schedule II if the Court chooses to do so.
The Rules Committee in their wisdom made brief mention of the Tariff but only
after giving the Tax Court of Canada very broad and significant discretion in
all matters on costs. As stated by my colleague Justice Hogan in General
Electric:
[26] … I
believe that the Rules Committee was well aware of the fact that there are
numerous factors which can warrant a move away from the Tariff towards a
different basis for an award of party and party costs, including lump sum
awards. Subsection 147(3) of the Rules confirms this by listing specific
factors and adding the catch-all paragraph (j), which refers to
"any other matter relevant to the question of costs". If misconduct
or malfeasance was the only case in which the Court could move away from the
Tariff, subsection 147(3) would be redundant. Words found in legislation are
not generally considered redundant. As stated by the Supreme Court in Hills
v. Canada (AG), [1988] 1 S.C.R. 513:
[106] ... In reading a statute it
must be "assumed that each term, each sentence and each paragraph have
been deliberately drafted with a specific result in mind. Parliament chooses
its words carefully: it does not speak gratuitously" (P.-A. Côté, The
Interpretation of Legislation in Canada, (1984), at p. 210).10
[27] It
has been repeatedly affirmed that McLachlin J.'s comment requiring misconduct
or malfeasance in Young v. Young, above, was specifically and only made
in reference to the availability of solicitor-client costs. It is true that
"[t]he general rule is that a successful litigant is entitled to party and
party costs," in accordance with the Tariff.11 It is also true
that a measure of reprehensibility is required for either party to be ordered
to pay costs to the other party on a solicitor-client basis. The two rules must
not be conflated, as to do so would remove all middle ground.
[28] The Interpretation
Act applies to the ITA and to this Court's Rules.12 Section 12 of the Interpretation
Act provides that every enactment "is deemed remedial, and shall be
given such fair, large and liberal construction and interpretation as best
ensures the attainment of its objects". It is reasonable to conclude that
the purpose of section 147 of the Rules was to give a judge the
discretion to move away from the Tariff in order to provide fair and reasonable
relief in the circumstances -- with or without reference to Schedule II, Tariff
B. A restrictive interpretation of that section that would require a taxpayer
to meet the same burden in order to move from the Tariff to any level of partial
indemnity or to a lump sum award in lieu of or in addition to any costs as it
would have to meet to obtain solicitor-client costs would defeat at least one
of the purposes of the section.
[18] A comparison of the
discretionary power in Rule 147 of the Rules and Rule 400(4) of the Federal
Court Rules, SOR/98-106 (“Federal Court Rules”) provide an example
of how a Rules Committee may take a different approach.
[19] The Tax Court of
Canada’s Rule 147(4) says:
The Court may fix all or part of the costs with
or without reference to Schedule II, Tariff B and, further, it may award a
lump sum in lieu of or in addition to any taxed costs.
[emphasis added]
The Federal Court’s Rule 400(4)
says:
The Court may fix all or part of any costs by
reference to Tariff B and may award a lump sum in lieu of, or in addition
to, any assessed costs.
[emphasis added]
There is a significant difference
in my view in the wording and the emphasis put on the Tariff in the Federal
Court Rules compared to the Tax Court of Canada’s Rule 147(4). Despite this
distinction, the Federal Court of Appeal, when reviewing the Federal Court
Rules in Consorzio Del
Prosciutto Di Parma v. Maple Leaf Meats Inc., 2002 FCA 417, concluded that those Rules
nonetheless allow the Court discretion in awarding costs. As stated by the
Federal Court of Appeal:
[8] An
award of party-party costs is not an exercise in exact science. It is only an
estimate of the amount the Court considers appropriate as a contribution
towards the successful party's solicitor-client costs (or, in unusual
circumstances, the unsuccessful party's solicitor-client costs). Under rule
407, where the parties do not seek increased costs, costs will be assessed in
accordance with Column III of the table to Tariff B. Even where increased costs
are sought, the Court, in its discretion, may find that costs according to
Column III provide appropriate party-party compensation.
[9] However,
the objective is to award an appropriate contribution towards solicitor-client
costs, not rigid adherence to Column III of the table to Tariff B which is,
itself, arbitrary. Rule 400(1) makes it clear that the first principle in the
adjudication of costs is that the Court has "full discretionary
power" as to the amount of costs. In exercising its discretion, the Court
may fix the costs by reference to Tariff B or may depart from it. Column III of
Tariff B is a default provision. It is only when the Court does not make a
specific order otherwise that costs will be assessed in accordance with Column
III of Tariff B.
