Hassanali Estate v. R., [1997] 1 CTC 2464, 97 DTC 783

Mogan J.T.C.C.: — This is a motion by the Appellant for costs in connection with an application by the Minister of National Revenue (the “Minister”) to add a third party to the appeal herein. The story begins with litigation in the Ontario Courts.

From 1969 to 1986, for at least 15 years, Count Sajan Hassanali (the “Count”) and Ms. Helga Georg cohabited in an intimate relationship during which he made repeated promises to marry her after his wife died. Soon after the Count’s wife died, he did not marry Ms. Georg but married another woman who became the Countess and is the actual Appellant herein. Ms. Georg commenced an action in the Ontario Courts against the Count with respect to his repeated promises to marry her and the valuable services she had rendered over the years both personally and concerning his properties. Walsh J. of the Ontario Court General Division found that the Count had been unjustly enriched as a result of Ms. Georg’s services and that she met the tests for a constructive trust with respect to certain property; the judge ordered the Count to pay $725,000 to Ms. Georg.

When computing his 1989 income, the Count deducted as a business expense the amount of $725,000 paid to Ms. Georg plus the amount of $111,584 paid as legal fees in his litigation with Ms. Georg. When computing her income for 1989, Ms. Georg did not include the said amount of $725,000. The Minister of National Revenue by Notice of Reassessment disallowed the deduction of $836,584; and the Count appealed to this Court from that reassessment by Notice of Appeal dated November 29, 1994. The Count died on January 16, 1995. In April 1995, Mr. Ghan, counsel for the Minister informed counsel for the Appellant that the Minister would commence an application under section 174 of the Income Tax Act to add Ms. Georg as a third party to this appeal in order to deal with this appeal and Ms. Georg simultaneously.

By letter dated June 5, 1995, counsel for the Appellant asked why Revenue Canada would include Ms. Georg in a section 174 application when it appeared that her 1989 taxation year was statute barred. On June 28, 1995, Mr. Ghan informed counsel for the Appellant that the section 174 application had been filed with this Court. By letter dated July 12, 1995, counsel for the Appellant again asked for details of Ms. Georg’s 1989 assessment and whether she might be statute barred. By letter dated July 17, 1995, Mr. Ghan stated that he could not provide any information as to whether Ms. Georg’s 1989 taxation year might be statute barred. On September 5, 1995, counsel for the Appellant wrote to Mr. Ghan and I will set out in full the contents of that letter:

We acknowledge receipt of your letter dated July 17, 1995.

With respect to the respondent’s application returnable September 13, 1995, the court must be satisfied that the determination of the questions set out in the application will affect assessments or proposed assessments in respect of both our client and Ms. Georg. As far as we are aware, it would appear that Ms. Georg’s original assessment may be statute barred. The application alleges that Ms. Georg did not include the payment in issue in her income for the 1989 taxation year. However, no facts are alleged to establish that the non-inclusion was a misrepresentation attributable to neglect or carelessness which would allow her to be assessed beyond the ordinary time limit. Consequently, in our view, the application is deficient in that insufficient facts are alleged to satisfy the court that a determination of the questions will affect an assessments or proposed assessment in respect of Ms. Georg.

Your unwillingness to provide the information requested is therefore most disappointing. We are left with no alternative but to oppose the application on the basis of this deficiency and seek costs. Surely this issue could be settled, one way or the other, depending upon the status of Ms. Georg’s assessment and the time period within which she may have been assessed.

On September 13, 1995, the section 174 application was heard by Associate Chief Judge Christie. In the course of that hearing, Mr. Ghan disclosed for the first time that the Minister had assessed Ms. Georg for the 1989 taxation year but had obtained a waiver under section 152(4) which would permit the Minister to reassess her. On November 1, 1994, Christie A.C.J. issued a lengthy order which, inter alia, (i) joined Ms. Helga Georg as a party to this appeal; (ii) required the Respondent to pay all reasonable and proper costs of Ms. Georg in relation to making her a party to this appeal; (iii) set April 15, 1996 as the date for the hearing to determine the questions set out in the section 174 application; and (iv) awarded cost of the application to the Appellant payable by the Respondent on a solicitor and client basis “forthwith in any event of the cause”. When delivering the reasons for the Order, Christie A.C.J. stated in part:

Mr. Shaw was entitled to know that, in fact, Ms. Georg was potentially liable for tax and, in my opinion, there was a legal obligation on Mr. Ghan to inform him that she had been assessed and that she could be reassessed by the Minister because of the existence of the waiver. That information was necessary to enable Mr. Shaw to determine the position he should take on behalf of his client in relation to the application under subsection 174(1) of the Act. In the circumstances I regard Mr. Ghan’s conduct as reprehensible. Although my decision to award solicitor-and-client cost does not turn on this, I observe that the arrogant impertinence and professional discourtesy with which Mr. Ghan treated a perfectly appropriate request for information is inconsistent with the civility expected of members of the bar who conduct litigation before this Court.

