Docket: A-113-14
Citation:
2015 FCA 95
|
CORAM:
|
DAWSON J.A.
WEBB J.A.
NEAR J.A.
|
|
BETWEEN:
|
|
HER MAJESTY THE
QUEEN
|
|
Appellant
|
|
and
|
|
ELEANOR MARTIN
|
|
Respondent
|
REASONS
FOR JUDGMENT
DAWSON J.A.
[1]
A judge of the Tax Court of Canada awarded costs
to the respondent, Eleanor Martin, following her successful appeal from an
assessment issued under the Income Tax Act, R.S.C. 1985, c. 1 (5th
Supp.) (Act). The Judge’s reasons in respect of the costs award are cited as
2014 TCC 50 (costs reasons); his reasons for allowing Mrs. Martin’s appeal are
cited as 2013 TCC 38 (appeal reasons). No appeal was taken from the Judge’s
decision allowing Mrs. Martin’s appeal.
[2]
As explained below, the Judge was critical of
the conduct of the Canada Revenue Agency. He wrote at paragraph 16 of his costs
reasons that he was surprised that Mrs. Martin’s appeal proceeded to trial.
While the Judge declined to award costs on a solicitor client basis, he did
award costs to Mrs. Martin in excess of the relevant Tariff amount. The Judge
did not explain how he calculated the increased costs. As I understand his
reasons, the Judge included an allowance for costs Mrs. Martin incurred at the objection
stage of her dispute with the Canada Revenue Agency.
[3]
This is an appeal and cross-appeal from the
Judge’s costs order. On the appeal, the Crown argues that the Judge erred in
principle in awarding increased costs. On the cross-appeal, Mrs. Martin argues
that the Judge failed to reasonably exercise his discretion when he failed to
order costs payable on a solicitor client basis including costs incurred in
connection with the audit and objection stages.
[4]
In my view, the following issues are raised by the
appeal and cross-appeal:
1.
What is the standard of review to be applied to
the Judge’s decision on costs?
2.
Did the Judge err in principle in awarding
increased costs?
3.
Did the Judge err in principle in declining to
award solicitor client costs as now sought by Mrs. Martin?
[5]
Before I turn to consider the issues, it is
necessary to briefly situate the issues in the relevant facts.
I.
Factual Background
[6]
Subsection 160(1) of the Act renders a taxpayer
liable for income taxes owed by a tax debtor with whom the taxpayer was not
dealing at arm’s length if property is transferred to the taxpayer from the tax
debtor for consideration less than the fair market value of the transferred
property.
[7]
The Canada Revenue Agency assessed Mrs. Martin
as a result of payments received from her husband in the 1999 through 2004
taxation years. During those years Mrs. Martin’s husband was indebted to the
Minister of National Revenue on account of income taxes. Mrs. Martin appealed
the assessment on the basis that she provided consideration for the amounts
transferred to her in the form of services she provided to her husband’s
medical practice and premises she owned and made available to the medical
practice. The Judge fully accepted Mrs. Martin’s evidence (appeal reasons, at
paragraph 2).
[8]
Mrs. Martin began working in her husband’s
medical practice in 1989. She was paid a salary from 1989 to 1994 and in 2001
and 2002 (appeal book, at page 39).
[9]
In his reasons, the Judge noted that:
i.
In a prior audit conducted in 1994, the Canada
Revenue Agency accepted the reasonable arm’s length value of the services
provided by Mrs. Martin. The values accepted for the 1989, 1990, 1991 and 1992
taxation years were respectively: $30,000.00; $32,000.00; $34,000.00; and
$36,000.00 (appeal reasons, at paragraphs 9 and 10).
ii.
The Canada Revenue Agency acknowledged that
during the 1994 audit Dr. Martin was told that in future he could not pay a
salary to his wife and deduct the amount of salary from his income (appeal
reasons, at paragraphs 11 and 21). This was incorrect and contrary to the
assessment that flowed from the 1994 audit.
iii.
As a result, thereafter Mrs. Martin was not paid
in the years 1995 through 2000. In 2001 she was paid $25,000.00 and in 2002 she
was paid $24,700.00 (appeal reasons, at paragraphs 10 and 11; cost reasons, at
paragraph 5).
iv.
