AMENDED REASONS RESPECTING
SUBMISSIONS ON COSTS
C. Miller
J.
[1]
On July 19, 2016, I dismissed Mr. Golini’s
Appeal and allowed the Parties time to make written submissions with respect to
costs. It is useful to set out the Tax Court of Canada Rules (General
Procedure) (the “Rules”) regarding
costs:
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,
(i.1) whether the
expense required to have an expert witness give evidence was justified given
(i) the nature of
the proceeding, its public significance and any need to clarify the law,
(ii) the number,
complexity or technical nature of the issues in dispute, or
(iii)
the amount in dispute; and
(j) any other
matter relevant to the question of costs.
(3.1) Unless otherwise ordered by the Court,
if an appellant makes an offer of settlement and obtains a judgment as
favourable as or more favourable than the terms of the offer of settlement, 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.
(3.2) Unless otherwise ordered by the Court,
if a respondent makes an offer of settlement and the appellant obtains a
judgment as favourable as or less favourable than the terms of the offer of
settlement or fails to obtain judgment, the respondent 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.
(3.3) Subsections (3.1) and (3.2) do not
apply unless the offer of settlement
(a) is in writing;
(b) is served no
earlier than 30 days after the close of pleadings and at least 90 days before
the commencement of the hearing;
(c) is not
withdrawn; and
(d) does not
expire earlier than 30 days before the commencement of the hearing.
(3.4) A party who is relying on subsection
(3.1) or (3.2) has the burden of proving that
(a) there is a
relationship between the terms of the offer of settlement and the judgment; and
(b) the judgment
is as favourable as or more favourable than the terms of the offer of
settlement, or as favourable or less favourable, as the case may be.
(3.5) For the purposes of this section,
substantial indemnity costs means 80% of solicitor and client costs.
(3.6) In ascertaining whether the judgment
granted is as favourable as or more favourable than the offer of settlement for
the purposes of applying subsection (3.1) or as favourable as or less
favourable than the offer of settlement for the purposes of applying subsection
(3.2), the Court shall not have regard to costs awarded in the judgment or that
would otherwise be awarded, if an offer of settlement does not provide for the
settlement of the issue of costs.
(3.7) For greater certainty, if an offer of
settlement that does not provide for the settlement of the issue of costs is
accepted, a party to the offer may apply to the Court for an order determining
the amount of costs.
(3.8) No communication respecting an offer
of settlement shall be made to the Court, other than to a judge in a litigation
process conference who is not the judge at the hearing, until all of the
issues, other than costs, have been determined.
(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.
[2]
Relying on Rule 147(3.2), the Respondent seeks a
lump sum of not less than $700,000 based on substantial indemnity costs from
the date of the settlement offer made June 11, 2015 (the “Settlement Offer”) and party and party costs before
that date, plus disbursements, calculated as follows:
(a) 80% of the respondent’s solicitor and client costs from June 11,
2015, the date of a settlement offer, totalling $587,440.20;
(b) party and party costs for the respondent based on the Tariff before
that date totalling $5,800; and
(c) all reasonable disbursements, totalling $104,937.63.
[3]
The Appellant argues that each Party should bear
their respective costs except, for $17,339 that should be awarded to the
Appellant, representing costs of a motion filed in 2015 seeking a copy of the
internal Canada Revenue Agency GAAR referral, and an order to set down for
hearing. The Respondent provided the GAAR referral before the motion, and the
motion proceeded on April 29 simply to have the matter set down. Justice Owen
so ordered, also ordering costs in the cause for the motion.
[4]
While the Appellant acknowledges that the
Settlement Offer satisfies the conditions in Rule 147(3.3), he rejects the
application of this Rule and Rule 147(3.2) on the basis my Judgment
is more favourable to the Appellant than the Settlement Offer. Given the
magnitude of the substantial indemnity costs arising from the application of
Rule 147(3.2), this is the major issue to address. It is important to bear in
mind that even under Rule 147(3.2), I still retain discretion in setting a
costs award.
[5]
So, first, is my decision to dismiss the
Appellant’s case more favourable to the Appellant than the Settlement Offer?
With respect to the very able counsel for the Appellant, they are attempting to
make a silk purse out of a cow’s ear in painting the dismissal of their
client’s Appeal as being more favourable. Neither side in their submissions
provided a detailed calculation of the dollars and cents differential between
the Settlement Offer and the assessment left standing. But it belies logic that
the Appellant would reject an offer so he can proceed to trial to have his case
dismissed.
[6]
The Appellant made the following argument:
15. The Qualifying Offer proposed to
settle the appeal on the basis that: (1) the dividend in the amount of
$7,500,000 added in computing the appellant’s income for the 2008 taxation year
would be vacated; (2) the paid-up capital (“PUC”) and the adjusted cost base
(“ACB”) of the 6,000,000 Class D Preferred shares (the “Shares”) of 1066167
Ontario Inc. owned by the appellant would be ground to $1; and (3) the
disallowance of the interest expenses and the guarantee fee would be
maintained.
