Date:20020422
Docket:97-3264-IT-G
BETWEEN:
PETER M. BROWN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor
Costs
[1]
At the conclusion of my reasons for judgment in the appeals of
Peter M. Brown from income tax assessments for the
1993, 1994, 1995 and 1996 taxation years, dated November 15,
2001 and judgment, dated March 13, 2002, I directed counsel
for the litigants to make submissions with respect to costs.
Counsel have forwarded their written submissions.
[2]
The main issue in these appeals was whether the appellant is
entitled to deduct his share of purported business losses from a
partnership as well as interest expense on money borrowed to
acquire the partnership interest. To a large extent the business
loss was the result of the partnership claiming capital cost
allowance on a Class 12 property, computer software. At least
eight matters had to be considered before determining the main
issue in these appeals: a) whether the partnership acquired
computer programs and, if so, b) were the assets acquired for the
purpose of earning income from a business; c) did the partnership
carry on business with a reasonable expectation of profit; d) did
the partnership and the vendor of the computer programs deal at
arm's length and, if not, e) what was the fair market value
of the computer programs; f) whether what I referred to in my
reasons as the Acquisition Note was a contingent liability; g)
was the appellant deemed to be a limited partner and, if so, what
was his "at-risk amount" (para. 96(2.4)(b)
of the Income Tax Act); and h) whether the computer
programs were "available for use" at the end of 1993
(s.s. 13(25) and (27) of the Act).[1]
[3]
These appeals were heard for a total of 16 days over the course
of a year, and in four cities: Vancouver, Winnipeg, Toronto and
Ottawa.
[4]
Each party is of the view it was the successful party in the
appeals.
[5]
The relevant portions of section 147 of the Tax Court of
Canada Rules (General Procedure) ("Rules")
relating to the award of costs provide as follows:
(1) Subject to the provisions of the
Act, the Court shall have full discretionary power over payment
of the costs of all parties involved in any proceeding, the
amount and allocation of those costs and determining the persons
by whom they are to be paid.
(2) Costs may be awarded to or against
the Crown.
(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,
. . . . .
(j) any other matter relevant to
the question of costs.
. . . . .
(5) 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, . . .
. . . . .
[6]
The appellant was successful on issues a), b), c), and h). The
respondent was successful on issues d), e), f) and g). There is
no doubt in my mind that for practical purposes the respondent
was the successful party. The issues in which the respondent was
successful trumped those issues in which the appellant was
successful.
[7]
The length of the trial was approximately evenly divided between
non-expert testimony and expert testimony. The non-expert
evidence included, among other matters, whether the partnership
carried on a business, and, if so, whether it was carried on with
a reasonable expectation of profit ("REOP"), whether
the parties were at arm's length and whether certain debt was
contingent or not. A substantial portion of the non-expert
evidence related to the REOP. The expert evidence related to the
valuation of the computer programs as at the end of 1993.
[8]
Appellant's counsel, in his submissions as to costs, states
that his client succeeded on all pertinent issues except for
valuation and that success on valuation was divided. The issues
of contingent liability and "at risk" amount became
moot once the Court determined value. Counsel suggests,
therefore, that the parties bear their own costs with regard to
experts' fees and expenses.
[9]
In her submissions, respondent's counsel advises that the
respondent made a written settlement offer on March 25, 1999 on
the basis that the cost of the computer programs was US$3.3
million, or $4,389,000 in Canadian funds. This amount, counsel
writes, "essentially represented the 40% cash portion for
the purchase of the software". This offer of settlement was
made before the preparation and filing of expert reports with the
Court. Thus, in counsel's view, the need for a trial and
"the tremendous expense of expert witnesses would have been
obviated".
[10] The
appellant rejected the respondent's offer to settle,
appellant's counsel writes, because "there was no
mention of any deduction for the interest paid on the Promissory
Note and, although the suggested fair market value of the
software was marginally higher than that found by the Court, by
leaving the income from the partnership in the appellant's
income and denying the interest expense, the result of this offer
would have been slightly worse than the result decided by this
Court".
[11] The
appellant rejected the respondent's offer to settle by June
11, 1999, after the exchange of experts' reports.
[12] The
appellant also made an offer of settlement on January 8, 2000:
"that if the Crown permitted a full deduction as claimed in
the 1993 and 1994 taxation years, the appellant would include at
capital gains rates (then 75%) the sum of US$8,000 per unit in
two phases in 2001 and 2003. This result, when coupled with the
continued devaluation of the Canadian dollar against the U.S.
dollar ... would have resulted in an income inclusion for
the Appellant in the 2000 taxation year of more than initially
claimed in respect of the promissory note". The differences
between the two proposals, according to appellant's counsel,
is that interest on the outstanding taxes due from 1993 and 1994,
which would be payable under the respondent's settlement
offer, would have been avoided under the appellant's
offer". Respondent counsel states, among other things, that
if the appellant's offer had been accepted, the appellant
would have an eight year tax deferral rather than a ten year tax
deferral on a portion of the amount involved, "hardly a
concession". The respondent rejected the offer to
settle.
[13] By
January 8, 2000 I had heard most of the non-expert evidence.
Valuation reports, of course, had been prepared and filed and
expenses incurred.
[14]
Subsection 147(1) of the Rules give me discretion over
payment of the costs of all parties in an appeal. In exercising
this discretion I may consider any offer of settlement made in
writing: s.s. 147(3). Both parties made written offers of
settlement. The appellant's offer depended on events taking
place at least several years after the years under appeal; the
respondent's rejection of the offer was not surprising.
