Date:
20100527
Docket:
A-381-09
Citation: 2010 FCA 135
CORAM: LÉTOURNEAU J.A.
NADON J.A.
PELLETIER J.A.
BETWEEN:
HER MAJESTY
THE QUEEN
Appellant
and
MARTINE
LANDRY
Respondent
REASONS FOR
JUDGMENT
LÉTOURNEAU
J.A.
Issue
[1]
Did Justice Hogan of the Tax Court of Canada (judge) properly
exercise his discretion pursuant to section 147 of the Tax Court of
Canada Rules (General Procedure) SOR/90‑688 (Rules) to award costs to
the parties in a proceeding? For the following reasons, I am of the opinion
that significant errors in law and in principle were made in that exercise of discretion
rendering it arbitrary and requiring this Court’s intervention.
Relevant legislation
[2]
I reproduce the relevant subsections of section 147.
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COSTS
General Principles
147. (1) Subject to the provisions of the Act, the Court
shall have full discretionary power over the payment of the costs of all
parties involved in any proceeding, the amount and allocation of those costs
and determining the persons by whom they are to be paid.
(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.
|
FRAIS ET DÉPENS
Règles générales
147. (1) Sous réserve des dispositions de la Loi, la Cour
a entière discrétion pour adjuger les frais et dépens aux parties à une
instance, pour en déterminer la somme, pour les répartir et pour désigner les
personnes qui doivent les supporter.
(2) Des dépens peuvent être adjugés à la Couronne ou
contre elle.
(3) En exerçant sa discrétion conformément au paragraphe
(1), la Cour peut tenir compte:
a) du
résultat de l’instance;
b) des
sommes en cause;
c) de l’importance
des questions en litige;
d) de
toute offre de règlement présentée par écrit;
e) de la
charge de travail;
f) de la
complexité des questions en litige;
g) de la
conduite d’une partie qui aurait abrégé ou prolongé inutilement la durée de l’instance;
h) de la
dénégation d’un fait par une partie ou de sa négligence ou de son refus de l’admettre,
lorsque ce fait aurait dû être admis;
i) de la
question de savoir si une étape de l’instance,
(i) était
inappropriée, vexatoire ou inutile,
(ii) a été accomplie
de manière négligente, par erreur ou avec trop de circonspection;
j) de
toute autre question pouvant influer sur la détermination des dépens.
(4) La Cour peut fixer la totalité ou partie des dépens
en tenant compte ou non du tarif B de l’annexe II et peut adjuger une somme
globale au lieu ou en sus des dépens taxés.
(5) Nonobstant toute autre disposition des présentes
règles, la Cour peut, à sa discrétion:
a) adjuger
ou refuser d’adjuger les dépens à l’égard d’une question ou d’une partie de l’instance
particulière;
b) adjuger
l’ensemble ou un pourcentage des dépens taxés jusqu’à et y compris une
certaine étape de l’instance;
c) adjuger
la totalité ou partie des dépens sur une base procureur-client.
(6) La Cour peut, dans toute instance, donner des
directives à l’officier taxateur, notamment en vue:
a) d’accorder
des sommes supplémentaires à celles prévues pour les postes mentionnés au
tarif B de l’annexe II;
b) de
tenir compte des services rendus ou des débours effectués qui ne sont pas
inclus dans le tarif B de l’annexe II;
c) de
permettre à l’officier taxateur de prendre en considération, pour la taxation
des dépens, des facteurs autres que ceux précisés à l’article 154.
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Facts and proceedings
[3]
The respondent was working as a nude dancer at the Chez Parée club in Montréal
when she met Mr. X. In 2003, she appeared on the radar screen of the
Canada Revenue Agency (Agency) because of an apparent discrepancy between her
assets and reported income. She therefore underwent a net worth audit for the
1998 to 2002 taxation years. The audit led to approximately $602,627 being
added to the respondent’s income, broken down as follows: $91,388 for 1998;
$89,146 for 1999; $68,068 for 2000; $181,849 for 2001 and
$172,176 for 2002. At the appeal hearing, she admitted to a reconstructed
discrepancy of $529,568: see Appeal Book, Volume 13, at page 2770.
