Citation: 2014 TCC 50
Date: 20140213
Docket: 2011-1635(IT)G
BETWEEN:
ELEANOR MARTIN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR ORDER
Boyle J.
[1]
In my Reasons for
Judgment allowing Mrs. Martin’s appeal in full, I allowed the parties 30 days
to make submissions on costs, and asked for specific information relating to
costs, namely (i) the Appellant’s actual legal costs, and (ii) the date on
which the Respondent became aware of the fact that a Canada Revenue Agency
(“CRA”) officer had in fact mislead the Martins with information different than
that officer had in fact concluded and recorded in writing to them. My decision
in Mrs. Martin’s appeal was not appealed.
[2]
Mrs. Martin had been assessed
under section 160 of the Income Tax Act (the “Act”) in respect of
her late husband’s tax liability. The amount in issue was approximately
$175,000. At the time of his death, Dr. Martin had been contesting some of his
taxes assessed. Both the estate’s assessment and Mrs. Martin’s related
assessment were appealed to this Court and were set down together for a three
day hearing before me in Toronto. After the hearing of both began, the parties
reached a settlement with respect to the Estate’s tax appeal which was read
into the record. The hearing continued thereafter only in respect of Mrs.
Martin’s appeal.
[3]
Both the Estate and the
Appellant were represented by the same counsel. The hearing did not last a full
day. The parties had agreed in advance to a Partial Joint Statement of Facts.
The Appellant was the only witness. The Respondent put a Book of Documents into
evidence with the Appellant’s consent.
[4]
The Appellant was
successful at trial on her positions that, at the time of the relevant transfer
to her by Dr. Martin, she had provided consideration to Dr. Martin of a
significantly greater amount by way of her work in his professional practice
and for the use in his practice of a building of which she was owner.
[5]
In a slightly earlier
audit of Dr. Martin’s professional practice, CRA had expressly satisfied itself
of the valuable nature of Mrs. Martin’s services and of her ownership of 25% of
the professional building. That was communicated in writing to the Martins.
However, the Appellant’s testimony was that, at that same time, the CRA officer
advised that CRA would not allow any amounts paid to Mrs. Martin as a deduction
in the future. In response to this, in later years relevant to this appeal,
Mrs. Martin was either not paid for her same services or was paid significantly
less, and rent was not paid to her in respect of the professional building. As
stated in my reasons, the reduced salary undoubtedly reflected a balancing of
CRA wrongly telling them nothing would be permitted as a deduction and their
accountant telling them CRA was wrong on that point. During the trial, it came
out that CRA had satisfied itself during its review of Mrs. Martin’s Objection,
at least four and a half years before the trial, that Mrs. Martin’s version of
the oral communication by the CRA in the earlier audit was in fact correct and
recorded this in its Report on Objection. It was for this reason that the Court
invited submissions, and requested information, on costs.
[6]
The parties’ written
submissions were received, they were the subject of a telephone conference, and
further written submissions and back-up documentation was further received from
the Appellant.
[7]
The taxpayers asked for
either solicitor/client costs or fixed costs under Rule 147 or costs by
reference to Tariff B for a Class C proceeding.
[8]
The Respondent’s
position is that the Appellant should only be awarded costs in accordance with
Tariff B as a Class C proceeding.
[9]
Counsel fee in
accordance with the Tariff has been calculated as $4,800. The Appellant’s
claimed disbursements are for the $550 filing fee for the Notice of Appeal and
$84.23 for copying and binding the Appellant’s Book of Documents.
[10]
The legal fees of the counsel
who represented the Appellant and the Estate at trial were $9,250 (before HST/GST)
for preparing and filing the Notice of Appeal through to judgment. This amount
was not recorded separately nor broken down as between the two taxpayers. The
parties have agreed that an appropriate allocation would be 50/50. The
Appellant’s actual legal fees were therefore $4,625 plus HST/GST.
[11]
Prior to the filing of
the Notice of Appeal, the Martins had been represented by Thorsteinssons at the
Objection stage of this dispute and for several months following the Confirmation.
Thorsteinssons’ fees, recorded and billed separately for Mrs. Martin, during
the period March 2006 to October 2008 were approximately $54,000 (tax
included). The Court was told that Thorsteinssons wrote off an additional
approximately $85,000 in time recorded but not billed. No reason was given for
it not being billed.
[12]
The Martins had used
McInnes Cooper at the Audit and Investigation stage of this dispute. Their
fees, also recorded and billed separately for Mrs. Martin, during the period
July 2005 to March 2006 were approximately $12,000 (tax included).