[10] The
Court, therefore, does have discretion to depart from the Tariff, especially
where it considers an award of costs according to the Tariff to be
unsatisfactory. Further, the amount of solicitor-client costs, while not determinative
of an appropriate party-party contribution, may be taken into account when the
Court considers it appropriate to do so. Discretion should be prudently
exercised. However, it must be borne in mind that the award of costs is a
matter of judgment as to what is appropriate and not an accounting exercise.
[20] Reference may also be
made to Ontario’s Rules of Civil Procedure, R.R.O. 1990, Reg. 194
(“Ontario Rules”), in particular Rule 57.01 and the Tariffs. Rule
57.01(3) states:
Fixing Costs: Tariffs
(3) When the court awards costs, it shall fix
them in accordance with subrule (1) and the Tariffs.
[emphasis added]
The Tax Court of Canada Rules
have no similar provision such as Rule 57.01(3) of the Ontario Rules –
nothing even remotely suggesting the Court shall fix costs according to the
Tariff.
[21] Although Rule 57.01(3) of the Ontario Rules
seems to provide the Court with little discretion, it is interesting to
note that recent amendments have actually increased the Court’s discretionary
power in awarding costs. Previously, the Ontario Rules included a
“costs grid” in Tariff A (Part I). The Court needed to follow the costs grid,
and their only discretion available was to refer exceptional cases for
assessment as described in Rule 57.01(3.1). On July 1, 2005, the costs grid was repealed. While the Tariffs continue to address amounts for disbursements
(Tariff A, Part II) and lawyer fees for accounts passed without a hearing
(Tariff C), they no longer include set rates for lawyer fees. The Court now
relies on s. 131 of the Courts of Justice Act, R.S.O. 1990, c. C.43 and
the discretionary factors listed in Rule 57.01(1). Parties seeking costs must
bring a “costs outline” (using Form 57B) to the hearing. The Costs Subcommittee
of the Civil Rules Committee also published a list of the maximum rates per
hour that the Court will normally consider for partial indemnity costs. [See Professor
Garry D. Watson, Q.C. and Michael McGowan, Ontario Civil Practice 2012
(Toronto: Carswell, 2011) at 1200–1203; James J. Carthy, W.A. Derry Millar,
& Jeffrey G. Cowan, Ontario Annual Practice (Aurora, Ontario: Thomson
Reuters, 2011) at 1197-1198.]
[22] I will now turn to
the specific appeal at hand.
[23] I consider this an
appeal in which there should be a lump sum award without reference to Schedule
II, Tariff B.
[24] As reviewed above,
this Court has very broad discretion in awarding costs. I make reference to
Rule 147(3).
1. The result of the
proceeding: The Appellant was wholly successful in the proceeding. The position
taken by the Respondent was entirely rejected.
2. The amounts in issue:
The amounts in issue are always of significance to the parties to the
litigation. The amounts in issue in this particular case were very significant,
in excess of $9,000,000 made up of non-resident tax of approximately
$8,600,000, plus penalties of approximately $860,000 with the amount of
non-resident tax at issue per year ranging from approximately $230,000 to
$1,600,000. Even though the Court was considering appeals from 1995 to 2004
inclusive, the amounts in issue are nonetheless very significant.
3. The importance of the
issues: The issue before the Court was the application of the “beneficial
ownership” test and who had beneficial ownership of the royalty payments in
question. Although the Respondent notes that this is not the first time that
the “beneficial ownership” test was considered and applied in Canada, it was the first time that it was applied in Canada in terms of royalties. Prévost Car
Inc., decided by Chief Justice Rip in 2008, and affirmed by the Federal
Court of Appeal in 2009, is certainly the leading jurisprudence on the
“beneficial ownership” test, but the litigation here was somewhat different in
nature as it concerned royalty payments as opposed to the dividend payments
that were the focus in Prévost Car. There are significant differences in
the manner that dividends versus
royalties are determined. Dividend payments are determined by a decision from
within the corporation by the board of directors while obligations relating to
royalties arise externally through contracts. The amount of interest in this
case, both nationally and internationally, as indicated by subsequent
commentaries in relation to the decision of the Court and the panels that
discussed the case both nationally and internationally since the decision has
been rendered, would certainly indicate that this case was of some importance.
The issue before the Court was important because it focussed on the “beneficial
ownership” test and the application of that test in an area that had not been
dealt with by the Court previously. Also of note is that this case was the
first to come before the Tax Court of Canada on this issue since the Prévost
Car Inc. decision in the Federal Court of Appeal.
