Lemmex v. The Queen, docket 98-361-IT-G

Date: 19991001

Docket: 98-361-IT-G

BETWEEN:

MERRIAN LEMMEX,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Order as to Costs

Lamarre, J.T.C.C.

[1] Counsel for the appellant brought a motion for an order directing the taxing officer to fix all costs without reference to Schedule II, Tariff B of the Tax Court of Canada Rules (General Procedure) ("Rules") and to award a lump sum of $12,000 in lieu of any taxed costs, in accordance with section 147 of the Rules.

[2] The Respondent's position is that the appellant should receive with respect to this appeal her ordinary party and party costs and disbursements under Tariffs A and B.

[3] Section 147 of the Rules reads as follows:

147. (1) Subject to the provisions of the Act, the Court shall have full discretionary power over the 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, (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) Any party may, (a) within thirty days after the party has knowledge of the judgment, or (b) after the Court has reached a conclusion as to the judgment to be pronounced, at the time of the return of the motion for judgment, whether or not the judgment included any direction concerning costs, apply to the Court to request that directions be given to the taxing officer respecting any matter referred to in this section or in sections 148 to 152 or that the Court reconsider its award of costs.

[4] Both parties agree that the appeal is a Class A proceeding as defined in section 1 of Tariff A of Schedule II of the Rules.

[5] The background to this appeal is summarized as follows by counsel for the appellant in his written submissions on costs:

... Ms. Lemmex was a Corel employee who exercised stock options in 1988, 1989 and 1990. Corel corporation went public in November of 1989. All of the shares in question were disposed of by Ms. Lemmex in 1990.

On Ms. Lemmex's 1990 tax return the disposition of the shares were treated as attracting capital gains and no employment benefit. Ms. Lemmex treated the fair market value of the shares as being $1.00 because of her understanding and belief that prior to Corel going public she could only sell the shares back to Corel for the price she paid – namely $1.00.

As a result of an audit being conducted on Corel Corporation, it was discovered that Corel had failed to provide its employees with the amount of their stock option benefit in box 38 of the employees' T4 slips. A project was thus established by Revenue Canada to review the tax returns for the Corel employees. This project was handled by Ms. Jennifer Mann, an auditor with Revenue Canada. Ms. Mann discovered that a substantial number of Corel employees had failed or otherwise improperly reported a taxable benefit from the exercise of stock options. Ms. Mann testified at trial that approximately 150 out of 200 employees had not properly claimed the taxable benefit.

By Notice dated August 28, 1995 Ms. Lemmex was reassessed for her 1990 taxation year on the basis that she had misreported her taxable employment benefit from the exercise of a portion of her stock options. In addition, over $5,000 in penalties were assessed against Ms. Lemmex on the basis that she had been grossly negligent. By Notice of Reassessment dated August 22, 1997 the imposition of penalties was waived although the balance of the earlier reassessment remained.

[6] In his assessment, the Minister of National Revenue ("Minister") had determined that the appellant failed to report a taxable benefit of $26,310.

[7] The appeal from this assessment was heard before me in Ottawa on June 7 and 8, 1999. Counsel for the appellant called four witnesses including the appellant.

[8] As the 1990 taxation year was statute-barred, the respondent had the initial onus of proving that Ms. Lemmex had made a misrepresentation attributable to neglect, carelessness or wilful default or had committed a fraud in the filing of her tax return, in order to justify the assessment. If that onus was met by the Minister, the onus of showing the assessment to be incorrect would then have shifted to the appellant.

[9] By judgment dated June 8, 1999, I allowed the appeal with costs and vacated the assessments on the basis that they were made after the appellant's normal reassessment period in respect of the 1990 taxation year and it had not been established, pursuant to subparagraph 152(4)(a)(i) of the Income Tax Act ("Act"), that the appellant had made any misrepresentation that was attributable to neglect, carelessness or wilful default or had committed any fraud in filing her 1990 tax return or in supplying any information under the Act.

[10] Counsel for the appellant submits that the award of costs should take into consideration the following facts:

1. This case is different from other tax appeals in that here the onus fell upon the respondent to justify her reassessment and the appellant was forced to commence an appeal with this Court in order to prove that she had not made a negligent misrepresentation.

2. A fair amount of trial preparation time was spent by the appellant's solicitors interviewing and obtaining information from over a dozen Corel employees, of whom two were asked to testify in court on behalf of the appellant. According to counsel, this information was important for the Court to understand and appreciate the broader context of why Ms. Lemmex honestly believed the shares had a fair market value of $1.00 and that this belief was reasonable given the understanding and information available, not just to Ms. Lemmex, but also to the Corel employees in general.

