BETWEEN:
KRUGER INCORPORATED,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS
RESPECTING SUBMISSIONS ON COSTS
Rip J.
[1]
In my Judgment dated May 26, 2015, I allowed the appellant’s
appeal from an income tax assessment for the 1998 taxation year and referred
the assessment back to the Minister of National Revenue for reconsideration and
reassessment on the basis that the appellant be permitted to value purchased
foreign exchange option contracts in accordance with subsection 10(1) of the Income
Tax Act and section 1801 of the Income Tax Act Regulations. However,
the appellant was not permitted to value the bulk of its option contracts for
the year, that is, written foreign exchange option contracts on a mark-to-market
basis, but was held to have to report the contracts on a realization basis, as
assessed. Another issue, concerning Part 1.3 of the Act, was dependant
on the valuation issue. The number of written contracts to purchased contracts in
1998 was approximately 4:1.
[2]
I gave the parties 30 days, or such longer delay
as I may approve, to make submissions as to costs. I had hoped, quite frankly,
that the parties would have agreed to costs. However, they did not and on
November 24, 2015, counsel made their submissions as to costs.
[3]
I should note that the Judgment of May 26, 2015 has
been appealed.
[4]
At the request of respondent’s counsel, Mr.
Denis Dionne, an officer of the Canada Revenue Agency responsible for providing
instructions to the Appeals Division of the Montreal Tax Services Office for
purposes of executing the Judgment, made calculations affecting inventory under
subsection 10(1) of the Act and section 1801 of the Regulations.
The result of his calculations was that the assessment appealed from was not to
be disturbed, that is, there would be no reassessment as a result of the
Judgment. Appellant’s counsel agreed.
[5]
Each party is asking for costs, the appellant
because the appeal was allowed, the respondent because the result of the
proceeding was substantially in its favour as to the amounts in issue and the
determination of the issue.
[6]
The appellant submitted that since success was
divided, each party should bear its own costs. Appellant’s counsel referred in
argument to several reported cases in support of its position: Bonik Inc. et
al v The Queen,
General Electric Capital Canada Inc. v The Queen, Ouellette
Sea Products Ltd. v Cap‑Pelé Herring Export Inc., AlliedSignal
Inc.(previously Allied-Signal Inc.) v. du Pont Canada Inc. and RMM
Canadian Enterprises Inc. v The Queen.
[7]
Notwithstanding the appellant’s success in Bonik,
the appellants were not awarded costs since, among other reasons, their
aggregate success was less than 5 percent. McArthur J. also found that much of
the delay in getting to trial was caused by the appellants. The trial judge
also noted that no costs were awarded to the respondent “who was overwhelmingly successful”. But where success
is divided, he stated that it is not unusual for no order of costs to be made.
[8]
In GE Capital, Hogan J., at paragraph 31,
found that “[t]here is a strong tendency in the case
law to accept the principle that costs awards should not be distributive, with
the amounts being based on the outcome of particular arguments.” He
referred to the decision of Bowman J., as he then was, in RMM:
[5] … It
frequently happens in litigation that arguments are advanced in support of
positions that, with the benefit of hindsight, turn out to have been
unnecessary. Unless such arguments are plainly frivolous or untenable, I do
not think that a litigant should be penalized in costs simply because its
counsel decides to pull out all the stops, nor do I think that it is my place
to second guess counsel’s judgment, after the event, and say, in effect, “If you had had the prescience to realize how I was going
to decide we could have saved a lot of time by confining the case to one issue.”
Moreover, one of counsel’s responsibilities is to build a record which will
enable an appellate court to consider all of the issues. [Emphasis added]
[9]
The New Brunswick Court of Appeal was of the
view that in a Pyrrhic victory, no costs should be allowed: Ouelette.
[10]
Appellant’s counsel conceded that
notwithstanding in future years the number of contracts may be reversed, that
is, Kruger may write more option contracts than it purchases, I have to rule on
what was done in 1998, not what the situation may be in other taxation years.
[11]
The Crown takes the position that it was
entirely successful and that it is entitled to party and party costs.
[12]
Referring to section 147 of the Tax Court of
Canada Rules (General Procedure),
Crown’s counsel submitted that a) the results favoured the respondent; b) the
amounts in issue were decided in favour of the respondent; and c) the issue was
important: whether the appellant can mark to market foreign exchange contracts
at the end of its fiscal year. The evidence at trial was related to the issue
of mark-to-market versus realization valuations. The Crown was successful in
maintaining the valuation of 80 percent of the option contracts on a
realization basis; the taxpayer was permitted to value 20 percent of its option
contracts other than mark to market. Furthermore, the assessment appealed from
was left undisturbed by the Judgment. Thus, the Crown succeeded in defending
the assessment and is entitled to 100 percent of the costs. Counsel cited SWS
Communication Inc. v The Queen,
where Hogan J., referring to his comments in GE Capital, repeated that
costs should not be distributive. The global result is what is pertinent.
[13]
As appellant’s counsel stated, nobody knew that
the assessment would not change as a result of the Judgment. That the
assessment was left untouched after reconsideration of the assessment by the
Minister is an anomaly. One normally expects that a reassessment in accordance
with a judgment granting the taxpayer some relief would result in a lower
amount of tax.
[14]
The amounts of money in issue in an appeal
before the Court may be relevant in determining costs. It is a leading factor
in subsection 147(3) of the Rules. Of course, the amounts in issue are
usually irrelevant to a judge when deciding an appeal: he or she is concerned
with the merits of the appeal and whether an assessment is good or not.
[15]
However, to the parties, the amounts in issue
are important. They influence the parties in how they will prepare and finance
the appeal. Where the amounts are appreciable, as in this appeal, the issue in
law may be more complex, the facts more complicated or involved, resulting in
more documents, lengthier examinations for discovery, expert evidence, etc. And
a successful party is entitled to his or her costs of prosecuting or defending
the appeal.
[16]
My task in this appeal was to determine whether
the appellant was permitted to value foreign exchange option contracts on a
mark-to-market basis at the end of the year or on a realization basis. The
decision was split but because of the type of option contracts and their
monetary value, as well as the result of the Minister’s reconsideration of the
assessment appealed from, it was the Crown who was the successful party,
notwithstanding the appeal was allowed.
[17]
Kruger did purchase four times as many contracts
in 1998 as it wrote and the aggregate amount of the purchased contracts would
be significantly higher than those it wrote. The volume of the work in
preparation for the appeal was significant and, as I appreciate it, equal on
both sides. The matter was complex, requiring four expert witnesses, two by
each party. The parties’ arguments were not frivolous or untenable. Neither
party was dilatory in getting the appeal to trial. This appeal was not a
Pyrrhic victory for either party. Each was successful but to different degrees.
[18]
The matters suggested in subsection 147(3) of
the Rules for a judge to consider in exercising her or her discretionary
power to determine the amount of costs assist me but the list is not limited to
what is set out in that provision.
[19]
The determination of costs, like other cases,
must also be decided on its own facts. During the hearing of the appeal and in
preparing my reasons, I found the testimony of Ms. O’Mally and Professor Klein
of significant assistance and their contributions were important and should be
recognized in considering costs.
[20]
There is no rule that I could find that
prohibits a judge from distributing costs between the parties, although it is
not encouraged. The issue in this appeal and the proportion of allocation of
success ought to be recognized in costs. I would award the Crown its costs with
respect to witnesses O’Mally and Klein and as to 50 percent of all other costs.
This may not be convention but I believe it is reasonable.
Signed at Ottawa, Canada, this 18th day of January 2016.
“Gerald J. Rip”
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