Citation:
2016 TCC 258
Date: 20161110
Docket: 2013-3028(IT)G
2012-4808(IT)G
BETWEEN:
RIO
TINTO ALCAN INC.,
Appellant,
and
HER
MAJESTY THE QUEEN,
Respondent.
REASONS
FOR ORDER ON COSTS
Hogan J.
I. INTRODUCTION
[1]
This matter concerns an award of costs in
respect of appeal number 2013‑3028(IT)G (henceforth referred to as the “Pechiney matter”) and appeal number 2012‑4808(IT)G (henceforth referred to as
the “Novelis matter”). In these matters, reasons were given in a combined judgment
allowing the Appellant’s appeals in part. I gave the parties until
September 8, 2016 to agree on costs. The parties have been unable to
reach an agreement and their written submissions have been reviewed by me.
[2]
The Appellant requests a lump sum costs award in
the amount of $518,112.76 in respect of the Pechiney matter and $419,377.20 in
respect of the Novelis matter. In both cases, this represents 55% of the
solicitor‑client costs incurred by the Appellant. The Appellant also
seeks an amount of $42,553.54 as a reimbursement of disbursements it incurred
in respect of both matters. The Appellant observes that its request falls below
the halfway mark in the range of 50% to 75% that this Court has often applied
in granting partial indemnity costs to appellants that have been mostly
successful in appeals.
[3]
In an attempt to agree on costs, the Respondent
offered to pay $13,100. The Respondent’s offer was based on Tariff B of
Schedule II of the Tax Court of Canada Rules (General Procedure)
(the “Rules”) The Appellant rejected this offer because it represents
only a small fraction of the Appellant’s solicitor-client costs in both
matters.
II. ANALYSIS
[4]
The parties agree that it is well established
that the Court enjoys broad discretionary power in awarding costs. This
discretion, however, must be exercised on a principled basis, giving proper
weight to the factors listed in section 147 of the Rules and such other
factors as produce a just result. Rossiter A.C.J., as he was then, succinctly
summarized the approach adopted by this Court with regard to costs as follows
in Velcro Canada Inc. v. The Queen, 2012 TCC 273:
[8] The Tariff annexed to the Rules
is a reference point only should the Court wish to rely upon it. It is
interesting to note that the first of two references to the Tariff in Rule 147
is subsection 147(4) which in and of itself gives extremely broad authority to
the Court in the awarding of costs.
[9] Notwithstanding former Chief Justice
Bowman’s comments in Continental Bank, supra at paragraph [9], it
is my view that:
1.
The Tariff was never intended to compensate a
litigant fully for legal expenses incurred in an appeal;
2.
The Tariff was also never intended to be so
paltry as to be insignificant and play a trivial role for litigants in dealing
with their litigation. The Court’s discretionary power is always available to
fix amounts as appropriate;
3.
Costs should be awarded by the Court in its sole
and absolute discretion after considering the factors of subsection 147(3);
4.
The discretion of the Court must be exercised on
a principled basis;
5.
The factors in Rule 147(3) are the key
considerations in the Court’s determination of costs awards as well as the
quantum and in determining if the Court should move away from the Tariff;
6.
In the normal course the Court should apply the
factors of Rule 147(3) on a principled basis, with submissions from the parties
as to costs, and only reference the Tariff at its discretion; and
7. The manner that the Tariff is referenced in Rule 147 indicates the
insignificance of the Tariff in costs considerations.
I will now apply the factors enumerated in subsection 147(3) of the Rules
to the matters at hand.
A. RESULT OF THE PROCEEDINGS
[5]
As regards the Pechiney matter, the Respondent
argues that it was more successful from a monetary standpoint than the
Appellant because the result of my decision is that the Appellant can deduct
48.35% of the amount claimed as a current expense in its appeal. However, this
percentage was calculated on total deductible expenses in the Pechiney matter
of $37,415,984. The total deductible expenses were misstated in my initial
reasons for judgment, which have been amended. The deductible expenses now
amount to $39,757,937. As a result of this change, the Appellant is entitled to
deduct 51.38% of the amount claimed as current expenses in its appeal.
[6]
I disagree with the Respondent’s
characterization of the impact of the Court’s decision on the Appellant. It is
important to recall with respect to the Pechiney matter that the amount of
$45,419,946 was originally deducted by the Appellant as current expenses when
it filed its tax return. This entire amount was disallowed by the Respondent in
the reassessment of the Appellant. In this context, the Court’s award
represents 87.5% of the amount originally claimed.
