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Citation: 2009 TCC 135
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Date: 20090304
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Docket: 2003-2892(IT)G
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BETWEEN:
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DOUGLAS ZELLER AND LEON PAROIAN,
TRUSTEES OF THE ESTATE OF MARJORIE ZELLER,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS RESPECTING SUBMISSIONS ON COSTS
Campbell J.
[1] My Reasons for Judgment in this matter
reserved the issue of costs pursuant to the request of both counsel. As the
parties have not been able to reach an agreement on costs within the allotted
timeframe, they have submitted written submissions setting out their respective
positions.
[2] The appeal itself involved the
determination of the fair market value (“FMV”) of the shares of 701221 Ontario
Limited (“701221”). On October 20, 1998, Marjorie Zeller, the sole
shareholder of 701221, died. In filing the terminal tax return, the estate
trustees reported the FMV as $958,548 pursuant to the deemed disposition
provisions contained at subsection 70(5) of the Income Tax Act (the “Act”).
The Minister of National Revenue (the “Minister”) reassessed the return and
increased the FMV of 701221 to $5,524,548.00, based on an expert report (the “Albert
Report”). The Appellant hired the Wise, Blackman firm to complete a valuation and
that firm determined the value of the shares to be $2,200,000.00 (the “Wise
Report”). The Minister then engaged another expert to complete a second report
which assigned a value of $6,380,000.00 to the shares on October 20, 1998 (the “Dunham
Report”). The value which I ultimately assigned to these shares was $3,394,345.00.
[3] The Appellant submitted the following four
options, listed below in the order of preference:
Option 1: Lump Sum amount of $413,556.01 (as contemplated under subsection 147(4)
of the Tax Court of Canada Rules (General Procedure) (the “Rules”)
This amount is comprised of:
a) Substantial indemnity for the services of Bruck Easton in the
amount of $233,934.00 [$219,800.00 fees (at $400.00 per hour) + GST of $14,134.00]
and
b) Substantial indemnity for the disbursements by counsel for the
Appellant and the costs of the Wise Report as paid by the Appellant, in the
aggregate of $179,622.01, comprised of:
· Substantial Indemnity for the costs of the Wise Report, the
expert witnesses called to testify on the Appellant’s behalf. These costs
include both the preparation of the Wise Report and the preparation and
attendance at trial of both Mr. Wise and Mr. Dorweiler in the amount of
$157,943.05.
· Compensation for the other disbursements incurred by counsel for
the Appellant in the amount of $13,125.25.
· Compensation for the GST paid by the Appellant in the Wise,
Blackman Invoices and in respect of other taxable disbursements paid by counsel
for the Appellant in the amount of $8,553.71.
Option 2: Lump sum amount of $226,189.51 (as contemplated under subsection 147(4)
of the Rules)
This amount is comprised of:
·
Indemnity to the
Appellant for services of counsel rendered based on an estimate of party and
party costs that would be taxable by the Appellant as provided in the
Tariff B to the Tax Court Rules, in the amount of $46,567.50 (being $44,350.00
plus GST of $2,217.50); and
·
Compensation for the
disbursements incurred by counsel for the Appellant and the costs of the Wise
Report as paid by the Appellant, in the aggregate amount of $179,622.01 (refer
to Option 1(b) for details of this amount).
Option 3: Directions be given by this Court to the
Taxing Officer, that the costs be awarded to the Appellant as follows: (as contemplated by subsection 147(6)
of the Rules)
·
Taxed on a Solicitor-Client
basis (plus GST) in respect of counsel fees for the Appellant; and
·
Shall include
reimbursement of all of the Appellant’s disbursements and the costs of the Wise
Report as paid by the Appellant, in the aggregate amount of $179,622.01 (refer
to Option 1(b) for details of this amount).
Option 4: Directions be given by this Court to the
Taxing Officer, that the costs be awarded to the Appellant as follows: (as contemplated by subsection 147(6)
of the Rules)
·
Taxed on a party and
party basis (plus GST) in respect of counsel fees for the Appellant; and
·
Shall include
reimbursement of all of the Appellant’s disbursements and the costs of the Wise
Report as paid by the Appellant, in the aggregate amount of $179,622.01 (refer
to Option 1(b) for details of this amount).
[4] The Respondent’s
position is that each party should pay their own costs. The Respondent submits
that while both parties made offers to settle, the Respondent’s last two offers
of $3,500,000.00 were more reasonable compared to the eventual outcome of the
hearing which determined the value of the shares to be $3,394,345.00.