3. (a) Ms. Jennifer Mann acted as the Revenue Canada auditor with respect to the Corel employees despite the fact that she had previously been an employee of Corel. According to counsel, Ms. Mann therefore had a conflict of interest, or at least was in a position that gave rise to a reasonable perception of conflict of interest.

(b) Ms. Mann's lack of preparedness at trial is demonstrative of the attitude the respondent and Ms. Mann have exhibited towards the situation faced by the appellant and towards her appeal.

4. The appellant had to prepare an entire Book of Documents and submissions for a second day of trial, which in the end were not presented because of the Court's decision to allow the appeal on the first issue (the assessment being statute-barred).

5. The use of two counsel to prepare the appeal.

[11] The submissions of counsel for the respondent are summarized as follows in paragraphs 17 to 24 of his written submissions on costs:

17. It is respectfully submitted that there exists no circumstances or matters herein to warrant the trial judge to exercise his discretion to award costs on a solicitor and client basis or to order the payment of a fixed sum in lieu of taxed costs. None of the factors referred to in Section 147(3) for consideration in the awarding of costs were present in this appeal.

18. There is nothing in the Respondent's conduct, both prior to and during the litigation, upon which to base a claim for costs beyond the Court Tariff. Nowhere in the appeal process is there any indication that there was any unnecessary or improper act or omission by or on behalf of the Respondent. There is no reprehensible conduct by the Crown such as described in the RCP Inc. case, and the Minister did not "merely issue figures indiscriminately" as described in Crown Trust Company v. Her Majesty the Queen, 77 DTC 5173, at page 5175 (FCTD).

19. The facts in this particular appeal were not complex, the amount of tax under appeal was not exorbitant and similar issues have been reviewed by this Court on many occasions.

(iii) Disbursements

20. It is submitted that the disbursements herein have been agreed to, with the exception of one. The one outstanding disbursement relates to the examination for discovery involving the transcript costs for the testimony of the Respondent's witness, Jennifer Ann Mann, and reporting costs in respect of three witnesses, Merrian Lemmex and Michel Bouillon, employees of Corel at the relevant time, and Ms. Mann.

21. The testimony of Ms. Mann addressed general questions and questions relating specifically to her involvement in the auditing of Appellants Merrian Lemmex and Michel Bouillon, with less specific questions interspersed therein concerning Corel, its stock options and reporting methods of the company and its employees.

22. The Respondent submits that its offer of $380.88, plus GST, for transcript and reporting costs is fair. This offer covers 50% of the costs of the invoices submitted by the Appellant. The said invoices relate to two appeals, Court No. 98-361(IT)G in the name of Merrian Lemmex, and 97-3764(IT)G in the name of Michel Bouillon.

(iii) Conclusion

23. In light of the foregoing, the Respondent requests that this Honourable Court's judgment of costs on a party and party basis stands and that an amount of $380.88, plus GST, for the disbursement for the examination for discovery transcript and reporting costs of the Appellant be ordered.

24. The Respondent further requests that costs be granted to the Respondent for the Written Submissions, on the basis of a motion provided for in the Court Tariff.

[12] I agree with counsel for the respondent that the circumstances set out in subsection 147(3) of the Rules are not applicable in the present case. As Judge Bowman of this Court said in McGorman et al. v. The Queen et al., 99 DTC 591 at 593, the Court has a fairly broad discretion with respect to costs, but that discretion must be exercised on proper principles and not capriciously. I shall repeat here what Judge Bowman said about awarding solicitor and client costs in Continental Bank of Canada et al. v. The Queen, 94 DTC 1858 at p. 1876:

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.

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.

[13] Judge Bowman then referred to the observations of Jackett C.J. in Smerchanski v. M.N.R., 77 DTC 5198 at pp. 5200-5201:

Finally, I should say on this point that the material submitted in support of this application does not, in my opinion, provide a reasonably arguable case for an exercise of judicial discretion increasing the fees for services of solicitors and counsel in connection with this appeal. Such a direction must be based on relevant considerations and must not be made on an arbitrary basis. All that has been established here is that the respondent incurred a very large solicitor and client bill in connection with the appeal, which would have been relevant if costs had been awarded on a solicitor and client basis but is not ordinarily relevant to the determination of costs on a party and party basis. Nothing has been put forward to suggest that there was anything in the conduct of the appeal to warrant any increase in the party and party tariff. While there is no principle with reference to the basis for ordinary party and party costs that is apparent to me from a study of the relevant Rules, it does seem to be clear that party and party costs are not designed to constitute full compensation to the successful party for his solicitor and client costs. (This must certainly be so in a case such as this where the successful party has chosen to instruct counsel whose base of operations is elsewhere than the appropriate place for the hearing of the appeal.)

