Citation: 2014-TCC 90
Date: 20140321
Docket: 2011-3234(IT)G
BETWEEN:
THOMAS O’DWYER,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR COST ORDER
I Introduction
[1]
This is a motion, brought by written submissions,
wherein the Appellant seeks costs on the following basis:
a)
On a solicitor and client basis in
the amount of $37,243, representing the total amount of all legal fees, costs
and taxes incurred in the appeal;
b)
In the alternative, a lump sum
award of costs in the amount of $33,519, being 90% of the Appellant’s costs
calculated on a solicitor and client basis;
c)
In further alternative, 80% of the
actual legal fees, being an amount of $23,013, incurred by the Appellant in the
appeal after the date of service of an offer of settlement and tariff costs in
respect of those costs incurred prior to the delivery of such offer; and,
d)
Costs to be fixed in respect of
this motion at $1,500.
II Background:
[2]
The Appellant, Mr. O’Dwyer, was
assessed a penalty as tax under subsection 237.1(7.4) of the Income Tax Act
(“the Act”). This personally assessed tax shelter penalty of $2,352,500 and
accrued interest of $485,312.34 related to certain transactions in respect of
which the Appellant acted as an accounting advisor in 2006.
[3]
In May of 2012, the Appellant
brought a motion before the Court to compel the Respondent to answer certain
demands for particulars in respect of the Reply filed or, in the alternative,
to strike portions of the Crown’s Reply or to strike the entire Reply. The
basis for this motion alleged that the Reply failed to describe sufficiently the
property, the representations allegedly made regarding the tax shelter and the
role the Appellant played in the promotion of the tax shelter.
[4]
This Court struck the Reply on the
basis that the Reply disclosed no reasonable grounds for opposing the appeal. In
doing so, this Court held that the Reply failed to allege facts which would
establish the necessary elements of the offence and the role of the Appellant necessary
in order to assess a penalty under the applicable penalty provisions.
[5]
The Respondent appealed that final
dispositive Order. Pending the hearing of the appeal, the determination of the award
of costs was held in abeyance.
[6]
On September 6, 2013, the Federal
Court of Appeal dismissed the Respondent’s appeals (there were two Orders) on
the basis that the Reply disclosed no reasonable grounds for opposing the
appeal since the Reply contained:
a)
insufficient alleged facts
relating to the requisite representations of the Appellant; and,
b)
insufficient factual allegations
regarding the role of the Appellant in relation to the promotion of the tax
shelter.
[7]
On the ground of appeal related to
the property description, while the Federal Court of Appeal found such factual
allegations by the Respondent were not correct, such an error, in isolation,
would not otherwise justify the striking of the entire Reply. In any event, the
Respondent’s appeal was dismissed on the other two grounds.
[8]
Therefore, this Court must now
decide the award of costs on the Appellant’s original motion to enforce the
demand for particulars or to strike the Reply brought in May 2012.
III Statutory
Authority:
[9]
The following is an excerpt from
the relevant cost provisions in the Tax Court of Canada Rules (General
Procedure) (the “General Rules”) relevant to the determination of this
question:
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.
147(3)
(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.
147(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.
147(3.1)
Settlement offers
(a) Unless otherwise ordered
by the Court and subject to paragraph (c), where an Appellant makes
a written offer to settle and obtains a judgment as favourable or more
favourable than the terms of the offer to settle, the Appellant is entitled to
party-and-party costs to the date of service of the offer and an amount equal
to solicitor-client costs after that date, plus reasonable disbursements and
applicable taxes.
(b) Unless otherwise ordered
by the Court and subject to paragraph (c), where a Respondent makes
a written offer to settle and the Appellant obtains a judgment 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 an amount equal to solicitor-client costs after that date, plus
reasonable disbursements and applicable taxes.
(c) Paragraphs (a) and (b) do not apply unless the
offer to settle
(i) is a
written offer of settlement submitted to the Court within two days of being
served, in a sealed date serviced envelope;
(ii)
is served at least 90 days before the commencement of the hearing; and
(iii) is not
withdrawn; and
(iv) does not expire
earlier than 30 days before the commencement of the hearing.
[10]
As a result of an Order-in-Council
in February of 2014, the Court notes that subsection 147(3.1), identified in
italics above, recently became a promulgated rule of this Court, as opposed to
its previous status of being subject to a directive Practice Note of the
Court.