[7]
The Respondent acknowledges that the Appellant
was more successful than the Respondent in respect of the Novelis matter. The
Court allowed as deductible expenses $14,218,477, which represents 72% of the
amount of $19,759,339 claimed by the Appellant in its appeal.
[8]
The parties appear to agree that there is a
strong tendency in the case law to find that costs awards should not be distributed
on the basis of the success achieved on each individual issue, but rather
should be based on the overall result of the appeal.
[9]
I agree with the Appellant’s submission that the
increase in the amount of its claim from the amount claimed in its tax returns
as filed to that claimed in its notices of appeal should not be treated as a
negative factor in the award of costs in both matters. In my opinion, this did
not increase the scope of work for the parties. It should be noted that the
Minister of National Revenue (the “Minister”) adopted a hard-line
approach in both matters arguing that all of the expenses claimed by the
Appellant in its tax returns were capital in nature. The Appellant’s position
is significantly improved by the results of both decisions as the Respondent
had fully disallowed the Appellant’s deductions claimed in its tax returns. As
a result of the decision the Appellant can now deduct substantially all of the
expenses that it initially claimed in its tax returns. This is a significant
victory for the Appellant that militates in favour of an increased costs award.
B. THE AMOUNT IN ISSUE
[10]
The Respondent argues that the amounts in issue
and the amount allowed by me are not significant in the context of the
transactions at issue and the Appellant’s overall business. I disagree.
[11]
The judgment allowed deductions totalling $53,976,414.
This is a significant amount as the Appellant alleges that it expects to
receive a refund in excess of $16,000,000. The Respondent does not dispute this
allegation. If an enhanced costs award is not allowed, the Appellant would be
awarded approximately $13,000 based on the Tariff after having spent over $1.7
million to obtain a tax refund of approximately $16,000,000 in respect of taxes
that the Minister was not entitled to collect under the law.
[12]
The Respondent’s proposal means that taxpayers would
be expected to pay significant legal costs notwithstanding the fact that they
are successful or mostly successful in their appeals. This appears unjust to me.
In short, taxpayers could be pressured into paying some of the amount that has
been improperly assessed in lieu of paying significant legal fees that would
not be reimbursed under the Tariff.
[13]
As noted by my colleagues Campbell J. and Rip J., in complex matters the Court
can take into account the party’s actual fees, having regard to the fact that
complex issues generally signify that the facts are more complicated and that documents
that need to be reviewed and presented in evidence are lengthy, which results
in lengthy examination for discovery and preparation for trial. Counsel must
also work hard at distilling complex facts in such a way as to facilitate the
Court’s appreciation of the matter.
C. THE IMPORTANCE OF THE ISSUE
[14]
With regards to the importance of the issues in
these appeals, the Respondent qualifies as being largely fact-specific and not
unique. The Respondent suggests that my reasons in these appeals will enjoy
little precedential value. Respectfully, I believe this is an
oversimplification of the impact of the judgment.
[15]
It is widely known that, before this judgment,
the Minister’s position was that fees related to investment banking or other
advisory services had to be capitalized if they were incurred in the broad
context of takeover or so‑called “spin-off” transactions. To my
knowledge, the demarcation line outlined in my reasons for judgment had not been
considered in the prior case law. Assuming my decision is not overturned on
appeal, my reasons for judgment should be useful to a large number of public companies
carrying out takeover or “spin-off” transactions.
[16]
In my reasons for judgment, I also comment on
the application of paragraph 20(1)(bb) of the Income Tax Act pleaded by
the Appellant in the alternative. Contrary to the Respondent’s position, I
decided that part of the Appellant’s investment banking fees were also
deductible under that provision if I was wrong in my finding that they
qualified as current expenses. This ruling will also be useful for taxpayers
seeking to deduct investment banking fees in a similar context to that in the instant
case.
[17]
In summary, the Appellant had to present novel
legal theories that had not previously been considered by Canadian courts. This
weighs in favour of an increased costs award.
D. OFFERS OF SETTLEMENT
[18]
The parties acknowledge that no offers of
settlement were made, in writing or otherwise, by either party. It is quickly
becoming a practice for parties engaged in complex tax appeals to seek to
settle their dispute through private or, as often is the case, Court-monitored
settlement discussions.
[19]
I acknowledge that subsections 147(3.1) to
147(3.8) of the Rules deal with the costs consequences that flow from
the making of settlement offers that are rejected. This being said, I view the
absence of offers as a negative factor in the determination regarding a request
for an enhanced costs award.