Reference was made to some four or five decisions of the Trial Division where Tariff B items were increased apparently "having regard particularly to the great volume of work done in preparation ...". I have difficulty in accepting volume of work in preparation considered alone, or in conjunction with such factors as the difficulty or importance of the case, as constituting a basis for exercising the judicial discretion to increase Tariff B costs items. It must be obvious that such items are so low in relation to what is involved in a very substantial proportion of the matters that come before the Court that they are not designed to provide complete compensation to the successful party for the costs incurred by him in the litigation. (Indeed, what is sought in this case is an increase that would still leave the successful party largely uncompensated for solicitor and client costs.) If Federal Court party and party costs are not designed to provide full reimbursement, as it seems to me, what is intended is that they be made up of the completely arbitrary amounts fixed by or in accordance with the rules subject to variations (where authorized) based on factors arising out of the conduct of the particular proceeding. As it seems to me, the vague basis put forward on behalf of the respondent would put the Court in the position, in a very substantial proportion of proceedings, of weighing imponderable factors, or factors that are not capable of determination, with a view to making an allowance of an undefined portion of solicitor and client costs. In my view, such an approach is not acceptable as a basis for exercising a judicial discretion under Tariff B and would open the way for an unseemly complication of our practice.

[14] This view was also adopted by the Federal Court of Appeal in MacMillan Bloedel (Sask.) Ltd. v. Consolboard Inc., 58 C.P.R. (2d) 100.

[15] I do not find in the instant case a degree of complexity sufficient to justify an additional award. Furthermore, the fact that Ms. Mann had previously worked for Corel and the fact that the appellant was forced to take action against an assessment that was statute-barred are not circumstances that the court may consider under subsection 147(3) in order to award costs beyond the amounts provided for in the tariff.

[16] Moreover, even though I suggested to Ms. Mann during the hearing that she should have reviewed her file before trial, I do not find that her conduct tended to lengthen unnecessarily the duration of the proceedings.

[17] With respect to the preparation necessary for a two-day trial, it must be reminded that the parties themselves requested two days for the trial and were thus expected to be ready to proceed both on the preliminary matter (i.e. that of whether the assessment was statute-barred or not) and on the merits of the case.

[18] Finally, I am not satisfied with the evidence that was presented before me to show that the conduct of Department of National Revenue officials, including Ms. Mann, towards the appellant was reprehensible and would justify the award of a lump sum amount beyond what the tariff allows, as was the case in R.C.P. Inc. v. M.N.R., [1986] 1 F.C. 485.

[19] Nor can it be said that there was a "total absence of merit [that made the assessment] border on the frivolous" and that would provide grounds for "a substantial increase over what could normally be had by way of party and party costs," as was the case in The Queen v. Global Communications Ltd., 97 DTC 5194.

[20] In light of the cases referred to above and others cited to me, I do not think that it would be appropriate to award costs to the appellant beyond the amounts provided for in the tariff.

[21] The respondent further submits that, at the appellant's request, the respondent has agreed to pay all of the disbursements in this appeal with the exception of those relating to transcripts and reporting services for the examinations for discovery. With respect to those the respondent has offered to reimburse half the amount of $761.75 plus GST invoiced by the appellant (i.e. $380.88 plus GST), on the basis that the invoices related to two appeals one of which was not the appellant's.

[22] The respondent further requests that costs be granted to the respondent for the written submissions on the present motions, on the basis of a motion provided for in the Court tariff.

[23] After having read those submissions, I direct the taxing officer to tax the appellant's costs on the following basis:

- The costs are to be on a party and party basis in accordance with Tariff B of Schedule II, under Class A.

- The respondent shall direct the issue concerning the disbursements relating to transcripts and reporting services for the examinations for discovery to the taxing officer.

- Each party is to bear its own costs in respect of this motion.

Signed at Ottawa, Canada, this 1st day of October 1999.

"Lucie Lamarre"

J.T.C.C.