IV Principled Analysis
of Various Cost Hierarchies:
i) Full
Solicitor and Client Costs - $37,243:
[11]
The Respondent submits that solicitor
and client costs on a full indemnity basis are not to be awarded unless there
is reprehensible, scandalous or outrageous conduct associated with the litigation
or where there is clear evidence that a party or counsel has engaged in that
behavior prior to the commencement of the action. This is referenced in the
cases of LeRiche v. Her Majesty the Queen, 2012 TCC 19, Miller v. Canada, 2003 DTC 6 (TCC) and Alberta Printed Circus v. Her Majesty the Queen, 2011
TCC 305. In the analysis which follows, this Court explores the tactical
intransigence of the Crown in its failure to appreciate the factual
deficiencies of its case. Nonetheless, considerable interpretive licence would
be needed in the present case to elevate the Crown’s conduct to that of reprehensible,
scandalous or outrageous as opposed to myopic, speculative and obdurate. This
is true during both the assessment and the litigation phases where examples of
an elongated confirmation period, the delivery of the notice of confirmation of
assessment without consultation and the factually deficient Reply were
highlighted by Appellant’s counsel in submissions. However, given that
malfeasance as opposed to obstinacy is a precondition to solicitor and client
costs on a full indemnity scale, the Court finds that such completely
recoverable costs shall not be awarded in this case.
ii) Exercise
of the Court’s discretion for Enhanced Costs:
[12]
The Respondent further submits
that there is no basis for this Court to award enhanced costs in the first
instance and, alternatively, not in the amount sought by the Appellant. Further,
the Court should decline to use its discretion to award costs in excess of those
otherwise provided for under Tariff B relating to a Class C proceeding (the
“Tariff”) or to give other directions as to costs. The Respondent submits that
the Tariff is sufficient in this matter in respect of the Appellant’s costs. Rule
147(3) clearly allows the Court to assess the factors enumerated therein on a
principled basis and, if warranted after the analysis, exercise its discretion in
awarding costs beyond the Tariff in order to achieve “a reasoned, balanced and
just result”: Daishowa-Marubeni International Ltd v The Queen, 2013 TCC
1222 at paragraph 4.
[13]
The Court recognizes that the
discretionary power to award costs beyond the Tariff must be exercised on a
principled basis bearing in mind it is a discretionary exercise and must have a
substantive purpose relevant to its use: R v. Landry, 2010 FCA 135 and Alberta
Circuits, supra. In this particular matter, the Court will exercise its
discretion to analyze the particular factors placed at its disposal in section
147 of the General Rules in order to determine whether costs beyond the
Tariff should be awarded.
a)
Results:
[14]
The Appellant achieved complete
victory. The alternative relief sought by the Appellant was rendered moot by
this unequivocal outcome. The order granted was fully determinative and
terminally dispositive of a successful appeal. At a preliminary stage and following
the only avenue open to the Appellant at the time, namely the bringing of a
motion to compel particulars or to strike the Reply, the Appellant was
completely successful before this Court. What began as an interlocutory
process became a final outcome. Given such a result, the authority cited by
the Respondent that only costs under the Tariff should apply to interlocutory
matters is not applicable: Canadian Imperial bank of Commerce v. R, 2013
FCA 179 at paragraphs 7 and 81.
b) Amounts
in Issue:
[15]
The Appellant was assessed with a
third party penalty under the Act. The assessment qua penalty
relates not to a reassessment of his tax return, but a penalty with respect to
professional services offered to others. This is among one of the most unilateral
type of assessments available to the Minister under the Act. It becomes
liability for tax, but is entirely unrelated to the Appellant’s own income and
filings. Accordingly, the Appellant, aside from bringing the motion, had only two
stark choices: continue to prosecute the appeal without a proper Reply or personally
pay the penalty in excess of $3,000,000. The relative importance of these
amounts, measured against the taxpayer’s livelihood, financial resources and
professional reputation were massive. In fact, it is difficult to imagine
another event in his professional life which could have so affected the
remainder of his working life and financial well-being. This huge personal
penalty exalts the Appellant’s right to know within the Reply the factual basis
of the imposition of the unilateral penalty against him. This right is further
enhanced because the penalty itself is unrelated to the Appellant’s personal affairs
which by comparison to usual assessments would otherwise have been deemed him to
have personal and intimate knowledge.
c) Importance
of the Issues:
[16]
Promoter penalties under
subsection 237.1(7.4) are not common before the Court. The Respondent’s faulty
pleadings witness the fact that the analysis and marshalling of factual
allegations concerning promoter penalties for limited partnership tax shelters
are not that commonplace either. Before the Court appeared two parties: one whose
livelihood was in peril under a levied tax penalty unrelated to his business or
personal tax status and, the other, the government seeking to establish the
format, threshold and methodology informing these entirely punitive
provisions. The Court observes that such stakes and principles were both
publicly and/or personally important to both parties.
d) Settlement
Offer:
[17]
There was an offer of settlement served
by the Appellant more than 30 days prior to the motion. It provided that the
Respondent would vacate the penalties with no costs payable to the date of the
offer and, thereafter, the Respondent would pay the Appellant 75% of his party
and party costs from the date of the offer until acceptance. This offer is commonly
referred to as “an all or nothing” offer as to the outcome of the main appeal.
