REASONS
RESPECTING SUBMISSIONS ON COSTS
Campbell J.
[1]
The Appellant filed a Notice of Motion on
November 26, 2015 pursuant to Rule 147(7) of the Tax Court of Canada Rules
(General Procedure) (the “Rules”), seeking
an increased award of costs.
[2]
The appeal was heard
over a three day period, April 8, 9 and 10, 2015, in Halifax. On October 27,
2015, I allowed the Appellant’s appeal, with costs, on the basis that its
expenditures were incurred for Scientific Research and Experimental Development
(“SR&ED”) and it was entitled to claim the corresponding investment tax
credits. The Appellant is now requesting increased costs representing 95
percent of all invoiced fees and disbursements from May 2, 2014 onward, with
costs prior to May 2, 2014 to be calculated according to the tariff.
[3]
The Appellant brings this motion based primarily
on the ground that it made two settlement offers, the first offer being made on
May 2, 2014 and the second on March 11, 2015, both of which the Respondent
rejected.
[4]
The Respondent proposes that any award of
increased costs should be limited to no more than 50 percent of the Appellant’s
fees plus disbursements for the period from May 2, 2014.
[5]
Section 18.26 of the Tax Court of
Canada Act provides that this Court may vary awards
of costs from that prescribed by the tariff and singles out the existence of
written settlement offers as a factor to consider in exercising its discretion
to award increased costs. Subsection 147(3) of the Rules sets out the
factors that this Court may consider in reviewing an award of costs:
147. […]
(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.
[6]
Although a settlement offer is only one of the
factors to be considered under Rule 147(3), it has gained significant
importance where the Court is considering an award of solicitor/client costs.
In the context of civil litigation, the principles, underlying a costs award,
have been expanded as reflected in the following statement:
26. 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. See Fellowes, McNeil v. Kansa General International Insurance
Co. (1997), 37 O.R. (3d) 464 at 467 and 472 (Ont. Ct. Gen. Div.).
27. In British Columbia (Minister of Forests) v. Okanagan
Indian Band, [2003] 3 S.C.R. 371 at paras. 25 and 26, LeBel J. discussed
the natural evolution of the law in recognizing these policy objectives:
As the Fellowes and Skidmore
[infra] cases illustrate, modern costs rules accomplish various
purposes in addition to the traditional objective of indemnification. An order
as to costs may be designed to penalize a party who has refused a reasonable
settlement offer [.] … Costs can also be used to sanction behaviour that increases
the duration and expense of litigation, or is otherwise unreasonable or
vexatious. In short, it has become a routine matter for courts to employ the
power to order costs as a tool in the furtherance of the efficient and orderly
administration of justice.
Indeed, the traditional approach to
costs can also be viewed as being animated by the broad concern to ensure that
the justice system works fairly and efficiently. Because costs awards transfer
some of the winner’s litigation expenses to the loser rather than leaving each
party’s expenses where they fall (as is done in jurisdictions without costs
rules) they act as a disincentive to those who might be tempted to harass
others with meritless claims. And because they offset to some extent the
outlays incurred by the winner, they make the legal system more accessible to
litigants who seek to vindicate a legally sound position. These effects of the
traditional rules can be connected to the court’s concern with overseeing its
own process and ensuring that litigation is conducted in an efficient and just
manner. In this sense it is a natural evolution in the law to recognize the
related policy objectives that are served by the modern approach to costs.
(1465778
Ontario Inc. v 1122077 Ontario Ltd., [2006] OJ No. 4248 (ONCA))
[7]
The more
prominent role that the factor of settlement offers has been given is also
reflected in recent decisions of this Court: Langille v The Queen, 2009
TCC 540, [2009] TCJ No. 429, and Donato v The Queen, 2010 TCC 16, 2010
DTC 1049. The more modern approach to costs awards and settlement offers is
reflected as well in the statutory authority granted under Rule 147(3.1), which
provides that an appellant who makes an offer and obtains a judgment more
favourable than the terms of the offer will be entitled to “substantial indemnity costs” subsequent to the date of the offer. In
addition, subsection 147(3.5) of the Rules provides that “substantial indemnity costs” means 80 percent of solicitor and client
costs.
[8]
The Appellant’s
first settlement offer was by letter dated May 2, 2014. The Respondent did not
bother to reply until March 11, 2015, almost 10 months later. As I understand
from the submissions of both parties, the Respondent did not even acknowledge
receipt of this offer during that 10 month period. When the Respondent did
respond, it simply refused the Appellant’s offer without an attempt to make a
counter offer. Shortly after the Respondent’s refusal, the Appellant, by letter
dated March 16, 2015, made a second offer. The Respondent declined this offer
on March 20, 2015 and countered by advising it would consent to the Appellant’s
discontinuance of the appeal on a without costs basis.
[9]
The Appellant
submits that its May 2, 2014 settlement offer satisfies each of the statutory
conditions for awarding solicitor and client costs as set out in the Rules
and based on the relevant jurisprudence, the award should be 95 percent of the
costs incurred after the date of this offer or, in the alternative, no less
than 80 percent of its solicitor/client costs.