4. Any offer of settlement
made in writing: The Court file does not indicate any offer of settlement made
in writing by either party filed with the Court.
5. The volume of work: Any
case coming before the Tax Court of Canada requires a certain amount of work
and preparation but when you are dealing with a case with a significant amount
at issue as well as the issue being somewhat novel and important, it can
require that much more work. I saw the effort put into this case by the
presentation in Court and the focussed nature of the parties; the effort was
considerable.
6. The complexity of the
issues: The issue itself was relatively straightforward but the facts
surrounding the issues were somewhat complex because of the variety of
agreements which related to the flow of royalties from and between parties to
an agreement, including license agreements, assignment agreements and letters
which relate to same, all of which contained certain provisions that affected
or could have affected the interpretation of the agreements and the determination
of who in fact was the beneficial owner of the royalties in question.
7. The conduct of a party;
the denial or refusal of any party to deny or admit anything which they should
have admitted; and whether any stage of the proceedings was improper, vexatious
or unnecessary, or taken through neglect, mistake or excessive caution:
I did not find any
conduct by either party to attempt to unnecessarily lengthen the duration of
the proceeding, nor did I find that there was any refusal or neglect by any party
to admit anything that should have been admitted; nor did I find that that
there were improper, vexatious or unnecessary pleadings taken through
negligence or mistake or excessive caution. I found that the appeal itself was
very well pleaded and both counsel were most impressive in their presentations
before the Court.
[25] The Respondent
suggests that there is no evidence before the Court with respect to the issue
of costs, but failed to note that submissions are made by counsel for the
Appellant who is an officer of the Court. Any presentation of fact by an
officer of the Court does not have to be under oath because the presentation is
considered to be under oath as it is made by an officer of the court. I found
this submission a technical argument for the Respondent to raise, certainly not
in line with the significance of the appeal.
[26] I have considered all
of the factors which I felt were relevant to the issue of costs in this
particular case under Rule 147(3). Of particular importance in awarding costs
in this case, to my mind, is: (a) the success or failure of the litigant in the
litigation: the Appellant here was totally successful in the litigation; (b)
the Appellant made an excellent focussed presentation at trial; (c) the amount at
issue was quite significant in scale; (d) the issue was of importance on a
national and international scale; and (e) the issue was novel in nature never
having been dealt with by the Tax Court of Canada. These factors play a
significant role in the awarding of costs in this case.
[27] Tax litigation is a
complex and highly specialized area. There are many cases that come before the
Court that regardless of size can be complex with issues of significance. The
Respondent has really taken the position
that unless the appeal requires that solicitor-clients costs should be awarded,
the Court must resort to the Tariff. This view is erroneous and is contrary to
Rule 147 as written by the Tax Court of Canada Rules Committee. I again refer to
the comments of my colleague Justice Hogan, hereof, as cited above regarding the
application of Rule 147 and in particular Rule 147(3). I also again refer to my
analysis of the construction of Rule 147 and the obvious and clear intention of
the drafters as to the discretionary role of the Tariff in costs awards.
[28] Costs should reflect
the efforts within reason of a litigant during the litigation. Accordingly, the
complexity or the volume of the litigation or the amount at issue will and do
play a role in the effort put into litigation and as such, the costs awarded
must be something which reflects the realities of tax litigation in the context
of each case.
[29] Considering all the
factors I have referred to under Rule 147(3) and the wide discretion that
the Court has in awarding costs, I make an award of $60,000 plus disbursements in
favour of the Appellant as noted in the Appellant’s Bill of Costs plus all
applicable taxes. I readily recognize that the $60,000 lump sum award is
nowhere near the legal fees incurred by the Appellant through the course of the
appeal, nor does it reflect the amount presented under the Tariff. As noted by many jurists, costs are not intended to
compensate litigants for their litigation costs. This lump sum award is
significantly less than the actual litigation costs incurred by the Appellant.
The fair disposition of this matter, partially compensating the Appellant for
having to come to Court and justify their position and be as successful as they
were, is the lump sum award of $60,000. This lump sum award also recognizes the
significant effort put into the litigation by the Appellant and their focused
presentation at the appeal hearing on this novel issue. This lump sum award is,
in my view, a fair and reasonable reflection of what a costs award should be
given the reasons that I enumerated above.
Signed at Ottawa, Canada, this 23rd day of July, 2012.
“E.P. Rossiter”
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