16. In the Judgment, the Court determined that
(1) the appellant was to be assessed a shareholder benefit in the amount of
$5,400,000; and (2) he was entitled to an annual interest deduction of $80,000.
The appeal was ultimately dismissed considering that this Court’s finding would
have increased the appellant’s tax liability beyond the amount assessed by the
Minister of National Revenue (the “Minister”) due to the dividend tax credit
mechanism.
17. We recognize that the economic
benefits of this Court’s finding is offset in the 2008 taxation year by the
inclusion of a shareholder benefit in the amount of $5,400,000 in the
appellant’s income. However, the appellant will get the benefit of an $80,000
interest deduction for each subsequent taxation years. He is also preserving
the tax attributes (PUC and ACB) of the Shares, the present value of which is
approximately $1,800,000.
18. For these reasons, we are of the view
that the Judgment is more favourable than the Qualifying Offer and that the
respondent is thus not entitled to “substantial indemnity costs” pursuant to
subsection 147(3.2) of the Rules.
[7]
Addressing first whether retaining the taxable
dividend in 2008 (the decision) versus
vacating the dividend (the Settlement Offer) is more favourable to the
Appellant is self-evident – it is not. Does grinding the paid up capital of the
6,000,000 Class D preferred shares of 1066167 Ontario Inc. to $1 (Settlement
Offer) counter balance this result? If 1066167 Ontario Inc. would have immediately
redeemed the shares, the two impacts would be similar, but obviously that is
not possible. Monies could remain in the company for many years without
triggering the tax on redemption or repurchase.
[8]
The Appellant argues the present value of
preserving the PUC and ACB of the shares (assuming redemption in 10 years at a
discount rate of 3%) would be $1,800,000. I presume that tweaking both the time
to redemption and the discount rate could significantly vary this result. The
Appellant acknowledged the amount of tax in issue was approximately $2,000,000
so, even accepting the Appellant’s numbers, the decision provided a less
favourable result.
[9]
With respect to the disallowance of the interest
expense and guarantee fee in 2008, that was the same under the Settlement Offer
and the decision.
[10]
What then is the effect of my Reasons which
suggests an expense deduction in future years? Future years were not in front
of me. Whether the Canada Revenue Agency assesses in future based on my Reasons
remains to be seen. But even if they did, does the tax saving derived from an
annual $80,000 deduction combined with the tax arising from an immediate deemed
dividend in 2008 create a more favourable result than no taxable income in
2008? I find it does not.
[11]
Taking all these factors into account, I
conclude the decision dismissing the Appeal is still a less favourable result
than the Settlement Offer and thus does trigger Rules 147(3.2) and 147(3.3).
[12]
As the Rules stipulate, substantial
indemnity costs means 80% of solicitor/client costs. I accept the Minister of
National Revenue’s (the “Minister”)
calculation in this regard that substantial indemnity costs are $587,440. The Appellant
urged me to consider reducing the inclusion of 167 hours claimed by the
Respondent for “post-trial” matters. I am not
prepared to do that. Only in clear cases of questionable time reporting will I
tinker with the reported hours. In this matter, I had asked for additional
representations on certain elements of the case, provoking settlement
discussions. The hours do not seem unwarranted.
[13]
Both Parties recognize the Rules leave me
with discretion even in applying them in connection with substantial indemnity
costs arising due to a settlement offer. Both Parties therefore addressed the
factors in Rule 147(3) to support, reject or tweak substantial indemnity costs.
[14]
First, with respect to the result of the
proceeding, yes the Appeal was dismissed, but not on the basis of the
Respondent’s primary argument being one of sham. While I did find, in the
alternative, some elements of sham in connection with the Metropac loan, I did not
accept the broad reach of sham argued for by the Respondent. The Appellant
places considerable emphasis on this point, suggesting the ardour with which
the sham argument was pursued was damaging to both Mr. Golini and his advisers.
As the Appellant put it: “it takes 20 years to build a
reputation and 5 minutes to ruin it”.
[15]
As was intended to be clear in my Reasons, I
viewed the Optimizer Plan very much a child of the planners and not of Mr.
Golini, so I am not convinced that it was his reputation that would have
greatly suffered. It is not unheard of that the winning litigant does not
receive costs due to this type of behaviour. See for example, Lewis v Inter
Provincial Parts and Equipment Inc.
[16]
There may be a fine line, but a line there is
nevertheless between a clever tax plan that might successfully push the
envelope and a deliberately misleading plan. Following the Appellant’s maxim,
advisers might make their reputation on the former and lose it on the latter.