For each year in the period from 1995 through
2004 the reasonable amount of salary which would have been paid in an arm’s
length relationship for the services provided by Mrs. Martin was $38,000.00 per
year.
v.
Additionally, Mrs. Martin was owed $37,500.00 by
her husband in consideration of unpaid rent (appeal reasons, at paragraph 19).
vi.
In total, Mrs. Martin was entitled to additional
consideration in the amount of $267,800.00 from her husband. This was
sufficient to allow the appeal and vacate the assessment (appeal reasons, at
paragraph 20).
vii.
There are issues the Canada Revenue Agency
should not pursue. This was a case where the essential facts were not in
dispute. No new or novel argument was advanced by the Crown (costs reasons, at
paragraph 21).
viii.
It was also relevant to the award of costs that
prior to trial the Canada Revenue Agency credited Mrs. Martin for her unpaid
services in the years in which the relevant transfers were made from Dr. Martin
to his wife. However, the Canada Revenue Agency refused to recognize as
consideration accrued unpaid services. This conduct was characterized by the
Judge as inconsistent and irrational (costs reasons, at paragraph 22).
[10]
It was agreed by the parties that under the
relevant Tariff, Mrs. Martin was entitled to a counsel fee of $4,800.00 and
disbursements of $634.23. Her actual legal fees before the Tax Court were $4,625.00.
Additionally, in the Judge’s view it was relevant that after the Canada Revenue
Agency became aware of the incorrect advice communicated to the Martins in the
1994 audit, Mrs. Martin paid legal fees of approximately $21,000.00 to
Thorsteinssons while pursuing her objection to the assessment. In total she paid
approximately $54,000.00 to Thorsteinssons and approximately $12,000.00 to
McInnes Cooper at the audit stage (costs reasons, at paragraphs 9, 10, 11,
12 and 23).
[11]
It is in this context that the Judge awarded
costs, inclusive of disbursements, in the amount of $10,635.00.
[12]
Having set out the relevant facts, I turn to the
standard of review to be applied to the Judge’s decision.
II.
Standard of Review
[13]
Awards of costs lie at the heart of a trial
judge’s discretion. Discretionary costs awards should only be set aside if the
judge made an error in principle, or if the award is plainly wrong: Hamilton
v. Open Window Bakery Ltd., 2004 SCC 9, [2004] 1 S.C.R. 303, at paragraph
27; Sun Indalex Finance, LLC v. United Steelworkers, 2013 SCC 6, [2013]
1 S.C.R. 271, at paragraph 247.
III.
Did the Judge err in principle in awarding
increased costs?
[14]
The Crown asserts two errors on the part of the Judge:
one of fact and one of law. The error of fact is said to be finding the 1994
auditor to have been deceitful when this finding was not supported by
admissible evidence. The error of law is said to be relying upon the auditor’s
incorrect advice as a basis for increasing the costs awarded to Mrs. Martin.
[15]
I see no merit in the first asserted error. The
Canada Revenue Agency acknowledged in its Report on Objection that during the
1994 audit Dr. Martin was told that amounts paid in future to his wife would
not be deductible in computing his business income. The Halifax office of the
Canada Revenue Agency confirmed that this “warning”
had been given to Dr. Martin (appeal book, at page 39). As noted above, this
advice was given notwithstanding the result of the 1994 audit was to accept
that the arm’s length value of Mrs. Martin’s services to be between $30,000.00
and $36,000.00 per year over a four-year period.
[16]
To the extent that the incorrect advice and the
consequences to Mrs. Martin that flowed from the incorrect advice could have
been relevant, these facts were established in the evidence. In my view,
nothing turns on the Judge’s use of the word deceitful as he declined to award
solicitor client costs.
[17]
I now turn to the second asserted error.
[18]
It is well-settled law that in exceptional
circumstances conduct that occurs prior to a proceeding may be taken into
account if that conduct unduly and unnecessarily prolongs the proceeding. See,
for example: Merchant v. Canada, 2001 FCA 19, 267 N.R. 186, at paragraph
7; Canada v. Landry, 2010 FCA 135, 404 N.R. 255, at paragraph 25.
[19]
Thus, in Merchant conduct at the audit
and objection stages was relevant to the assessment of costs in the Tax Court
because it impacted on the manner in which the trial proceeded. In the trial
Judge’s view, a trial that should have lasted no more than one day took seven
days: Merchant v. Canada, [1998] T.C.J No. 278, 98 DTC 1734, at
paragraph 59.