E. VOLUME OF WORK
[20]
The Respondent submits that the volume of work
was average in the context of an appeal of this nature before this Court. I
disagree and share the Appellant’s view of the considerable volume of work that
was undertaken by its counsel on its behalf, as set out in paragraphs 33, 34,
37, 38, 39 and 40 of its written submissions as follows:
33. The notice of
appeal was filed in October 2012 for Novelis and in August 2013 for Pechiney,
appealing the Minister’s reassessments of the appellant’s 2007 and 2003
taxation years respectively, denying the entirety of the Disputed Expenses.
These appeals remained ongoing from that time until the trial. From the time
the appeal process was commenced, the appellant completed both the examinations
for discovery as well as undertakings before the respondent elected to issue a
further reassessment in Novelis. This action by the respondent during the
appeal process required the appellant to amend its pleadings in that appeal in
accordance with the order rendered by Justice Favreau on
October 7, 2014 as it appears in the Court file. Similarly, the
respondent filed an amended reply to the notice of appeal in Pechiney 1.5 years
after the original reply was filed to include new arguments on central issues
contained in the appeal.
34. In addition,
the appellant prepared for and completed five days of trial before this Court,
during which it was the appellant that led all of the testimonial evidence and
examined six witnesses. As this Court is well aware, because of the amounts in
issue and the importance of the issues, a large amount of evidence was put
forward before the Court. The appellant prepared the joint book of documents
which amounted to seven volumes, 366 separate documents and over 7,000 pages of
evidence. In addition, the appellant filed two rounds of written
representations amounting to 250 pages of written material, referenced dozens
of cases including foreign jurisprudence. In contrast, as was found by the
Court in the reasons for judgment, “[t]he Respondent led no testimonial
evidence…posed few questions on cross‑examination”.
. . .
37. As was the
case in Repsol, the litigation in Pechiney and Novelis covered
27 months and 35 months, respectively, the onus was on the appellant,
the facts were complicated, several witnesses were required, legislative
history and extensive jurisprudence was required and the transactions in
question were international. Accordingly, the volume of work completed by the
appellants in Pechiney and Novelis should be seen as justified.
38. The appellant
has been obliged to incur significant legal and other professional costs as a
result of the appeals in Pechiney and Novelis. Some of the proceedings could
have been avoided, as will be detailed below, had the respondent applied a
reasoned approach, including applying the Canada Revenue Agency’s published
positions in IT‑475, rather than taking wholesale approach in denying all
of the expenses incurred without further consideration as to the facts and
issues in dispute.
39. Furthermore,
throughout the course of Pechiney and Novelis, the appellant took all measures
it could to efficiently pursue these appeals by joining separate appeals with
similar issues, consolidating the required steps along the way, and utilizing
technology to allow witnesses from overseas to appear before the Court. These
efforts were intended to ensure the effective use of each parties’ [sic]
and the Court’s resources. The appellant should not be penalized for these
measures by further discounting the costs actually incurred by a larger
discount factor than has already been done in the request for enhanced costs in
the amounts detailed in paragraph 3 above.
40. Accordingly,
the volume of work in this matter was justified and was significant and thus
favours the appellant being awarded with the enhanced costs it seeks in this
costs award.
[21]
The considerable volume of work undertaken on
behalf of the Appellant justifies an enhanced costs award.
F. THE COMPLEXITY OF THE ISSUE
[22]
The transactions and the issues presented by
them were complex. This factor militates in favour of an enhanced award.
G. THE DENIAL OR THE NEGLECT OF
ANY PARTY TO ADMIT ANYTHING THAT SHOULD HAVE BEEN ADMITTED
[23]
I see nothing in the record that justifies a higher
award because of conduct of this kind.
H. OTHER RELEVANT MATTERS
[24]
There appear to be no other factors that need to
be weighed in my determination of the costs award in this matter.
III. CONCLUSION
[25]
In light of all of the above, I conclude that
cost awards based on the Tariff are inadequate in both of these appeals. In the
absence of meaningful settlement discussions, I am of the view that an
additional 25% discount factor should be applied to the 55% solicitor-client
costs amount requested by the Appellant in its written submissions. On this
basis, I award the Appellant 30% of its legal fees of $1,704,527.20, which translates
into an award of lump sum partial indemnity costs of $511,358.16 for both
appeals plus 100% of disbursements, which amounts to $42,553.54.
Signed at
Ottawa, Canada, this 10th day of November 2016.
“Robert J. Hogan”
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