[4]
The Agency’s audit began on February 10, 2003. It was hampered by the
respondent’s uncooperativeness. The Agency was never able to meet with her. In
fact, the Agency’s auditor, Mr. Noiseux, stated at the March 2009 trial
that this was the first time he had seen the respondent: see Appeal Book, Volume 17,
at page 3736. Nevertheless, the Agency finally managed to meet with a
representative of the respondent and of her common‑law spouse in
March 2003: see Appeal Book, Volume 7, at pages 1424 to 1428.
[5]
In mid‑April 2003, the respondent retained the services of a
lawyer: ibidem, at page 1429. On May 1, a meeting took place between
the respondent’s lawyer, the team leader of the Agency’s Investigations
Division, Mr. Gagnière, and the auditor appointed to the file, Mr. Noiseux.
[6]
The respondent’s lawyer was told that his client’s file was at the audit stage.
To explain his client’s assets, he put forth the hypothesis that she was
perhaps being supported, unbeknownst to her common‑law spouse, by someone
from her past, namely, a hockey player. However, he refused to give this person’s
name and the information requested by the Agency to start the net worth audit off
on the right track: ibidem, at page 1431.
[7]
At a subsequent meeting on June 20, 2003, the Agency was given certain
documents:
a)
financial statements for the company 9051‑1957 Québec Inc., owned by
the respondent, for the years 1998 to 2002;
b)
two copies of a purchase contract in which the company 9057‑6042
Québec Inc., also owned by the respondent, acquired Class A shares of the
company 9051‑1957 Québec Inc.;
c)
a copy of the financing contract between 9057‑6042 Québec Inc.,
represented by the respondent, and Mr. Guérin, the creditor; and
d)
a copy of a lease contract between Les Immeubles Leopold Inc. (the lessor)
and 9057‑6042 Québec Inc., represented by the respondent.
[8]
Eight months after the start of the audit, the Agency again asked the
respondent’s lawyer to provide the name of the person allegedly supporting his
client, the sums that she had received, the dates of the alleged payments, the
method of payment and the alleged reason for the payments.
[9]
The respondent’s lawyer refused to reveal the identity requested and
provide the other information. He insisted that his suggestion that his client
had received sums of money from a hockey player was merely a hypothesis: ibidem,
at page 1448.
[10]
Faced with a refusal to provide requested information, the Agency has no
choice, as it told the respondent’s lawyer if he refused, but to proceed with a
Requirement to Provide Information and Documents, set out at section 231.2
of the Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1.
[11]
The Requirement to Provide Information and Documents was mailed to the
respondent on November 12, 2003: ibidem, at page 1451. In a
letter of response to the Requirement, which letter was dated December 3,
2003, the respondent’s lawyer hypothesized that there may be more than one
third party supporting his client: see Appeal Book, Volume 2, at page 262.
[12]
In a letter to Raymond Galimi, Director of the Laval Tax Services Office, dated
January 9, 2004, the respondent’s lawyer gave Mr. Galimi, in a sealed
and initialled envelope, the name of a third party who had given substantial
sums of money to the respondent. However, the envelope could not be opened to
reveal the name to the Agency without the respondent’s authorization, as she
saw fit: ibidem, at page 267.
[13]
Nonetheless, the multiple third party hypothesis resurfaced in a letter
from the respondent’s lawyer to the Agency dated March 26, 2004: ibidem,
at pages 271 and 272.
[14]
On May 25, 2004, a draft assessment was sent to the respondent: see
Appeal Book, Volume 7, at page 1461.