[5] Under the Tax Court of Canada Act the
following provisions are applicable concerning costs:
18.26 (1) The Court
may, subject to the rules, award costs. In particular, the Court may award
costs to the appellant if the judgment reduces the aggregate of all amounts in
issue or the amount of interest in issue, or increases the amount of loss in
issue, as the case may be, by more than one half.
18.26 (2) The Court may, in deciding whether to award costs,
consider any written offer of settlement made at any time after the notice of
appeal is filed.
[6] Section 147 of the Rules gives the
Court a very broad discretion in awarding costs. It states:
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.
(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,
(h) the denial or the
neglect or refusal of any party to admit anything that should have been
admitted,
(i) whether any stage in
the proceedings was,
(i) improper, vexatious, or
unnecessary, or
(ii) taken through negligence,
mistake or excessive caution,
(j) any other matter relevant to the question
of costs.
(4) 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.
(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,
(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.
(6) The Court may give
directions to the taxing officer and, without limiting the generality of the
foregoing, the Court in any particular proceeding may give directions,
(a) respecting increases
over the amounts specified for the items in Schedule II, Tariff B,
(b) respecting services
rendered or disbursements incurred that are not included in Schedule II,
Tariff B, and
(c) to permit the taxing officer to consider
factors other than those specified in section 154 when the costs are taxed.
[7] Several relevant
points have emerged from the caselaw. In Merchant v. Canada, [1998] 3 C.T.C. 2505,
at paragraph 58, Bowman J. (as he was then) stated:
…The general rule is
that a successful litigant is entitled to party and party costs. Where success
is divided it is not unusual for no order to be made for costs. … To award
solicitor and client costs against a litigant who has achieved the degree of
success that Mr. Merchant has requires a high degree of reprehensible conduct.
There must, to use the words of McLachlin J. in Young (supra) at p. 134, be
"reprehensible, scandalous or outrageous conduct on the part of one of the
parties".
[8] Party and party costs based on
the Tariff Scale are intended to afford the party to whom they are awarded
partial indemnity for the costs which must be paid to their own solicitor (Mark Orkin, The Law of Costs, 2nd ed., vol 1
(Aurora: Canada Law Book, 2008) at 1-9). However, in recent times, such costs
have been used for more than indemnification:
Traditionally, the purpose of
an award of costs within our “loser pay” system was to partially or, in some
limited circumstances, wholly indemnify the winning party for the legal costs
it incurred. However, costs have more recently come to be recognized as an
important tool in the hands of the court to influence the way the parties
conduct themselves and to prevent abuse of the court’s process. Specifically,
the three other recognized purposes of costs awards are to encourage
settlement, to deter frivolous actions and defences, and to discourage
unnecessary steps that unduly prolong the litigation (Mark Orkin, The Law of Costs, 2nd ed., vol 1 (Aurora: Canada
Law Book, 2008) at 2-1)).
[9] Traditionally, the degree of
indemnification represented by partial indemnity costs has varied between 50%
and 75% of solicitor-and-client or substantial indemnity costs (Mark Orkin, The Law of Costs, 2nd ed., vol 1
(Aurora: Canada Law Book, 2008) at 2-3).
[10] As stated in Merchant,
to depart from the usual rule requires unusual circumstances. For a
successful or partially successful litigant
(a)
to be
deprived of costs,
(b)
to be
ordered to pay party and party costs,
(c)
to be
ordered to pay costs to the other party on a solicitor and client costs,
requires
a measure of reprehensibility ([1998] 3 C.T.C. 2505, at paragraph 58).
[11] The Supreme Court of Canada in Young v.
Young, [1993] 4 S.C.R. 3, at page 134, established the test for
awarding solicitor-client costs:
…Solicitor-client costs are generally
awarded only where there has been reprehensible, scandalous or outrageous
conduct on the part of one of the parties.
[12] I do not believe that an award of solicitor-client costs would be
appropriate in the circumstances of this appeal. The Appellant’s main argument
for requesting solicitor-client costs is focussed on the results of the
proceeding, the settlement offers and the general idea that the approach taken
by the Minister, including “high-balling” the valuations, created more work
than would ordinarily have been required. Even if the Appellant is right in
respect to the Minister’s use of this tactic, it does not warrant the application
of solicitor-client costs. Valuations are, in general, difficult procedures to
apply. They are by their very nature not an exact science. As noted in my Reasons
at paragraph 39, in quoting Bowman C.J. in Western Securities Limited v. The Queen, 97 DTC 977, when expert valuators are
hired by their respective clients, there may be a bias to ascertain as high a
value as possible or as low a value as possible, depending on the desires of
the party that hired them.