However, in this particular instance, the determination of the Minister to
assess penalties was also an all or nothing proposition. There was no possible offer
of settlement regarding the final appeal to be made by either party in this
type of third party penalty assessment other than that of an “all of nothing”
offer. There is no spectrum of possible points between the determination or
non-determination of liability. The former commands the statutory imposition of
the penalty as pre-determined and pre-quantified by the relevant section of the
Act. The latter causes the penalty to be vacated. There is simply no
discretion on the part of the Minister except for one notable exception: to
undertake a careful assessment of the factual underpinnings of the case and
determine whether to persist, especially when confronted with such an offer at such
an early stage as a precursor to the initiation of such a motion to strike the
Reply.
[18]
Logically, if “all or nothing
offer” offers to settle are not to be considered at all, then it is never open
to either a respondent or an appellant in any tax court matter to utilize an
offer to settle with costs consequences where there is an all or nothing
determination of liability. Hypothetically, if the Appellant had placed an
offer to the Minister for an assessment of one-half of the quantum of the third
party promoter penalty, the Minister could not have accepted it: CIBC World
Markets Inc v. The Queen, 2012 FCA 3 at paragraph 22. If “all or nothing”
offers can never be considered then the cost provisions related to offers of
settlement are inapplicable in such circumstances even though there is no
express preclusion in the General Rules.
[19]
In order to ascribe some sense to
the broad wording of Rules 147(3)(d) and 147(3.1), the issue is not whether an “all
or nothing” settlement can or cannot be made with cost consequences. Instead, in
cases where only such an offer can be made, weight should be given to such an
offer where a party is completely successful in an ultimate way where interim alternative
relief was also sought. This sensible approach adds “weight” to the offer in
the present case for several reasons. Firstly, if the alternative relief had
been granted to the Appellant (i.e. demand for particulars enforced or only
portions of the Reply were struck), the matter would continue, the cost
principle regarding interlocutory matters would apply and the threshold of the
offer to settle would not have been achieved. Secondly, an “all or nothing”
offer made at the close of pleadings sounds a clarion call to the opposing
party that an overdue review, analysis and reconsideration of the entire matter
ought to be undertaken. Similarly, when an offeror sets the threshold of the
offer so high at the close of pleadings (abandonment of opposing the appeal), the
usual probability of an enhanced cost award is unlikely, but should make the
offeree wary of the conjunctive facts the offer’s preparation and service have been
undertaken so early in the proceedings and directly linked with the motion to strike.
Lastly, within the offer, there was quantifiable compromise on the issue of
costs, not just to the date of the offer (no costs), but in the case of
acceptance (only 75% on a party and party basis). These facts provide ballast
to employing the offer as guidance without contravening other cost principles
which usually winnow or nullify the effect of an all or nothing offer because
no other degree of compromise was possible than those offered: Mckenzie v.
The Queen, 2012 TCC 329.
e) Volume
of Work:
[20]
While intense, the amount of work
expended by the Appellant in respect to this matter did not extend over a long
period. This is reflected in the relatively small amount of the total costs
even on a full indemnity basis: $37,243.00. However, had the Appellant elected
not to bring this motion and allowed this matter to proceed to discoveries and
then to a full hearing of this Court, the result would have had been no
different at trial, but the Appellant’s costs would have been dramatically
higher. This is not to suggest that the Appellant’s action in bringing the
motion is something for which the Crown should be thankful and happily pay
enhanced costs. Nonetheless, it is a factor in assessing the reduced volume of
work and related costs which were expended by all at this time in an intense
and efficient fashion, rather than in an otherwise more passive and prolonged
manner had the manner proceeded to hearing in the absence of the motion. Moreover,
a specific examination of Appellant’s counsel’s accounts (submitted with the
materials) illustrates a methodical, calibrated and negotiable approach in the
intermittent and lock-step service of materials, discussion with opposing
counsel and subsequent proceeding to next steps. Such an approach reveals that
had the matter settled before the hearing of the motion, the Appellant would
have incurred fees in a progressively efficacious and cost-effective manner.