[15]
On July 28, 2004, approximately one and a half years after the start
of the audit, the Agency still did not know the identity of the third parties
who had allegedly given money to the respondent. At that point, it received a
letter from the respondent’s lawyer again suggesting that there was more than
one party, but indicating that Mr. X was the person mainly responsible for
the monetary contributions: see Appeal Book, Volume 8, at pages 1796 and 1800.
[16]
Steps were then taken to meet with Mr. X regarding the business transactions
with the respondent and information that he had allegedly given large and
generous sums of money to the respondent. That meeting took place on
October 26, 2004, and Mr. X denied three times having in any way paid
substantial sums of money to the respondent between January 1, 1997, and
December 31, 2003. The interview was recorded on DVD: see Appeal Book, Volume 11,
at page 2392.
[17]
On November 15, 2004, the Agency’s representatives met with the
respondent’s lawyer one last time before the assessment was finalized. The
respondent’s lawyer was offered the chance to make concrete submissions on the
draft assessment, an offer that he turned down. He also refused to specify
whether there were other third parties besides Mr. X who had paid sums of
money and whether his client had made winnings at the casino during the period
covered by the audit: see Appeal Book, Volume 7, at page 1465.
[18]
At that time, the respondent’s lawyer gave the Agency’s representatives
verbal authorization to open the sealed letter previously given to Mr. Galimi.
The letter contained only one name, that of Mr. X, who, contrary to the
false information knowingly given at the start of the audit, has nothing of a
hockey player about him: ibidem.
[19]
On June 9, 2005, the Minister of National Revenue issued a notice of
assessment against the respondent for the periods at issue. On July 18,
the respondent, without going through the objection process, appealed to the
Tax Court of Canada. Pleadings were closed, a hearing took place from
March 9 to 13, 2009, and the Tax Court of Canada rendered its
judgment on August 10, 2009.
[20]
A notice of appeal was filed with this Court on September 25, 2009,
in which the appellant challenged the higher costs of $35,000 awarded to the
respondent.
[21]
I refrain from relating certain facts at this point in order to avoid repetition
later. I will address and consider them in the analysis of the decision under
appeal.
Analysis of the decision
and parties’ submissions
[22]
Relying on the decision of this Court in Lau v. Canada, [2004] F.C.J.
35, at paragraphs 4 and 5, the respondent notes that section 147
of the Rules vests the judge with a highly discretionary power to award costs.
A reviewing court may not substitute its opinion for that of the judge. I
agree, but this Court also points out that discretion must be exercised on a
principled basis: ibidem.
[23]
The appellant alleges that, here, three errors of law and two errors of
fact were made in this exercise of discretion rendering it arbitrary and
unlawful. Let us consider these allegations.
The judge misinterpreted Rule 147 and therefore
misapplied it in considering conduct prior to the proceedings
[24]
The judge has the power to fix a lump sum for costs, in excess of the sum
that would have resulted from the usual application of the Tariff provided for
in the Rules. To do so, the judge must normally consider the conduct of the parties
during the proceedings. This can be seen from the factors listed at Rule 147
and the case law: see Hunter v. Canada, 2003 D.T.C. 51 (TCC) and the
case law cited therein. Only in exceptional cases may the Court take into
account conduct prior to the proceedings: ibidem, see also Merchant v.
Her Majesty the Queen, 2001 FCA 19, where the taxpayer’s conduct
frustrated the audit process, and unduly and unnecessarily prolonged the
hearing, Merchant v. Canada, [1998] 3 C.T.C. 2505, 98 D.T.C. 1734 (CCI).
[25]
With respect, the judge misinterpreted the law and facts in this issue in
faulting the auditor for having failed to conduct a reasonable investigation into
the merit of the statements made by the appellant regarding her generous
benefactor. If there was a failure at the audit level, it was on the part of
the respondent, as will be seen below.