[13] In
paragraphs 46 and 48 of my Reasons, I noted that had Mr. Dunham, the
Respondent’s expert, interviewed corporate management, he would have gained a
better understanding of certain issues, such as the shareholder loans and
salaries, and would have consequently incorporated a further adjustment in his
analysis to reflect the true nature of the business. There were, however,
factors which Mr. Dunham employed which I factored into my Reasons,
including size premium, the company specific size premium, growth rates,
marketability and minority discounts and allocation of goodwill to
non-competition agreement. In the end, I took and applied those factors from
each of the expert reports that I considered to be the most appropriate and
reasonable under the circumstances. In determining FMV, I accepted four
critical valuation criteria contained in the Wise Report, and one critical
criteria contained in the Dunham Report while compromising between both Reports
in respect to three other critical criteria.
[14] While
the Respondent’s expert witness could have met with the Appellant for further
clarification as I noted in my Reasons, this is not similar to the facts in Hunter
v. Canada, [2003] 1 C.T.C. 2652, where in reassessing the taxpayers, the
Minister did not review the books of the taxpayers and did not contact the
taxpayers respecting a proposed reassessment at any time prior to issuing the
reassessment. It appears that the cases that have awarded solicitor-client
costs contained facts that were far more extreme than the facts in this appeal
where I do not consider that the Respondent’s conduct could in any respect fall
within the category of reprehensible, scandalous or outrageous.
[15] In this case, there were offers to settle made by both sides. The
Appellant made three offers:
· October 2005 - $1,580,000.00,
· February 2006 - $2,200,000.00,
· October 2006 - $2,200,000.00,
while the Respondent made four offers:
· February 13, 2006 - $4,600,000.00
and each party bearing its own costs,
· August 2, 2006 - $3,790,000.00
and each party bearing its own costs,
· October 4, 2006 - $3,500,000.00
and each party bearing its own costs,
· October 31, 2006 - $3,500,000.00
and each party bearing its own costs.
[16] The Appellant submits that
the offers by the Respondent came well into the trial of the matter, some eight
years after the death of the taxpayer, and after a good portion of the expenses
of the litigation had already been incurred by the Appellant. Nonetheless, it
is important to point out that the offers made by the Minister of $3,500,000.00
on both October 4 and 31, 2006 were much closer to the final result of
$3,394,342.00, compared to the offer made by the Appellant of $2,200,000.00
Thus the Minister’s offer was quite reasonable under the circumstances. There
were also supposedly informal discussions in October 2002, where attempts to
settle the matter occurred. Regardless of the fact that this may be discounted
because there was no written settlement offer and that Mr. Paroian is now
deceased, it is fair to say, considering the original offers made by the Minister
of $4,600,000.00 before the trial started, that it was only greater than the
final value determined by the Court by $1,200,000.00. The last offer made by
the Appellant of $2,200,000.00 was less than the final value determined by the Court
by the same difference of $1,200,000.00. The fact that the Minister continued
to make offers throughout 2006 shows a continuing attempt to resolve the
matter. Thus, this supports the contention that the Respondent’s behaviour was
not reprehensible or outrageous to warrant solicitor-client costs.
[17] Another option suggested by the Appellant is to award lump sum amounts
or amounts in excess of the Tariff. A lump sum award may be considered where
solicitor-client costs are not warranted but the Tariff will not be sufficient
(subsection 147(4) of the Rules). In Hunter, Bell J. awarded
one set of costs, inclusive of fees and disbursements, or the sum of $25,000.00,
after the Appellant sought $22,000.00. However, in that case, there was a
finding of some reprehensible behaviour on the part of the Respondent.
[18] In Bruhm v. The Queen, 94 DTC 1400, Sarchuk J. suggests that
something more than just “indemnification” is required before a lump sum award
is warranted. At pages 1404 and 1405, Sarchuk J. states:
…I do not accept the Appellant's
position that an “indemnification principle” is an appropriate consideration in
determining whether a lump sum pursuant to 147(4) of the Tax Court of Canada
Rules should be awarded in this case. I also confess to some difficulty
with his proposition that financial disparity between litigants warrants an “adjustment
of the traditional principles” with respect to costs.