This approach actually moderated the costs by incrementally measuring Appellant
Counsel’s volume and expenditure of work against the Respondent’s responses
leading up to the hearing of the motion.
f) Complexity
of the Issues:
[21]
While the legal issues, per se,
are neither extraordinary nor complex in terms of a motion to strike a Reply or
to enforce a demand for particulars, it should be noted that all aspects of the
motion were strenuously resisted by the Respondent. This is evident both by representations
made at the hearing of the motion and at the Federal Court of Appeal. As well,
the components of the legal and factual elements of the promoter penalty provisions
for tax shelters are neither simple nor widely or frequently litigated. Accordingly,
the complexity of legal issues in the main appeal upon which the motion was
based was higher than usual.
g) Conduct
of Any Party:
[22]
The Respondent, while it did not
engage in behavior which was improper, vexatious or unnecessary, did fail to
undertake an appropriate review of the factual underpinnings and legal
components of the third party promoter penalty and the ability of such a case
embodied in the Reply to withstand this type of preliminary motion from the Appellant.
This assessment of the Respondent’s conduct holds even after the Respondent received
the appropriate notice, warning and opportunity to move to sturdier middle
ground or, as it turned out, in the absence of seeking such refuge, vacate the
penalties. The Respondent’s unwillingness to expend the effort and time to do
so made the motion and its ultimate determination essential.
h) Neglect
of the Party to Admit:
[23]
This was an interlocutory matter
(albeit a dispositive one) and so the narrow issue of admitting facts is not
relevant.
i) Improper Conduct or Negligence:
[24]
The Court has already determined
that there were no improper, vexatious or unnecessary proceedings. However,
there was, from the beginning and throughout, a refusal by the Respondent to
properly assess the merits of the case, its theory and the requisite facts. The
Respondent’s failure to effectively assess the absence of facts otherwise
necessary to establish the specific allegations against the Appellant, his role
in the promotion of the tax shelter and the connection of that role to the
penalty assessed, was at the heart of the striking of the Reply. In addition,
even on the finding related to the definition of the partnership as property,
it is clear that while the Federal Court of Appeal would not have upheld the
decision of this Court to strike the Reply on that ground alone, the Federal
Court of Appeal in several paragraphs of its decision reflected that such
drafting was a legal error within the Reply.
[25]
Factually and with reference to
recent authorities where enhanced costs have been awarded, the Respondent’s
conduct as a factor falls somewhere between malfeasance (Lariche and Miller,
supra) and no appreciable neglect, delay or intransigence ( Reynold Dickie
v. The Queen, 2012 TCC 327, Alberta Circuits and Daishowa-Marubeni,
supra). In affixing the spectral placement of such conduct in this matter,
it would appear farther away from neutrality than it does from impropriety.
V Conclusion
[26]
Therefore, with respect to the
Court’s analysis of the majority of the factors above, this Court easily finds
that its discretion should be exercised in favour of awarding the Appellant substantially
enhanced costs well beyond the Tariff. Given the present circumstances woven
within any analysis of the factors, the Tariff would be entirely inadequate: Re:
Consorzio del Proscuitto v. The Queen, 2002 FCA 417.
[27]
The Court, in applying the factors
above, identifies that most, if not all, of the factors weigh strongly in
favour of awarding the Appellant enhanced costs: the probable dramatic
financial effect of the penalty on the taxpayer, the importance of the issue to
the Respondent and to the Appellant, the comparative complexity of the penalty
provisions, the efficacy of litigating the deficiencies in the Reply at the
pleading stage, the offer of settlement made in writing (albeit by nature an
all or nothing settlement) and the conduct of the Respondent, not to the extent
of improper conduct, but to the extent of myopic, perfunctory and hasty
evaluations of the merits of the assessment throughout (ultimately reflected in
the Reply). Moreover, the final factor, relating to the Respondent’s conduct, was
a determinative omission to the entire appeal which arose and continued in the
face of legitimate queries of, and subsequent opportunities provided to, the
Respondent to evaluate, amend or vacate such penalties when questioned at
various stages by the Appellant and the Court, alike.
[28]
Accordingly, the consideration of
all of these factors justifies an award of costs to the Appellant on the basis
of a lump sum equal to $33,519.00 being approximately 90% of his solicitor and
client costs. In addition, the Appellant shall have its costs on this motion
as requested.
Signed at Vancouver, B ritish Columbia, this 21st day of March, 2014.
“R.S. Bocock”
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