[13]
In response to the
Court’s request to be informed of the date (prior to the June 2008 Report on Objection)
at which CRA satisfied itself that one of its officers did indeed mislead the
Martins by telling them something that was completely at odds with his or her
written audit findings on the very subject of amounts payable to Mrs. Martin as
expenses of Dr. Martin’s dermatology practice, the Court was advised that it
was sometime between the September 2006 Reassessment and the June 2008 Report
on Objection, and that the parties would, for the sake of efficiency, agree to
July 2007 being used for this purpose.
The Court’s Approach to Costs
[14]
Much has been written
on the law of costs in this Court.
I do not propose to do more here than
simply summarize. The Court’s Rule 147 is appended hereto.
1) The Court has jurisdiction to
award solicitor/client costs. As a general rule, costs on a solicitor/client
basis are only to be awarded in appropriate cases where there has been
reprehensible, scandalous or outrageous conduct on the part of a party. Even in
such circumstances, an award of solicitor/client costs is not automatic but
remains discretionary.
2) The Court has broad discretion in
fixing costs, provided it is always exercised prudently not capriciously, on a
principled basis, and after hearing from the parties.
3) The Court’s approach to fixing
costs should be compensatory and contributory, not punitive nor extravagant.
The proper question is: What should be the losing party’s appropriate
contribution to the successful party’s costs of pursuing the appeal in which
his or her position prevailed?
4) The Court is not bound to defer
to the Tariff absent unusual or exceptional circumstances of misconduct or
malfeasance. The Court should always follow a principled approach to determine
the losing party’s appropriate contribution to the successful party’s costs in
the particular circumstances of the proceeding. This includes considering and
weighing all relevant circumstances, including those enumerated in the Rules
which are relevant in the particular circumstances of the case.
5) The acts of a party and events prior
to the commencement of the legal proceeding may, in appropriate circumstances,
be considered in awarding costs.
6) The successful party’s actual
costs may be considered and taken to account in appropriate cases. So too may a
losing party’s actual, approximate or estimated costs.
Consideration and Conclusion
[15]
As can be seen, the
Appellant’s actual counsel fees for preparing, filing and pursuing her Notice
of Appeal through to judgment was $4,625 plus HST/GST. Counsel fee computed in
accordance with the Tariff would be $4,800. Absent other relevant considerations,
everyone should be happy with costs simply left to the Tariff. It can also be
observed in this case that this Court’s Tariff can be both credible and
valuable in many typical cases, even for those using very competent and
professional counsel, and in a major centre (although undoubtedly trial efficiency
was helped in this case by the significant work done by prior counsel at the
Objection and post-Confirmation stages).
[16]
However, I wrote in my
Reasons for Judgment in this case at paragraph 21:
[21] As
mentioned above there is some considerable concern raised by the CRA
correspondence with Dr. Martin and the Appellant in relation to the 1994
resolution of the prior audit of 1990 to 1992. There is a shocking difference
between what CRA communicated in writing regarding the acceptable reasonable
arm’s length salary to be paid to Mrs. Martin for her work at her husband’s
dermatology practice, and what has now been confirmed by CRA to have been told
to the Martins by that CRA auditor. This is not a case of a CRA auditor writing
something incorrect or stating something incorrectly. It appears that it can
only be considered to have been intentionally deceitful. Such actions by public
servants are entirely inexcusable. The Court is very surprised that the CRA
would in these circumstances have pursued its section 160 case against Mrs.
Martin with such vigour given that the deceit related precisely to the most
significant issue in this case being the worth of Mrs. Martin’s services to her
husband’s practice. The Court has accepted Mrs. Martin’s version that in 1994
the auditor told them in relation to the resolution of both her and her
husband’s audits that he could no longer deduct any portion of any salary he
chose to pay her. The CRA has since acknowledged in writing that in fact that
was what they were told, notwithstanding what the same auditor wrote. According
to the Appellant this is what led her to continuing to work for her husband but
to not be paid for the years prior to the years of her husband’s tax arrears
and transfers to her, and to be paid a much lesser amount in some of the later
years after her husband’s business accountant advised them that a reasonable
salary was in fact properly deductible and always had been. I accept this
explanation fully and believe this reinforces overall Mrs. Martin’s
credibility.
I remain very much of that view. This remains very
disappointing and I remain very surprised that Mrs. Martin’s appeal proceeded
to trial – indeed the dollar values determined by me were entirely consistent
with those determined by CRA in its preceding but recent audit.