[26]
She and her spouse never met with the auditor, whereas, in 99 per
cent of audit cases, taxpayers agree to meet with the auditor: see Mr. Noiseux’s
testimony, Appeal Book, Volume 17, at pages 3735, 3736 and 3756,
where the witness states that the audit division was forced to proceed with the
Requirement to Provide Information and Documents, given the lack of
cooperation.
[27]
Furthermore, up until the very last minute, the respondent hid her donor’s
identity, while floating the idea that it was merely a hypothesis and that
there might also be more than one donor: see paragraphs 6, 8, 9, 11, 12,
13 and 15 of these reasons. In fact, when, as far as she knew, the audit was
approximately 85% completed, the respondent still refused to reveal her
benefactors’ names and addresses, even though she knew that there was only one:
see Appeal Book, Volume 7, page 1448, and Volume 17 at pages 3678
and 3754 to 3756.
[28]
It is cold comfort, and of no help to the audit, for an auditor to be told
that a sealed envelope, which may not be opened without the consent of a
respondent who refuses to give it, contains information that is necessary and
crucial to the effective and proper exercise of his or her authority to audit.
How, in such circumstances, can one blame the auditor for the respondent’s uncooperativeness
without acting arbitrarily? I think that the answer is evident.
[29]
The respondent had recorded telephone calls from Mr. X during the
period covered by the audit in which he described himself as a [translation] “generous benefactor” and
stated that he was prepared to say anything to the Agency’s auditor during his
meeting with him on October 26, 2004: see Appeal Book, Volume 5, at pages 873
to 884.
[30]
However, it was only at the stage of the appeal before the Tax Court of
Canada that she revealed the existence and contents of the telephone messages. She
never did it at the audit stage. Given that Mr. X formally denied three
times that he had made gifts of large sums of money to the respondent, the
Agency was entitled to ask the Court to rule on the credibility issues raised
by the respondent’s appeal, without incurring the Court’s wrath for having
exercised its right in the public interest.
[31]
At paragraph 64 of his reasons, the judge wrote the following:
[64] That said, I
believe on the other hand that if the appellant had made available to the CRA
some of the evidence submitted during the trial, the CRA’s attitude might have
been different. I therefore believe that the appellant is partly responsible
for the length of the proceedings.
When this significant fact is added to
the lack of cooperation during the audit period, it can only come as a surprise
that the Agency was then ordered to pay costs higher than what is normally
awarded by the Tariff.
[32]
At the hearing, the judge, clearly in possession of all the facts at that
point, considered the possibility of an offer to settle before trial, given
that there were reputations to protect. The auditor, Mr. Noiseux, answered
that the respondent had not cooperated and discussed a settlement: see Appeal
Book, Volume 17, at pages 3749 to 3751 and 3778. Two
parties are required in order to discuss a settlement, and the auditor was
never able to meet with the respondent and her spouse. Essentially, the
respondent’s strategy was to say “prove the asset discrepancies, and then we will
see”.
[33]
Further, let us not forget that, legally, the respondent bore the burden
of explaining the source of the large sums of money in her possession during
the periods at issue. She could have done this at the audit stage. She did not
do so. Rather, she chose to go directly to trial, without even going through
the objection process and discharging her burden at that point. The Agency
cannot be blamed for the fact that the respondent chose a trial and refused to
cooperate for an out‑of‑court settlement.
[34]
Overall, the judge exercised his discretion under Rule 147 by taking
into account factors prior to the proceedings and external to the parties’ conduct
at the proceedings, even though the exceptional circumstances required for him
to do so did not exist. In acting as he did, he exercised his discretion in a
manner contrary to established principles. In fact, if there are exceptional
circumstances, they are in favour of the appellant.
The judge erred in his interpretation of Rule 147 in
inferring from it a power to sanction nonexistent obligations
[35]
On this subject, the appellant faults the judge for having created a
threefold obligation for the Agency: to conduct an investigation into the merit
of the statements made by the respondent regarding Mr. X, to conduct an
investigation into Mr. X’s affairs and businesses and, lastly, to explain
the sources of the respondent’s income.