Neither the planners nor the enforcers should treat this lightly. The enforcers
should not see a sham behind every tax plan, but nor should they shy away from
legitimate investigations for fear of tarnishing reputations. It is a serious
and difficult business. The Respondent’s attempt to perhaps broaden the sham
concept to sweep into its net transactions to which a taxpayer was neither a
party nor of which the taxpayer was aware, was not accepted by me.
[17]
On balance, I find the lack of success on the
primary argument is a factor I am prepared to weigh to affect some
downward adjustment on the substantial indemnity costs award.
[18]
The amounts in issue, the importance of the
issue, the volume of work and the complexity of the issue, while may have held
some sway if simply considering costs generally, I find they do not influence
me in tinkering with the substantial indemnity award arising from the
application of Rules 147(3.1) – (3.8).
[19]
What does have some influence, however, is the
consideration of the conduct of the Parties, as contemplated in factors (g),
(h) and (i) of Rule 147(2). Reviewing how counsel conduct litigation cannot be
a matter of second guessing nor be analyzed with a view that counsel could have
done better or should have done more or, perhaps, should have done less. That
is something of a mug’s game. My experience is that lawyers in the tax
community, from both the private bar and from the Department of Justice, do
their utmost to protect their clients’ interest within the rules of the game
and with respect, civility and candor. Yet, it is not uncommon that what might
be considered enthusiastic representation by one side is viewed as “inexplicable”, a lack of “professional
decency”, “shocking”, “lack of good faith”, here by the Appellant in describing
the Respondent’s behaviour in his written submissions on costs.
[20]
The Appellant raises these concerns pointing
specifically to four actions by the Respondent:
a. The respondent’s refusal to examine for
discovery Andrew Guizzetti (“A. Guizzetti”) in place of Paul Jr.;
b. The respondent’s refusal to provide the
GAAR Referral and to fix the time and place of the hearing within the timeline
provided for by an Order of this Court;
c. The numerous issues and requests made by
the respondent in respect of the Thorsteinssons Opinion; and
d. The respondent’s refusal to clarify her
sham argument.
[21]
Yet, at the same time, the Respondent points to
several actions of the Appellant that either caused delay or lengthened the
proceeding unnecessarily: the Appellant’s refusal to
admit certain facts, the Appellant’s refusal to produce the Thorsteinssons’
legal opinion, the Appellant’s insistence on raising a protective assessment
argument in the pleadings requiring a motion by the Respondent to strike (which
was successful), the Appellant’s refusal to settle a motion to produce, the
Appellant’s refusal to answer certain discovery questions and, according to the
Respondent, failing to work cooperatively to assemble a partial agreed
statement of facts”.
[22]
Looking at these concerns flying both ways, I
would categorize most of it as procedural wrangling and litigation tactics that
are not uncommon, and that I have seen before. I would not describe any of
it as improper, vexatious or egregious.
[23]
Some actions may well have lengthened the
duration of the proceedings and, in hindsight, perhaps, could be viewed as
unnecessary, but the actions must be viewed through counsels’ eyes at the time
of the actions. The only action that I find causes me to consider
adjusting costs, in the context of conduct of the Parties, is the lack of clarity
from the Respondent prior to trial as to the full nature of the sham argument.
An Appellant facing a sham argument from the Government is entitled to fully
appreciate the nature and substance of that argument.
[24]
The Appellant raises some additional concerns
regarding the Respondent’s submissions on disbursements. First, the Appellant
submits the Respondent’s claim for $40,297.16 for the expert, Mr. Johnson, is
unwarranted given the limitation I put on his testimony. It is always a
strategic call for counsel to identify the scope and breadth demanded of an
expert. Each side is expected by the Court to put forward impartial experts,
whose role is to assist the Court on technical matters, not in the Judge’s area
of expertise. I did not allow some of Mr. Johnson’s expert report to be
introduced as parts were unnecessary to assist me. The Appellant should not be
responsible for all of Mr. Johnson’s costs. I reduce it by half.
[25]
The Appellant also queries the
approximate $20,000 charge for photocopy. The Respondent provided a schedule
indicating dates and amounts of copying. I see no basis upon which to change
this calculation.
[26]
In conclusion, I am not prepared to award
substantial costs at the rate of 80%, but will reduce that to 60%. Regarding
disbursements, I reduce the fee charged by Mr. Johnson by $20,000. With respect
to the Appellant’s request for costs of the motion, I am not prepared to tinker
with the motions’ judge’s decision. In summary, I award the Respondent
$531,317.78, made up of 60% of solicitor-client costs of $440,580.15, party and
party costs before settlement of $5,800 plus disbursements of $84,937.63.
These Amended Reasons for Judgment are
issued in substitution of the Reasons for Judgment dated November 1st, 2015.
Signed at Ottawa, Canada, this 16th day
of November 2016.
“Campbell J. Miller”
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