The Respondent appealed to the Federal Court of Appeal from those parts of the order of Christie A.C.J. which required the Respondent to pay the costs of Helga Georg in relation to making her a party to this appeal, and which awarded costs of the section 174 application to the Appellant on a solicitor and client basis. By judgment delivered on March 28, 1996, the Federal Court of Appeal allowed the Respondent’s appeal; set aside the order of the Tax Court of November 1, 1995; and referred the matters back to the Tax Court for redetermination in accordance with the reasons of the Federal Court of Appeal.

On April 10, 1996, counsel for the Respondent wrote to the Registrar of this Court stating that Helga Georg was in bankruptcy; that the Minister was withdrawing the section 174 application; and that the Respondent was requesting an Order that the appeal herein be heard at Toronto on April 15, 1996 as the parties had planned since Christie A.C.J. had issued his Order of November 1, 1995. The appeal herein was heard on its merits by my colleague Sarchuk J. at Toronto on April 15 and 16, 1996. Because the Minister withdrew his application to add Ms. Georg as a party (she was not represented by counsel when the section 174 application was first heard on September 13, 1995), the only issue remaining to be decided as a result of the judgment of the Federal Court of Appeal is whether the Appellant should be awarded costs of the section 174 application on a solicitor and client basis.

When this motion for costs was heard, counsel for the Appellant argued first that the Order of the Federal Court of Appeal (March 28, 1996) required this motion to be heard specifically by Associate Chief Judge Christie and not by any other member of this Court. I decided at once that the Federal Court of Appeal had not required that the cost question be determined only by Associate Chief Judge Christie. The motion then proceeded on its merits.

The opening words of subsection 174(4) imply that the Minister may lawfully assess or reassess two or more persons:

174(1) Where the Minister is of the opinion that a question of law, fact or mixed law and fact arising out of one and the same transaction or occurrence or series of transactions or occurrences is common to assessments or proposed assessments in respect of two or more taxpayers....

I have described above the letters between counsel dated June 5, June 28, July 12 and July 17, 1995; and I have set out in full the letter from Appellant’s counsel dated September 5, 1995 because I am satisfied from those letters that the Appellant would not have contested the Minister’s application under section 174 if the Appellant had known that the Minister had obtained a waiver from Ms. Georg under subsection 152(4) of the Act. The question raised by Appellant’s counsel in the letters of June 5, July 12 and September 5 concerning whether Ms. Georg’s 1989 taxation year was statute barred was a bona fide question which could have and should have been answered by Respondent’s counsel as permitted by subsection 241(3) of the Act. Instead of answering the question, Respondent’s counsel replied briefly as follows in his letter of July 17, 1995:

This is with reference to your letter dated July 12, 1995 asking us to provide you with information with regard to Ms. Georg’s assessment. I cannot advise you whether Ms. Georg’s assessment is statute barred nor can I provide you with information with respect to her assessment. Your concern should strictly be with respect to the claim for deduction of the amount paid to Ms. Georg and nothing further.

One could easily infer a tone of arrogance or impertinence in such a letter. Respondent’s counsel does not appear to have considered whether the Appellant might have achieved some tactical advantage in the presentation of her appeal if she could have prevented Ms. Georg from being added as a party to that appeal. Without attempting to determine the issue, I would simply observe that a taxpayer appellant appears to have an arguable case against the addition of a third party in a section 174 application if it can be demonstrated that the Minister could not issue a valid assessment to the third party with respect to the common transaction. This seems to be what the Appellant had in mind in the correspondence described above. The Appellant’s opposition to the addition of Ms. Georg as a party to this appeal collapsed, of course, when Mr. Ghan finally stated at the actual hearing of the section 174 application that the Minister had obtained a waiver from Ms. Georg under subsection 152(4) of the Act.

The Appellant asks for costs on a solicitor and client basis because of the failure of Respondent’s counsel to provide in a timely manner the information concerning Ms. Georg’s waiver. If that information had been provided in response to the Appellant’s letters of June 5 and July 12, the Appellant would have been saved the costs of preparing for and attending at the hearing of the section 174 application. The Federal Court of Appeal made the following comment (per MacGuiguan J.A.) with respect to the failure of Respondent’s counsel:

We believe government counsel was wrong in law in refusing to reveal this information to his opposite party on the basis of the confidentiality provision in section 241 of the Act. In our opinion subsection 241(3) provides an adequate exemption for “legal proceedings relating to the administration or enforcement of this Act”.