[20]
This discretion to consider pre-proceeding
conduct must, however, be exercised within the context of the Rules of the Tax
Court. Here, the governing rule is Rule 147 of the Tax Court of Canada Rules
(General Procedure), SOR/90-688a.
[21]
Rule 147 is set out in the appendix to these
reasons. Briefly, Rule 147 allows the Tax Court to determine the amount of the
costs of all parties to a “proceeding” (Rule
147(1)). “Proceeding” is a defined term. In Rule
2 it is defined to mean “an appeal or reference”.
In exercising its discretion on costs the Tax Court may consider a number of
factors, including the conduct of any party that tended to shorten or to
lengthen unnecessarily the duration of the “proceeding”
(Rule 147(3)(g)) and whether any stage in the “proceeding”
was improper, vexatious or unnecessary (Rule 147(3)(i)(i)). The Tax
Court has discretion to award or refuse costs in respect of a “part of a proceeding” (Rule 147(5)(a)).
[22]
Read in the context of the definition of “proceeding”, the Judge erred in principle in
allowing an amount incurred in respect of costs unrelated to the appeal which
were incurred at the objection stage. Those expenses, by definition, were not
incurred as part of the appeal “proceeding”. The
error is made manifest when one considers that it resulted in an award of more
than twice as much as Mrs. Martin’s actual counsel fees for preparing, filing
and pursuing her notice of appeal through to judgment in the Tax Court (costs
reasons, at paragraph 15). As a result, I would allow the appeal and set aside
the order as to costs issued by the Tax Court. It follows that the appellant should
pay costs to the respondent in the amount of $4,800.00 plus disbursements and
taxes.
IV.
Did the Judge err in principle in declining to
award solicitor client costs?
[23]
Mrs. Martin seeks an award of costs on a solicitor
client basis in the amount of $73,151.22 in order to indemnify her for costs
incurred at the audit and objection stages as well as at the Tax Court.
[24]
In my view, the cross-appeal must fail for the
following reasons.
[25]
First, it follows from the above analysis that
an award of solicitor client costs in the proceeding before the Tax Court would
not include costs incurred prior to the appeal to the Tax Court at the audit
and objection stages.
[26]
Second, even if the Tax Court could award
solicitor client costs incurred prior to the commencement of an appeal before
it, it is well-settled law that solicitor client costs are generally awarded
only where there has been reprehensible, scandalous or outrageous misconduct
connected with the litigation.
[27]
In the present case, the Judge did not view the
conduct of the Canada Revenue Agency to warrant an award of solicitor client
costs for the reasons set out at paragraph 17 of his costs reasons.
[28]
Mrs. Martin has failed to show any error in
principle on the part of the Judge. Nor has she shown that it was plainly wrong
not to award her the costs she now seeks.
[29]
For these reasons, I would dismiss the
cross-appeal.
V.
Costs
[30]
The Crown asks that the appeal be allowed
without costs. Therefore, I would not award costs in this Court. No costs are
awarded in respect of the cross-appeal.
“Eleanor R. Dawson”
“I agree.
Wyman W. Webb
J.A.”
“I agree.
D. G. Near
J.A.”
Appendix
Rule
147 of the Tax Court of Canada Rules (General Procedure), SOR/90-688a
reads as follows:
|
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. (1) La Cour
peut fixer les frais et dépens, les répartir et désigner les personnes qui
doivent les supporter.
|
|
(2) Costs may be
awarded to or against the Crown.
|
(2) Des dépens
peuvent être adjugés à la Couronne ou contre elle.