[10]
The Respondent’s
proposal respecting an award of increased costs, that would limit it to 50
percent of the fees, is well below the minimum threshold provided by Rule
147(3.5). By such a proposal, I assume, although it is not specifically stated,
that the Respondent is advancing the position that the Appellant’s offers were
unable to be accepted due to the legal disability of the Respondent to do so
and to engage in the process. At paragraph 14 of the Written Submissions of the
Respondent, dated December 15, 2015, it argued that, in respect to its refusal of
the offers without making a counter offer to the Appellant, “[t]he Appellant’s inability to provide
substantial enough documentation to support their claims that the work they
were conducting met the criteria for SR&ED put the Respondent at a legal
disability.”
[11]
Assessments are
to be made on a principled basis and the results of settlement offers must be
those that legislation would allow. As such, there is a statutory duty for the
Minister of National Revenue (the “Minister”) to assess tax payable, based on
the facts as the Minister finds them, in accordance with the law as the
Minister understands it. It follows that the Minister has no authority to
implement a compromise settlement that is not in accordance with the facts and
the law (Galway v MNR, 74 DTC 6355). However, the Minister is able to consent to a judgment designed
to implement an agreement of the parties as to how the assessment of tax
liability should have been made by application of the law to the true facts.
Although the Respondent submitted that the issue in the appeal concerned a “yes-no” question as to whether the activities met
the criteria for SR&ED (paragraph 15 of the Written Submissions of the
Respondent), my reasons made it clear that my conclusions were based on both
oral and documentary evidence. The Appellant was successful, but not on the
sole basis of a conclusion of law for which there was only one answer. In fact,
the Appellant’s settlement offers were for amounts of qualifying expenses that
were less than the total amount of qualifying expenses that were in issue.
[12]
I conclude that
there is nothing in this appeal that would have prevented the Respondent from
engaging in the negotiation process which the Appellant initiated on May 2,
2014, almost one year prior to the commencement of the hearing of the appeal.
In support of its project, the Appellant engaged in a number of different
activities which it claimed to be SR&ED. The Respondent claimed that it did
not make a settlement offer in part due to inadequate documentation. The
Appellant made two different settlement offers, each of which were for amounts
that were less than the total amount of qualifying expenses that were in issue.
It is for these very reasons that the Respondent should have engaged in the
negotiation process in anticipation that it was open to this Court to weigh
both the oral and documentary evidence, which is what occurred. There was room
to negotiate as to quantum of qualifying expenses which distinguishes the
present appeal from others (CIBC World Markets Inc. v Canada, 2012
FCA 3, [2012] FCJ No. 30).
[13]
Apart from the
factor of settlement offers, the Appellant was wholly successful and the
amounts in issue were significant to the Appellant’s business activities. Both
of these factors support an enhanced award of costs. However, while the
successful resolution of the issues was important to the Appellant, the
importance of the issues in this appeal as they relate to the general state of
the law was minimal. My conclusion was based primarily on findings of fact and
therefore this factor alone either does not support an increased award or is of
neutral significance. In comparison to other similar appeals involving research
and development activities, I believe the volume of work would be comparable.
Such activities tend to be highly technical and necessitate intensive
preparation. Although the Respondent suggests that the Appellant relied on four
witnesses in order to compensate for inadequate documentation, the opposing
argument remains just as valid: that the Appellant had to rely on its witnesses
to provide explanation of the activities and its documentation. The Respondent
also argued that, since the Appellant spent a considerable amount of time on
preparation of its proposed expert, who at the commencement of the hearing I
disqualified, this should not be a factor for an increased costs award.
However, the Court’s qualification of an expert is one of the uncertainties of
the litigation process and one of the decisions that counsel make in preparing
the client’s appeal.
[14]
I am of the view
that an award of enhanced costs in the amount of 95 percent of the
invoiced fees for the period from May 2, 2014 to present is reasonable in the
circumstances. This conclusion is based primarily on the Appellant’s
demonstrated willingness to negotiate a settlement, the reasonableness of those
proposals, the Respondent’s refusal to participate in any meaningful manner in
the settlement negotiation process and the eventual success of the Appellant’s
appeal.
[15]
I am, therefore,
directing that the Appellant be awarded costs equivalent to 95 percent of its
invoiced fees and disbursements from May 2, 2014 to the date of the filing of
the within submissions, together with normal tariff costs for a
wholly-successful litigant with respect to all matters prior to May 2, 2014.
[16]
I have one final
comment in respect to the Respondent’s treatment of the invoices, payable by
the Appellant, that were attached as exhibits to the Affidavit submitted with
the Notice of Motion. The Respondent, in its response to the Appellant’s
motion, at paragraphs 32 to 35, submitted that these invoices contained
insufficient detail to determine if one or more counsel conducted the work or
what the hourly rate was or the amount of time spent on each task. I
wholeheartedly agree with the Respondent that these invoices were insufficient
for the purposes of adequately supporting such a motion. This would have affected
the percentage of the costs award if the Respondent had not then gone on, in
its submissions, to request that the Appellant file with the Court more
detailed invoices. On January 27, 2016 and pursuant to the Respondent’s
request, the Appellant filed those detailed invoices. At a minimum, the
Respondent should have objected to the subsequent filing of more detailed
invoices. If this motion had been heard in Court and not by way of written
submissions, I would not have allowed an adjournment in order that the
Appellant could rectify its supporting documents.
Signed at Ottawa,
Canada, this 26th day of February 2016.
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