Ronald Bruhm v. Her Majesty the Queen, [1994] 1 CTC 2551, 94 DTC 1400

Sarchuk, J.T.C.C.:—Appeals from assessments of income tax with respect to Ronald Bruhm's 1982, 1983, 1984 and 1985 taxation years were scheduled to be heard on January 19, 1993. On January 18, 1993 counsel for both parties appeared before me and advised that all matters in issue except costs had been settled. Consents to judgment dismissing the appeal for the 1982 taxation year and allowing the appeals for the 1983, 1984 and 1985 taxation years were filed with the Court on January 27, 1993. A motion made that day by the appellant for an order pursuant to Rule 147 for costs was adjourned sine die to permit cross- examination on certain affidavits filed.

Submissions on the motion were heard on May 25, 1993. In addition I have before me the affidavits of Ronald Bruhm; Julian Doyle, one of his solicitors; Keith Pomianowski, a certified general accountant, and of Roberto Siqueira, as well as the cross-examination of each on their respective affidavits. Also filed were the affidavits of Victor Stanley, an appeals officer of Revenue Canada, Taxation and Harry Erlichman, counsel to the respondent, together with the cross-examinations on their affidavits.

Appellant's position

It is the position of the appellant that the circumstances including the conduct of the respondent are such that he should be fully indemnified for his costs. Counsel submitted:

. . . this is a case that calls for a lump sum award. Alternatively, I would draw your attention to the cases that have dealt with the change of rule of solicitor/client costs and I would ask you, either on the basis of those cases to apply the indemnity principle or using that principle, award a lump sum in this case.

The position advanced was that although the award of costs between parties on a solicitor and client basis has traditionally been reserved for cases where there exists misconduct connected with the litigation or where the Court wishes to show its disapproval of conduct that is oppressive or contumelious, that rule has been modified. The new principle was said to have been summarized by Mr. Justice Henry in Apotex Inc. v. Egis Pharmaceuticals (1991), 4 O.R. (3d) 321, 37 C.P.R. (3d) 335 (Ont. Ct. Gen. Div.), at page 325 (C.P.R. 339) in the following words:

. . . there is also a factor that frequently underlies the award, that is not necessarily expressed, that the successful party ought not to be put to any expense for costs in the circumstances. That is a factor in my decision in this case.

Counsel for the appellant referred to this as the indemnity principle and argued that it was one of the underlying rationales for the awarding of solicitor and client costs.

Reference was also made by counsel for the appellant to the decision of Madame Justice Macdonald in Coughlin v. Mutual Omaha Insurance Co. (1992), 10 O.R. (3d) 787, 96 D.L.R. (4th) 551 (Ont. Ct. Gen. Div.). In that case Madame Justice Macdonald found Mutual Life to be consistently adamant and aggressive in its position and described it as playing hard ball with Coughlin until the fifth day of the trial at which time it conceded the validity of his position. The learned trial judge took the position that because of the disparity of Coughlin’s financial situation as compared to that of Mutual Life and because of Mutual’s conduct throughout the trial, Coughlin was entitled to full indemnification of all costs incurred in connection with the assertion of his claim. The Court noted that this decision was not to be taken as an indirect way of awarding exemplary or punitive damages but followed a decision of Potts, J. in Wright v. National Life Assurance Co. of Canada (1987), 25 C.C.L.I. 1 (Ont. H.C.), in awarding solicitor and client costs because the defendant's conduct and behaviour forced the plaintiff to bring an action to establish his whole rights.

Counsel argued that where a taxpayer is obliged because of the position taken by the respondent to “jump through the hoops to assert his or her rights, that there is this emerging principle that in the appropriate case full indemnity should be given to the plaintiff". He submitted that:

. . . the courts are starting to recognize that we are no longer dealing with equal bargaining positions, but that we are dealing very often with people of unlimited resources or parties facing very large institutions, whether it be insurance companies, whether it be the state and that, therefore, there has to be an adjustment of the traditional principles.

As to the present appeal counsel submitted that it was essentially a single issue matter relating to the disposition of certain inventory by Bruhm to Viceroy Rubber & Plastics Ltd. (Viceroy). This issue was set out in the notices of appeal in unambiguous language and there could not have been any doubt as to the appellant's position. He conceded that procedural matters were also raised but says they were secondary to the inventory issue.

It is the appellant’s contention that Doyle, who was at that time responsible for the appellant's file, raised the issue of settlement when he spoke to Erlichman in June 1991 and at meetings on April 24 and August 10, 1992, but was in essence rebuffed. Furthermore, certain documents (which according to counsel proved the appellant's case) had been available to the officials of Revenue Canada responsible for the assessments for a substantial period of time but were not acted upon. In December 1992 Mr. Olah provided copies of these documents to Erlichman and in short order the case was settled. Thus, it was argued, the respondent's failure to settle prior to the last moment was irresponsible, improper and caused the appellant to incur the substantial costs that he did. More specifically the appellant was obliged to pay for the costs of preparation for trial unnecessarily and this was sufficient to warrant the award of a lump sum applying the indemnity principle. The following decisions were cited in support: RCP Inc. v. M.N.R., [1986] 1 F.C. 485, 10 C.E.R. 214 (F.C.T.D.); Janigan v. Harris (1989), 70 O.R. (2d) 5, 62 D.L.R.