|
|
(3) In exercising
its discretionary power pursuant to subsection (1) the Court may consider,
|
(3) En exerçant
sa discrétion conformément au paragraphe (1), la Cour peut tenir compte :
|
|
(a) the
result of the proceeding,
|
a) du résultat de l’instance;
|
|
(b) the
amounts in issue,
|
b) des sommes en cause;
|
|
(c) the
importance of the issues,
|
c) de l’importance des questions en litige;
|
|
(d) any
offer of settlement made in writing,
|
d) de toute offre de règlement présentée
par écrit;
|
|
(e) the
volume of work,
|
e) de la charge de travail;
|
|
(f) the
complexity of the issues,
|
f) de la
complexité des questions en litige;
|
|
(g) the
conduct of any party that tended to shorten or to lengthen unnecessarily the
duration of the proceeding,
|
g) de la conduite d’une partie qui aurait
abrégé ou prolongé inutilement la durée de l’instance;
|
|
(h) the
denial or the neglect or refusal of any party to admit anything that should
have been admitted,
|
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)
whether any stage in the proceedings was,
|
i) de la question de savoir si une étape de
l’instance,
|
|
(i) improper, vexatious, or unnecessary, or
|
(i) était inappropriée, vexatoire ou inutile,
|
|
(ii) taken through negligence, mistake or excessive caution,
|
(ii) a été accomplie de manière négligente, par erreur ou avec
trop de circonspection;
|
|
(i.1)
whether the expense required to have an expert witness give evidence was
justified given
|
i.1) de la question de savoir si les dépenses
engagées pour la déposition d’un témoin expert étaient justifiées compte tenu
de l’un ou l’autre des facteurs suivants :
|
|
(i) the nature of the proceeding, its public significance and any
need to clarify the law,
|
(i) la nature du litige, son importance pour le public et la
nécessité de clarifier le droit,
|
|
(ii) the number, complexity or technical
nature of the issues in dispute, or
|
(ii) le nombre, la complexité ou la nature des questions en
litige,
|
|
(iii) the amount in dispute; and
|
(iii) la somme en litige;
|
|
(j) any
other matter relevant to the question of costs.
|
j) de toute autre question pouvant influer
sur la détermination des dépens.
|
|
(3.1) Unless
otherwise ordered by the Court, if an appellant makes an offer of settlement
and obtains a judgment as favourable as or more favourable than the terms of
the offer of settlement, the appellant is entitled to party and party costs
to the date of service of the offer and substantial indemnity costs after
that date, as determined by the Court, plus reasonable disbursements and
applicable taxes.
|
(3.1) Sauf
directive contraire de la Cour, lorsque l’appelant fait une offre de règlement
et qu’il obtient un jugement qui est au moins aussi favorable que l’offre de
règlement, l’appelant a droit aux dépens entre parties jusqu’à la date de la
signification de l’offre et, après cette date, aux dépens indemnitaires
substantiels que fixe la Cour, plus les débours raisonnables et les taxes
applicables.
|
|
(3.2) Unless
otherwise ordered by the Court, if a respondent makes an offer of settlement
and the appellant obtains a judgment as favourable as or 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 substantial indemnity costs after that date, as determined by the
Court, plus reasonable disbursements and applicable taxes.
|
(3.2) Sauf
directive contraire de la Cour, lorsque l’intimée fait une offre de règlement
et que l’appelant obtient un jugement qui n’est pas plus favorable que
l’offre de règlement, ou que l’appel est rejeté, l’intimée a droit aux dépens
entre parties jusqu’à la date de la signification de l’offre et, après cette
date, aux dépens indemnitaires substantiels que fixe la Cour, plus les
débours raisonnables et les taxes applicables.
|
|
(3.3) Subsections
(3.1) and (3.2) do not apply unless the offer of settlement
|
(3.3) Les
paragraphes (3.1) et (3.2) ne s’appliquent que si l’offre de règlement :
|
|
(a) is in
writing;
|
a) est faite par écrit;
|
|
(b) is
served no earlier than 30 days after the close of pleadings and at least 90
days before the commencement of the hearing;
|
b) est signifiée au moins trente jours
après la clôture de la procédure écrite et au moins quatre-vingt-dix jours
avant le début de l’audience;
|
|
(c) is not
withdrawn; and
|
c) n’est pas retirée;
|
|
(d) does
not expire earlier than 30 days before the commencement of the hearing.
|
d) n’expire pas moins de trente jours avant
le début de l’audience.
|
|
(3.4) A party who
is relying on subsection (3.1) or (3.2) has the burden of proving that
|
(3.4) Il incombe
à la partie qui invoque le paragraphe (3.1) ou (3.2) de prouver :
|
|
(a) there
is a relationship between the terms of the offer of settlement and the
judgment; and
|
a) qu’il existe un rapport entre la teneur
de l’offre de règlement et le jugement;
|
|
(b) the
judgment is as favourable as or more favourable than the terms of the offer
of settlement, or as favourable or less favourable, as the case may be.