[36]
The appellant bases the first two allegations on paragraph 63 of the
reasons for decision, which reads as follows:
[63] After hearing
the evidence as a whole and listening to the testimony of Mr. X, I must
find that the CRA failed in its duty to conduct a reasonable investigation into
the merit of the statements made by the appellant regarding Mr. X.
Moreover, if the CRA had pushed its investigation with Mr. X further, it
would have easily been able to discover the truth and the existence of the
gifts. The CRA had the authority to conduct such an investigation or audit of
Mr. X. Moreover, Mr. Noiseux had no possible explanation as to the
sources of the appellant’s income. In his testimony, he admitted that the
tax accounts of the appellant’s companies were in order and he had no
indication of unreported income. In most cases where net worth assessments are
made and confirmed by the courts, there is found to be unreported income from
taxpayers’ businesses. Mr. Noiseux had no valid grounds for believing
Mr. X’s version of the facts, namely that there were no cash gifts.
[Emphasis added]
[37]
Even though the judge recognized in his reasons that the respondent has
the obligation to rebut the Minister’s assumptions, it is surprising to see
that he created an obligation on the part of the Agency to conduct
investigations into third parties to corroborate or try to disprove the
respondent’s statements. Taxpayers are the ones who have information on their affairs,
and it is up to them to provide it and discharge their burden of proof,
especially in cases of net worth assessments. Contrary to what the judge wrote,
it was not up to the auditor to provide a “possible explanation as to the
sources of the [respondent’s] income”: see paragraph 63 of the judge’s
reasons for decision.
[38]
Furthermore, it was practically impossible to conduct an investigation
into Mr. X, since it was not until October 26, 2004, that the auditor
learned that Mr. X was the generous donor. The Agency immediately
confronted Mr. X with the respondent’s statements, and he formally denied
them three times. The Agency might have known that Mr. X was not telling
the truth had the respondent revealed the existence and contents of the voice
recordings.
[39]
At paragraph 62 of his reasons for decision, the judge acknowledged
this when he wrote the following:
[62] . . . However,
in a system based on self‑assessment, when the Minister notices increases
in net worth unexplained by a taxpayer’s income, the taxpayer has an obligation
to provide the Minister with clear explanations. It should also be noted that
the conduct of Mr. Noiseux might have been different if the evidence
possessed by the appellant (including voice recordings) had been made available
to him.
[40]
However, the fact is that this evidence was hidden from the auditor in the
audit phase. Contrary to what the judge wrote, the auditor, kept in the dark
and out of the loop as he was by the respondent, had no valid grounds at the
audit stage for not believing Mr. X’s version of the facts, that is, that
there were no cash gifts. When the concealed evidence was brought to the
Agency’s attention, the appeal proceedings had already been initiated by the respondent.
[41]
To justify awarding increased lump‑sum costs, the judge erred in
imposing obligations on the Agency that it does not have and shifting to the
Agency the burden of proof that falls on the respondent. In this regard as
well, judicial discretion was not exercised according to established principles.
[42]
This leads me to consider the appellant’s final two submissions regarding
the judge’s alleged errors of fact.
The judge made errors of fact in concluding that the
auditor was biased in favour of Mr. X and failed to conduct a normal audit
in the respondent’s file
[43]
At paragraph 61 of his reasons for decision, the judge wrote the
following:
[61]
. . . According to Mr. Ouellette, Mr. X was treated with
deference during his interview with the CRA. Mr. Noiseux did not conduct
an in‑depth investigation; he accepted without any basis for so doing the
version of the facts given by Mr. X, a businessman, rather than believe
the appellant, a former erotic dancer. In my opinion, Mr. Noiseux’s
conduct amounted, in the circumstances, to an unfounded bias in favour of
Mr. X because of his social standing, which bias would have been
dissipated by an investigation and a normal audit of Mr. X or his
businesses. Mr. Ouellette argued that Mr. X’s conduct was
suspicious from his first meetings with the CRA and that if Mr. Noiseux
had followed normal procedures, the CRA would have discovered the existence of
the large gifts that Mr. X had made to the appellant.