(4th) 293 (H.C.J.); Hillsdale Golf& Country Club Inc. v. The Queen, [1979] 1 F.C. 809, 16 L.C.R. 1 (F.C.T.D.); Foulis v. Robinson (1978), 92 D.L.R. (2d) 134, 21 O.R.

(2d) 769 (Ont. C.A.); Wallace v. Canada, [1991] 2 C.T.C. 2341, 91 D.T.C. 1134 (T.C.C.); Veldman v. M.N.R., [1992] 1 C.T.C. 2708, 92 D.T.C. 1334 (T.C.C.).

Respondent's position

Counsel for the respondent submits that an award for costs above the tariff is not called for because solicitor and client costs are awarded only in exceptional circumstances, generally only on the ground of misconduct connected with the litigation. No such misconduct has been established. Settlement of these appeals was not delayed b the conduct of counsel for the respondent but by the failure by the appellant or his solicitor, Doyle, to address the merits of the case and to produce all relevant documents to the respondent. Once the appellant’s case was directed to the substantive issue in December of 1992 the matter was settled promptly. Thus none of the factors referred to in subsection 147(3) of the Rules, as relevant to the questions of costs, warrants a departure from the tariff. The respondent relied on: Bache & Co. Canada Ltd. v. Hirschler (1974), 4 O.R. (2d) 323 (Master); Veldman v. M.N.R., supra; The Queen v. Lee, [1991] 2 C.T.C. 344, 91 D.T.C. 5596 (F.C.A.); Amway of Canada Ltd. v. The Queen, [1986] 2 C.T.C. 339, [1986] 2 F.C. 312 (F.C.A.); Rummel v. M.N.R., [1990] 2 C.T.C. 2524, 90 D.T.C. 1868 (T.C.C.); RCP Inc., supra; Shairp v. The Queen, [1988] 2 C.T.C. 344, 88 D.T.C. 6484 (F.C.A.); Everdale Place v. Rimmer (1975), 8 O.R. (2d) 641 (H.C.J.); Edwards v. Shuber (1988), 30 C.P.C. (2d) 290 (Ont. Master); West Hill Redevelopment Co. v. The Queen, [1987] 1 C.T.C. 310, 87 D.T.C. 5210 (F.C.T.D); Foy v. Foy (No. 2) (1979), 12 C.P.C. 188, 26 O.R. (2d) 220 (Ont. C.A.).

Analysis

Section 147 of the Tax Court of Canada Rules—General Procedure, SOR/92-41 sets out the general principles applicable to the award of costs. The relevant portions of this section are:

147(1) Subject to the provisions of the Act, the Court shall have full discretionary power over 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.

(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 uration 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,

(c) to award all or part of the costs on a solicitor and client basis.

The discretion to award costs on a solicitor and client basis or by way of a lump sum in lieu of taxed costs under section 147 of the Rules is in my view only to be exercised in relation to matters connected with the litigation. Thus events which may have occurred prior to the filing of the Notice of Appeal such as negotiations with officials or officers of the respondent before the assessment was made or at the objection stage are not part or the proceeding and are not matters entitled to consideration in the awarding of costs.

The primary thrust of the appellant's submissions is that the respondent's conduct unnecessarily lengthened the duration of this proceeding. [1] The affidavits and the cross-examinations of Doyle and Erlichman are of particular relevance to this issue. In brief the following sequence emerges. Notices of Appeal for 1982 and 1983 were filed on March 6, 1991 and for 1984 on March 20, 1991. Replies were filed on May 6, 1991. In a letter dated August 20, 1991 Doyle indicated to Erlichman that he would contact him in the near future to discuss the merits of the appeals. By letter dated January 27, 1992 Erlichman asked Doyle how he wished to proceed. By further letter dated February 20,1992 Erlichman again asked Doyle whether he still wished to discuss the merits of the appeal. On March 3, 1992 Erlichman confirmed by letter that Doyle would arrange a meeting for early April. On March 25, 1992 Erlichman provided Doyle with a copy of the reply to the refiled notice of appeal for the 1985 taxation year and asked tor the appellant's list of documents. [2]

A meeting took place on April 24, 1992. Doyle asserts that he again inquired as to the possibility of settlement to which Erlichman reiterated tnat he had no instructions in that regard. Erlichman's recollection is that the primary substance of that discussion was the appellant’s concern regarding the manner in which the assessments had been made and that the discussion centered on these procedural matters. On April 28, 1992 Doyle wrote to Erlichman confirming certain undertakings made at that meeting. Each of these, and there were tour in number, related specifically to procedural matters raised by Doyle. No mention was made of the substantive issue. By letter dated May 27,1992 Erlichman replied and asked Doyle how he wished to proceed. On May 29 Doyle wrote to Erlichman specifically requesting documentation with respect to the procedural issue. On August 4, 1992 Erlichman provided the additional documentation. [3]