Similarly, the appellant's rejection of the respondent's
offer to settle was not unreasonable since it left out a vital
component in issue, that of interest. I agree with
appellant's counsel that a reason for enumerating a written
settlement offer as a factor to consider in an award of costs is
to discourage unreasonable rejection of a settlement offer. I do
not give any weight to the fact that the offers to settle were
rejected.
[15] In my
reasons for judgment I did not fix a value for the computer
programs as at December 31, 1993 since, at the date of my
reasons for judgment, I thought it may not be necessary to do so
in view of my other findings. In my review and conclusion of the
expert evidence, I set out certain guidelines to serve as a basis
for a future valuation. I stated that if the parties required a
valuation the guidelines set out in my reasons would serve as the
basis of any valuation.
[16] The
parties required a valuation. I directed the respondent's
valuator, Mr. Rosen, to prepare the valuation based on my
reasons. Mr. Rosen required some clarification and I issued
directions on how the valuation would proceed. Applying the
guidelines and additional information gathered during conference
calls with counsel and me, Mr. Rosen fixed the value of the
computer program as at December 31, 1993 to be $4,129,000 and,
after review by counsel, judgment was issued accordingly.
Respondent is entitled to Mr. Rosen's costs (and
expenses) incurred to perform these services.
[17] Valuation
reports should serve to assist a trial judge to determine the
proper valuation. A valuator should not advance his client's
position. Once the author of a valuation report is effectively
examined and cross-examined the strengths and weaknesses of the
report are highlighted; the puffery and hyperbole hopefully
disappear and the judge can appreciate the quality of the
valuation and give the valuation its due weight. At the end of
the day I did not give more weight to the report prepared by
Messrs. Wise and Michelin or to the report prepared by
Mr. Rosen. There were serious flaws in each report yet,
taken together, the reports - and the testimony of their
authors, and their examinations in chief and cross-examinations
- did help me to develop guidelines to serve as the basis
of the valuation.
[18] In the
case at bar I adopted and rejected principles and conclusions of
Messrs. Wise, Michelin and Rosen. Unfortunately,
Mr. Rosen's valuation relied in great part on a
technical report prepared by Mr. Lam. Much of Mr. Lam's
report was of value to me. However, he erred in assuming the
computer software was written in C language rather than in
assembler and this error distorted the development costs of the
computer programs, adversely affecting Mr. Rosen's original
valuation. Mr. Rosen also valued individual games, rather
than a pool of games. Therefore, I am of the view that the
appellant should not have to pay costs of Mr. Rosen's
and Mr. Lam's reports prepared for the trial in these
appeals.
[19] Costs
shall be in favor of the respondent. Each party asked for two
counsel fees; I agree that these appeals warranted two counsel.
The respondent, as the successful party, is entitled to costs for
two counsel. The respondent is also entitled to
Mr. Rosen's costs after November 15, 2001, the date of
my reasons for judgment.
[20] After
receipt of submissions by the Court, one of the appellant's
counsel advised the Court that, according to his information,
several other appeals "which relate to an investment in a
Class 12 partnership known as Basic Software are being held in
abeyance" along with other objections with respect to the
same matter. He estimated the number of appeals and objections
may exceed 3,000. He submitted that since the appeals at bar are
the first appeals to be heard by a Court dealing with Class 12
partnership issues, these appeals should be considered a
"test" case and the Crown absorb all costs. I cannot
agree. This was not a test case. Simply because a provision of
the Act is considered by a Court for the first time and
may affect other taxpayers does not colour that appeal with the
character of a test case. The normal income tax appeal -
which this appeal was - is not a matter of public policy
(as in Lachine General Hospital Corp. v. A.G. of Quebec)[2] or
touch on constitutional principles and in the public interest (as
in Singh v. The Queen)[3]. It is simply a dispute between a
taxpayer and the Crown as to whether the taxpayer was properly
assessed tax. The principle purpose of these appeals was to
settle a dispute between the parties, not necessarily to settle a
point of law.[4]
That the decision of a Court in a tax appeal may help settle
other assessments and reduce the Crown's expenses are not
reasons for the Crown to absorb costs of the appeal.
Signed at Vancouver, British Columbia, this 22nd day of April
2002.
"Gerald J. Rip"
J.T.C.C.
97-3264(IT)G
BETWEEN:
PETER M. BROWN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appearances
Counsel for the
appellant:
Craig C. Sturrock
David R. Davies
Counsel for the
respondent:
D. Graham Reynolds
Lisa Macdonell
ORDER (AS TO COSTS)
Whereas reasons for judgment and judgment in the
appellant's appeals from income by assessments for the 1993,
1994, 1995 and 1996 taxation years were issued by this Court on
November 15, 2001 and March 13, 2002, respectively;
And whereas costs of these appeals were to be determined upon
submissions from the parties;
And having considered the submissions of the parties;
It is
ordered that costs in these appeals shall be awarded to the
respondent provided, however, that:
a) the costs awarded to the
respondent shall not include the costs of Messrs. Rosen and
Lam for services provided to the respondent in the appeals prior
to date of reasons for judgment;
b) the respondent is entitled to costs
of Mr. Rosen for his services after date of reasons for
judgment; and
c) the costs awarded to the respondent
include costs for two counsel.
Signed at Vancouver, British Columbia, this 22nd day of April
2002.
J.T.C.C.
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