[Emphasis added]
[44]
The judge endorsed the submissions of counsel for the respondent. With
respect, those submissions were not supported by the evidence.
[45]
There was no evidence, and counsel for the respondent was unable to point
to any, that “Mr. Noiseux’s conduct amounted, in the circumstances, to an unfounded
bias in favour of Mr. X because of his social standing”, as the judge
stated. This is mere speculation, and the judge’s finding or inference of fact
is capricious and unreasonable.
[46]
The same can be said for the judge’s finding that the auditor’s bias would
have been dissipated by an investigation and a normal audit of Mr. X or
his businesses. In fact, this finding is contrary to the evidence because
Mr. X and his businesses had recently been audited, and everything was in
order: see Appeal Book, Volume 11, at page 2390.
[47]
There was nothing in Mr. X’s conduct to suggest to the auditor that
he was concealing information. He agreed to a meeting with the Agency and to
the recording of the interview, and he answered the questions that he was asked.
[48]
The auditor did not know that the respondent had received bags of cash. He
was surprised to learn, during the proceedings brought by the respondent, that recordings
had been made of telephone conversations between the respondent and Mr. X,
when he had never been told of this fact and of the contents of the recordings
during the audit process.
[49]
Lastly, he also discovered after the audit that certain documents relating
to the sale of a building, including the acquittance, had not been sent to him despite
having being in the respondent’s possession.
[50]
The evidence shows that the auditor followed the normal audit procedure
but that his effectiveness was impaired by the respondent’s strategy of non‑cooperation.
Again, the judge’s finding that the normal audit procedure had not been
followed is unreasonable because it is contrary to the evidence. It cannot be used
to support the discretion to increase costs in favour of the respondent.
Conclusion
[51]
The income tax system is based on self‑assessment. Each year,
taxpayers are required to report their income for the current taxation year in
an honest and forthright manner. Inevitably, challenges arise regarding each
side’s respective assessments of the income reported, income earned and taxes
claimed, if any.
[52]
A dispute over taxes is no different from ones in other areas of law, in
that it raises credibility issues. This is especially true in taxation when the
taxpayer’s assessment is based on the net worth method. The taxpayer is then
asked to explain the discrepancy between the income reported and his and her
net worth. The explanation provided may be sufficient to close the file.
However, it may also be somewhat credible and, in some cases, simply not
believable.
[53]
Both the Agency and the taxpayer are entitled to apply to the court for a
decision on credibility issues. Although the Agency has the obligation of
verifying the existence of certain reported facts, it does not bear the burden
of investigating into the conduct of a third party who is a stranger to the
dispute in order to try to establish that the taxpayer is not telling the truth
or corroborate his or her statements. The onus rests on the taxpayer to rebut
the assumptions on which the Minister bases the assessment.
[54]
The power to award costs and determine the amount is discretionary, not
arbitrary. This discretion must be exercised according to established
principles that are relevant to the purpose of the discretion exercised. In
this case, the exercise was erroneous and capricious.
[55]
For these reasons, I would allow the appeal with costs. In light of the
respondent’s uncooperativeness during the audit, the false information that she
provided and the information that she concealed, which would have given rise to
a possible settlement and precluded a costly hearing, I would set aside the
judge’s cost order and replace it in court file 2007‑3211(IT)G with an
order stipulating that each party is to bear its own costs of the proceedings
in the Tax Court of Canada.
“Gilles Létourneau”
“I agree
M. Nadon J.A.”
“I agree
J.D. Denis Pelletier J.A.”
Certified
true translation
Tu-Quynh
Trinh
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