On August 10, 1992 a status hearing was held and a trial date was set for January 19, 1993. By facsimile dated August 11, 1992 Doyle referred to the status hearing and the time limits set at that hearing and sought Revenue Canada’s position as to whether some of the years under appeal were statute barred and whether there was any independent verification of the accuracy of the date of mailing of the notices of reassessment for the 1982 and 1983 taxation years. Doyle indicated that otherwise he would need discovery solely for the purpose of obtaining this information. Further correspondence dated August 13, 1992, August 21, 1992, September 11, 1992 and September 17, 1992 dealt only with a waiver and revocation for the 1985 taxation year. [4]

On October 30,1992 Doyle provided an unsworn list of documents. By letter dated November 18, 1992 he provided an affidavit of documents which did not include the documents central to the primary issue. Doyle also stated that:

During our meeting with Mr. Bruhm at that time [5] , it came to our attention that there may be further documents relevant to the matters in issue in the possession of our client, such as accounting records.

We will be attending at the offices of Viceroy Rubber & Plastics Ltd. on December 9, 1992 for the purpose of determining the existence of any other relevant documentation. A supplementary affidavit of documents will be served and filed at that time if appropriate. [6]

Mr. Olah was retained in November 1992. He wrote to Erlichman and suggested that discoveries should be held in order to crystallize the issue and perhaps come to some agreement with respect to the facts of the case. He also suggested a meeting and one was held on December 10, 1992. Following the meeting Olah wrote to Erlichman on December 17, 1992 outlining the appellant's position which, he said, was supported by the books and records of Viceroy and other documents. He also advised Erlichman that a "supplementary affidavit of docu ments to include various financial records of the corporation and other relevant documents which have recently been located by our client" was being prepared. On January 11, 1993 Erlichman requested that he be provided with "the account records" which were central to the appellant's position. That same day Olah forwarded an unsworn supplementary affidavit of documents and made particular reference to accounting records considered particularly relevant. Upon receipt of this documentation Erlichman forwarded it to Revenue Canada and on January 14, 1993 was instructed to settle the appeals "on the basis of the submissions by counsel and the supporting documentation recently provided".

Conclusion

(a) Solicitor and client costs: The rule with regard to an award of costs on a solicitor and client basis is that such an award is exceptional and generally ought to be made only on the ground of misconduct connected with the litigation which in income tax matters commences with the filing of a notice of appeal. [7] The comments in Apotex and Coughlin, supra, in my view, are of limited relevance in my consideration of the applicability of subsection 147(5) of the Tax Court of Canada Rules in this proceeding.

The facts before me do not support an award of costs on a solicitor and client basis. There is no evidence of misconduct by the respondent connected with the litigation.

(b) Lump sum award: I do not accept the appellant’s position that an "indemnification principle” is an appropriate consideration in determining whether a lump sum pursuant to subsection 147(4) of the Tax Court of Canada Rules should be awarded in this case. I also confess to some difficulty with his proposition that financial disparity between litigants warrants an "adjustment of the traditional principles" with respect to costs.

As to the circumstances I am satisfied that the appellant did not convey adequately his position on the merits to respondent's counsel until December 1992 and January 1993. The evidence strongly suggests that Doyle focused his efforts on the procedural validity of the notices of reassessment (i.e., that the reassessments were statute barred) and appears to have relegated the substantive issue to a secondary or subordinate position. [8] The notice of appeal for the 1982, 1983 and 1985 taxation years [9] also suggests that was the case. Furthermore, although the inventory issue was clearly raised in the pleadings, it was the procedural matter to which Erlichman was asked to respond on a number of occasions. While I accept that Doyle on several occasions inquired as to the possibility of settlement I am satisfied that these inquiries were made in passing and were not a proposal of settlement which could be taken by Erlichman to his client. [10] It is also significant that immediately following Olah's retainer in November 1992 the primary issue became the focus of discussions with Erlichman, the appellant’s position was outlined in specific detail and the supporting documenta tion was provided. In my view the responsibility for the delay in settlement should not be attributed to the respondent.

I turn next to the appellant's contention that documents central to the determination of the main issue were always available to the respondent but were either deliberately not acted upon, or at the very least improperly and negligently ignored. In addition to Erlichman’s evidence I nave considered the affidavits and examinations of Stanley, Pomianowski and Siqueira. On balance I am not able to reach the conclusion sought by the appellant.

The provisions of section 147 of the Rules permit me to consider a very wide array of factors in determining the appropriate award of costs, including matters such as the conduct of any party as it related to the proceeding. Furthermore, subsection 147(4) of the Tax Court of Canada Rules specifically entitles this Court to award a lump sum in lieu of or in addition to any taxed costs. I have considered the criteria enumerated in the Rule and have concluded that a lump sum award is not warranted. I am not satisfied that the respondent's conduct was such that it lengthened unnecessary the duration of the proceeding nor was the respondent's conduct at any stage in the proceedings improper, vexatious or unnecessary. Furthermore, no offer of settlement in writing was made by the appellant nor was any real discussion of settlement initiated by Doyle. Costs therefore are awarded to the appellant to be taxed in accordance with Schedule Il, Tariff B.

Order accordingly.