[17]
However, it is not
entirely clear to me that CRA’s misleading, incorrect and deceptive
communications with the Martins warrant an award of solicitor/client costs,
even though they would surely be considered reprehensible, scandalous and outrageous
to the Canadian taxpayers CRA serves. It may well be, but I did not hear from
the auditor involved or his or her colleague, nor did I hear from the Appeals Officer
who determined it did indeed occur as Mrs. Martin described. While it is
exceedingly difficult in the circumstances to imagine how this auditor’s actions
could have been accidental, inadvertent or innocent, I would prefer to exercise
my discretion towards solicitor/client costs only in the clearest of cases, and
for that reason only I am not exercising it in this case. This should not be
construed as a comment or guidance on what action does or does not meet the
threshold level of reprehensible, scandalous or outrageous conduct.
[18]
Nonetheless, I am
satisfied that this is a relevant consideration in fixing costs and I am fixing
costs in excess of the Tariff amount which in the circumstances would not be
appropriate or satisfactory.
[19]
The previous CRA
auditor’s written statement and his or her oral warning or threat can not both
be true and correct. The Appeals Officer in this proceeding satisfied himself
that the incorrect, oral communication had indeed been made. The incorrect oral
communication was made at a time when the maker knew clearly that it was not
correct and not in accordance with how CRA would apply the law as he or she had
just written out the correct approach at the conclusion of a contentious audit
on the Martin’s unchanged facts. This incorrect oral communication lead
directly to Mrs. Martin’s not being paid for her valuable services or for the
use of the professional building of which she was an owner. The issues of
unpaid services and unpaid rent were the entire answer to the dispute before
me.
[20]
Having not received a salary
for some years, and a much reduced salary in others, would have had a direct
adverse financial impact on both her RRSP funds and her CPP entitlements
throughout her retirement years. These are the result notwithstanding her
complete success before me. This made the issue and amount that much more
important to her. Further, Dr. Martin would have been borne more tax as a
result of having deductions to which he was entitled but which the CRA told him
he could not take and would not be allowed in the future.
[21]
In my costs decision in
Jolly Farmer Products Inc. v. The Queen, 2008 TCC 693, I wrote in
conclusion:
[26] There
are perhaps some arguments and some cases that the Canada Revenue Agency just
should not pursue. The Crown is not a private party. By reassessing a taxpayer
and failing to resolve its objection, the Crown is forcing its
citizen/taxpayers to take it to Court. If the Crown’s position does not have a
reasonable degree of sustainability, and is in fact entirely rejected, it is
entirely appropriate that the Crown should be aware it is proceeding subject to
the risk of a possibly increased award of costs against it if it is
unsuccessful. The Crown is not a private party and tax litigation is not a
dispute like others between two Canadians. This is the government effectively
pursuing one of its citizens. There will be many times when the Crown will lose
cases in circumstances where prior to the hearing the Crown was not fully aware
of the taxpayer’s evidence or could not test its credibility, or could not
fully understand the taxpayer’s position. There will be times when the Crown
unsuccessfully pursues new or novel arguments. None of those appear to have
been the case here. The essential facts do not appear to have been in dispute
and there had been lengthy discovery of the taxpayer. As mentioned, the taxpayer’s
first settlement letter included a detailed analysis of the taxpayer’s legal
position.
These same comments are equally apt and a
relevant consideration in this case.
[22]
A related but separate
relevant consideration in fixing costs in this case is that the Respondent had,
prior to trial, given Mrs. Martin credit for her unpaid services in the years
in which the relevant transfers had been made from Dr. Martin to Mrs. Martin,
but refused to recognize as consideration her accrued unpaid services from the
immediately preceding years. There was no legal or rational basis for making
this distinction and, even when pressed, counsel could not suggest one to put
forward. Had the Respondent been consistent or rational in this regard in
reassessing Mrs. Martin and recognized this consideration accrued in the
immediately preceding years, it would have very significantly wiped out Mrs.
Martin’s section 160 assessment. This is a consideration in fixing costs
similar to those described in Rule 147(2)(g), (h) and (i).
[23]
CRA was aware that Mrs.
Martin was telling the truth about what the prior CRA auditor had told the
Martins since the Appeals Officer in this proceeding determined exactly that in
the course of reviewing Mrs. Martin’s Objection. After that time, presumed by
the parties and the Court for this purpose to be July 2007, Mrs. Martin paid
legal fees of approximately $21,000 to Thorsteinssons in pursuing the Objection
and for several months after the Report on Objection and the subsequent Reassessment
giving rise to this appeal (I see no relevance whatsoever in this case to the
time accrued but never billed to Mrs. Martin).
[24]
This is a very unusual,
difficult, and hopefully exceptional, case. In the circumstances, I am fixing
total costs, including disbursements, payable to the Appellant in the amount of
$10,635.
[25]
The Appellant is also
entitled to her costs for the costs submissions and hearing in accordance with
the Tariff at $700.
Signed at Ottawa, Canada this 13th day of February 2014.
"Patrick Boyle"
APPENDIX
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,
(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.
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