|
b) que le jugement est au moins aussi
favorable que l’offre de règlement ou qu’il n’est pas plus favorable que
l’offre de règlement, selon le cas.
|
|
(3.5) For the
purposes of this section, “substantial indemnity costs” means 80% of
solicitor and client costs.
|
(3.5) Pour
l’application du présent article, les dépens « indemnitaires substantiels »
correspondent à 80 % des dépens établis sur une base procureur-client.
|
|
(3.6) In
ascertaining whether the judgment granted is as favourable as or more
favourable than the offer of settlement for the purposes of applying
subsection (3.1) or as favourable as or less favourable than the offer of
settlement for the purposes of applying subsection (3.2), the Court shall not
have regard to costs awarded in the judgment or that would otherwise be
awarded, if an offer of settlement does not provide for the settlement of the
issue of costs.
|
(3.6) Lorsqu’elle
détermine que le jugement accordé est au moins aussi favorable que l’offre de
règlement visée au paragraphe (3.1) ou qu’il n’est pas plus favorable que
l’offre de règlement visée au paragraphe (3.2), la Cour ne tient pas compte
des dépens qui sont accordés dans le jugement ou qui seraient par ailleurs
accordés, si l’offre de règlement ne prévoit pas le règlement de la question
des dépens.
|
|
(3.7) For greater
certainty, if an offer of settlement that does not provide for the settlement
of the issue of costs is accepted, a party to the offer may apply to the
Court for an order determining the amount of costs.
|
(3.7) Il est
entendu que si une offre de règlement qui ne prévoit pas le règlement des
dépens est acceptée, une partie au règlement peut demander à la Cour une
ordonnance quant aux dépens.
|
|
(3.8) No
communication respecting an offer of settlement shall be made to the Court,
other than to a judge in a litigation process conference who is not the judge
at the hearing, until all of the issues, other than costs, have been determined.
|
(3.8) Tant qu’une
décision n’aura pas été rendue sur toutes les questions en litige, à
l’exception de celle relative aux dépens, aucune communication concernant une
offre de règlement n’est faite à la Cour, sauf à un juge qui préside une
conférence dans le cadre d’une instance et qui n’est pas celui qui présidera
l’audition de cet appel.
|
|
(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.
|
(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)
Notwithstanding any other provision in these rules, the Court has the
discretionary power,
|
(5) Nonobstant
toute autre disposition des présentes règles, la Cour peut, à sa discrétion :
|
|
(a) to
award or refuse costs in respect of a particular issue or part of a
proceeding,
|
a) adjuger ou refuser d’adjuger les dépens
à l’égard d’une question ou d’une partie de l’instance particulière;
|
|
(b) to
award a percentage of taxed costs or award taxed costs up to and for a
particular stage of a proceeding, or
|
b) adjuger l’ensemble ou un pourcentage des
dépens taxés jusqu’à et y compris une certaine étape de l’instance;
|
|
(c) to
award all or part of the costs on a solicitor and client basis.
|
c) adjuger la totalité ou partie des dépens
sur une base procureur-client.
|
|
(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,
|
(6) La Cour peut,
dans toute instance, donner des directives à l’officier taxateur, notamment
en vue :
|
|
(a)
respecting increases over the amounts specified for the items in Schedule II,
Tariff B,
|
a) d’accorder des sommes supplémentaires à
celles prévues pour les postes mentionnés au tarif B de l’annexe II;
|
|
(b)
respecting services rendered or disbursements incurred that are not included
in Schedule II, Tariff B, and
|
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) to
permit the taxing officer to consider factors other than those specified in
section 154 when the costs are taxed.
|
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.
|
|
(7) Any party
may,
|
(7) Une partie
peut :
|
|
(a) within
thirty days after the party has knowledge of the judgment, or
|
a) dans les trente jours suivant la date à
laquelle elle a pris connaissance du jugement;
|
|
(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,
|
b) après que la Cour a décidé du jugement à
prononcer, au moment de la présentation de la requête pour jugement,
|
|
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.
|
que le jugement
règle ou non la question des dépens, demander à la Cour que des directives
soient données à l’officier taxateur à l’égard des questions visées au
présent article ou aux articles 148 à 152 ou qu’elle reconsidère son
adjudication des dépens.
|
Email this Content