Her Majesty the Queen v. Georges E Lemay, [1980] CTC 202, 80 DTC 6137

Walsh, J:—Plaintiff appeals from the taxation of costs dated February 13, 1980, in the amount of $2,727.17. A similar appeal was made in connection with the taxation of costs in the same amount in case No T-249-77 Her Majesty The Queen and Doctor Claude Leclerc. Actually the costs were taxed at double this amount but are divided equally in favour of each of the two defendants, the defence having been identical in each case. Although judgment was rendered in favour of plaintiff maintaining the tax appeals in each case plaintiff was required to pay defendants “reasonable and proper costs” pursuant to the provisions of paragraph 178(2)(a) of the Act which reads as follows:

Where, on an appeal by the Minister, other than by way of cross-appeal, from a decision of the Tax Review Board, the amount of

(a) tax, refund or amount payable under subsection 196(2) (in the case of an assessment or determination, as the case may be) that is in controversy does not exceed $2,500,

the Federal Court, in delivering judgment disposing of the appeal, shall order the Minister to pay all reasonable and proper costs of the taxpayer in connection therewith.

The amount of tax in issue in the case of Mr Lemay was $1,325 and in the case of Doctor Leclerc $1,324.94.

The interesting issue raised in these appeals is what are “reasonable and proper costs’’ in the case of such appeals. It is clear that the section is not limited to the allowance of taxable costs according to the Tariff, but neither does it call for an award of costs taxed on a solicitor and client basis, although an allowance of reasonable and proper costs would probably more closely approach the latter since in an income tax appeal involving less than $2,500 of tax it is unlikely that the amounts allowed under the tariff would adequately compensate the respondent for all legal expenses incurred in resisting the Minister’s appeal. The section is an exceptional one and is evidently intended to protect a taxpayer from being put to heavy expense in resisting such an appeal by the Minister from a decision in favour of the taxpayer by the Tax Review Board, whether the Minister’s appeal is successful, as in the present cases, or not.

In the present cases the Crown in appealing against the taxation does not dispute the time spent by respondents’ counsel in preparation for and participating in the appeals and hearings which lasted for two full days, nor the time charges made for this, but contends that it is not reasonable and proper that the legal time devoted to a case should be permitted to exceed in value the amount in issue, unless of course the establishment of an important principle is involved which will affect future cases, which was not the case here where the only issue was the valuation of the depreciable portion of property of which respondents were purchasers. The fact that the Crown would be anticipating being called on to pay the reasonable costs of respondents was called to the attention of their attorney before the action was even set down for trial by letter from the attorney for the Department of Justice dated June 19, 1979, referring to this and to the case of The Queen v L R Creamer, [1977] CTC 20; 77 DTC 5025. In the Creamer case the total amount of tax involved, both federal and provincial, was only about $160, but the account for fees based on time charges which Mahoney, J in rendering judgment found to be fair, amounted to $3,921.35. Unlike the present case the decision would affect what the learned judge referred to as perhaps tens of thousands of persons similarly employed in the delivery of their employers’ goods so that the principle was important to the Crown in bringing the appeal, and had the defendant not resisted the action the Tax Review Board decision would have been a precedent invoked by all these others in filing their future tax returns. At p 206 of the judgment Mahoney, J States:

While the taxpayer is not to be deterred by financial considerations from undertaking his defence, he is not being given a licence to squander public funds in a frivolous or luxurious manner, nor are those whom he retains. If they charge a fair fee for time necessarily spent in the defence of the action, they may expect their client to be put in funds, or reimbursed, for its payment. If they charge more he and they may have a problem, depending on their arrangements and his ability to pay.

In rendering judgment Mahoney, J referred to a judgment I had occasion to render in the case of The Queen v R Lavigueur, [1973] CTC 773; 73 DTC 5538, in which the amount of tax involved was only $222.19 but the tax implications for future years were substantial. In that case I found that the term “reasonable and proper costs” extended to solicitor and client fees over and above taxable court costs. In rendering jugment i stated at 784 [5546]:

.. . I Should have thought that in the present case if subsection 178(2) is to be applied, the reasonable and proper costs of the taxpayer should be limited to those which would be reasonable in an action involving a tax of under $2,500. While in view of the difficulty of the issue these reasonable and proper costs would be more than the mere taxable costs allowed in a Class I action into which category this action would fall, they must nevertheless be kept in moderation and not exceed proper solicitor and client fees which the defendant might reasonably be expected to pay himself but for subsection 178(2) in an action in which the amount in issue did not exceed $2,500.

To briefly resume the facts in the present case Messrs Lemay and Leclerc bought certain property from four vendors for a price of $650,000 of which $350,000 was attributed to depreciable assets in the agreement. It was of course advantageous for the vendors to establish the figure for depreciable assets as low as possible so as to minimize the recaptured capital cost allowance while conversely it was to the advantage of the purchasers, the present respondents, to get the figure as high as possible to be used as a base for capital cost allowance claims by them following purchase. The Minister in his assessments of all parties established the figure at $429,000, while the vendors used the $350,000 figure set out in the agreement, and the purchasers, the present Respondents, used the figure of $450,000 in their tax returns. The Tax Review Board allowed the appeal of the purchasers Mr Lemay and Doctor Leclerc and referred all assessments back to the Minister for re-assessment on the basis of the value of $450,000 for the depreciable assets. At trial in this Court before me the appeals of the vendors were dismissed, the figure used by the Minister $429,000 was accepted. Accordingly, the Minister’s appeals against the $450,000 evaluation sought by the purchasers were maintained. As pointed out in the reasons for judgment the difference between the Crown’s figure of $429,000 and that sought by the purchasers of $450,000 is not great in view of the fact that such valuations are never completely exact. The finding against the purchasers was to the effect that they had failed to discharge the burden of proof of establishing that the Crown’s assessment of $429,000 was not reasonable.

Unlike the Creamer and La vigueur cases therefore no future rights of the taxpayers or other taxpayers was involved. It is even possible to speculate that had the vendors not appealed the decision of the Tax Review Board fixing the valuation at $450,000, seeking a much lower value of $350,000, thereby forcing the Crown to contest, the Crown might very well have not appealed the Tax Review Board decision in favour of the present respondents Mr Lemay and Doctor Leclerc in view of the comparatively small amount of tax involved and the fact that no principle was at stake.

Under the circumstances and although there can be no criticism of the time expended by counsel for said respondents nor of his changes, such expenditure of time cannot be considered as being justified for the amount of tax involved, and therefore this account cannot be considered as reasonable and proper within the meaning of paragraph 178(2)(a) of the Act. In view of the amount of tax in issue being only approximately $1,325 in each case I find that the maximum amount which should be allowed on taxation is $1,250 plus disbursements in each case, and accordingly maintain the appeal against the taxations. This judgment is of importance to appellants for use in future taxations under the said section of the Act. The cost of these appeals should therefore be borne by the appellants and no costs of the appeals awarded against the respondents.