…
…I have considered the criteria
enumerated in the Rule and have concluded that a lump sum award is not
warranted. I am not satisfied that the Respondent's conduct was such that it
lengthened unnecessary the duration of the proceeding nor was the Respondent's
conduct at any stage in the proceedings improper, vexatious or unnecessary.
Furthermore, no offer of settlement in writing was made by the Appellant nor
was any real discussion of settlement initiated by Doyle. Costs therefore are
awarded to the Appellant to be taxed in accordance with Schedule II, Tariff B.
[19] In Scavuzzo et al. v. The Queen, 2006 DTC 2311, Bowman C.J. did
not award solicitor-client costs against the Minister but awarded costs in
excess of party and party amounts provided in the Tariff. In fixing costs at
$275,000.00, as partial reimbursement of expenses, he considered the existence
of such factors as the Minister’s refusal to give effect to one taxpayer’s
resignation as a director, obtaining a jeopardy collection order that was
high-handed and oppressive, wrong assumptions pleaded by the Minister,
rejection of the taxpayer’s settlement offer and providing a flawed counter
offer, the amount exceeded two million dollars and finally the complexity of
the matter.
[20] Turning now to a consideration of the factors listed in subsection
147(3) of the Rules:
(a) The Result of
the Proceeding:
My determination of the FMV of
the shares to be $3,394,342.00 was certainly more favourable to the Appellant.
The Respondent’s expert report had valued the shares at $6,380,000.00, which
was almost double my final figure. The Appellant’s expert report valued the
shares at $2,200,000.00 which was almost $1,200,000.00 less than my final
determination.
(b) The Amounts in Issue:
It is undisputed that the
amounts are significant. With a FMV of $3,394,342.00, the Appellant submits
that the associated amount of income tax related to the deemed disposition of
those shares is approximately $1,200,000.00.
(c) The Importance of the Issues:
From the Appellant’s
perspective, the FMV of the shares made up a significant portion of the estate.
(d) Any Offer of Settlement Made in
Writing:
The offers of settlement by each
party have been discussed at paragraphs [14] and [15] herein. While both
parties made attempts to settle, the Respondent’s offer was not unreasonable
given the eventual outcome. However, although not unreasonable, it was still
higher than my determination, and, more importantly, it came well into the
commencement of the hearing of the appeal when much of the expenses of the
litigation had already been incurred.
(e) The Complexity of the Issues;
and
(f) The Volume of Work:
Because the parties could not
reach a settlement, experts were employed by each. The Wise Report consisted of
almost 80 pages of facts, valuation analysis and calculations while the Dunham
Report contained more than 40 pages. The hearing of the appeal took 15 days
comprising four different sittings of the Court over one-and-one-half years. My
Reasons for Judgment were over 30 pages long and included lengthy and detailed
calculations.
(g) The Conduct of any Party that
Intended to Shorten or Lengthen
Unnecessarily the Duration of
the Proceeding:
As noted in my Reasons, the
Respondent should have talked directly with management to gain a better
understanding of some of the items which they ended up factoring into their
calculations. It therefore could be argued that if the Respondent’s expert had
done so, it may have assisted in settlement negotiations being more successful.
(h) The Denial or the Neglect or
Refusal of any Party to
Admit Anything that should
have been Admitted:
Not applicable.
(i) Whether any Stage in the
Proceeding was
(I) Improper, Vexatious
or Unnecessary, or
(II) Taken Through
Negligence, Mistake or Excessive Caution:
With respect to (I) above, it
could be argued that had the Respondent discussed some of the issues with the
Appellant, there may have been a better understanding of these, resulting in a
factoring of them into a valuation. This may have facilitated settlement
discussions. If so, certain issues analyzed during the hearing may accordingly
have been unnecessary.
(j) Any Other Matter Relevant to
the Question of Costs:
Not applicable.
[21] Based on a review of these factors and also my conclusion that
solicitor‑client costs are not warranted, I believe that it is reasonable
in these circumstances that a lump sum amount of $226,189.51 be awarded to the
Appellant, for costs, in accordance with subsection 147(4) of the Rules,
as per the Appellant’s proposed Option 2 as summarized in paragraph [3] herein.
[22] Several days into this hearing it came to my knowledge that no
pre-hearing conference had been held. It is unfortunate that one did not occur
early on as I believe it may have gone a long way to settling the appeal
thereby reducing the costs. I hope that in the future counsel would avail
themselves of this avenue in similar appeals.
Signed at Ottawa,
Canada, this 4th day of March 2009.
Campbell J.
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