Respondent’s counsel was not only wrong in law but he appears to have been careless in not even considering whether the disclosure of Ms. Georg’s waiver may have fallen within the exemption in subsection 241(3). He is quoted as having said in the course of arguing the section 174 application:

The information regarding the waiver, if the Court requires us to give the information, we give the information. We don’t provide this information to the other parties, it is none of their business. Here it says either assessed or proposes to assess and that should be enough for the Appellant here. And he has made so much out of this small thing. I have made several applications and I have never encountered that argument before.

If he had never encountered the argument before, and if it was put forward by responsible counsel (as it was), he had all the more reason to take it seriously and consider its consequences. In my opinion, Respondent’s counsel was negligent in his failure to take seriously the bona fide requests of the Appellant’s counsel in the letters of June 5, July 12, and September 5. The real question is whether solicitor/client costs are justified by such negligence.

When delivering the Reasons for Judgment in the Federal Court of Appeal, MacGuigan J.A. referred to the decision of that Court in Amway Corp. v. R., (sub nom. Amway Corp. v. The Queen), (sub nom. The Queen v. Amway of Canada Ltd. et al) [1986] 2 C.T.C. 339 in which Mahoney J.A. stated, at page 340:

..Costs as between solicitor and client are exceptional and generally to be awarded only on the ground of misconduct connected with the litigation.

In Young v. Young, [1993] 4 S.C.R. 3, [1993] 8 W.W.R. 513 McLachlin J. stated at page 134 (W.W.R. 541):

...Solicitor-client costs are generally awarded only where there has been reprehensible, scandalous or outrageous conduct on the part of one of the parties.

I cannot characterize as “reprehensible, scandalous or outrageous” the conduct of Respondent’s counsel in his failure to disclose the existence of Ms. Georg’s waiver. He may have been relying, mistakenly, on the provisions of section 241 of the Income Tax Act, but the Federal Court of Appeal has stated that subsection 241(3) provides as adequate exemption for such disclosure. Similarly, I cannot characterize the failure to disclose as “misconduct” because of the possible mistaken reliance on section 241. I have already expressed my opinion that Respondent’s counsel was negligent in his failure to take seriously the Appellant’s request for information. That being said, negligence of counsel is not ordinarily grounds for solicitor and client costs.

At the conclusion of his argument, Mr. Gibson (counsel for the Respondent on this motion) stated six possible orders with respect to costs on the Minister’s application under section 174.

1. Costs to the Respondent because the Minister was successful before Christie A.C.J. in having the third party added. (Mr. Gibson acknowledged that this was “the hardest one to sell” because Mr. Ghan erred in failing to disclose the waiver.)

2. Costs in the cause.

3. Each party to bear its own costs which is, in effect, no award as to costs at all.

4. Costs to the Appellant on a party/party basis in any event of the cause.

5. Enhanced costs to the Appellant.

6. Costs to the Appellant on a solicitor and client basis.

In all of the circumstances of this case, I will not grant costs to the Appellant on a solicitor and client basis in connection with the Minister’s application to add Ms. Georg as a third party. Also, the complexity of this case (or the lack thereof) does not justify enhanced costs to the Appellant on the application under section 174. Notwithstanding the fact that the Minister was successful before Christie A.C.J. on the application to add a third party under section 174, I will award costs to the Appellant on that application on a party/party basis in any event of the cause because (i) the Appellant prepared for and appeared on that application thinking that there may be reasonable grounds (1.e. the inability of the Minister to reassess Ms. Georg for 1989) for opposing the addition of Ms. Georg as a third party; (ii) the Appellant would not have prepared for or appeared on the application if she had known of the waiver from Ms. Georg; and (iii) Respondent’s counsel erred in failing to disclose the existence of Ms. Georg’s waiver. In Lipsey v. Minister of National Revenue, [1984] C.T.C. 675, 85 D.T.C. 5080, the taxpayer applied to the Federal Court Trial Division for a declaratory order and other relief. At page 681 (D.T.C. 5085), Strayer J. (as he then was) stated that the application was “almost entirely unnecessary and ill-founded” but awarded the Minister of National Revenue only party/party costs. Extraordinary circumstances are required to justify costs on a solicitor and client basis.

Although the Appellant had reasonable grounds to seek costs on a solicitor and client basis having regard to the order of Christie A.C.J. dated November 1, 1995, and the observation of the Federal Court of Appeal in the reasons of MacGuigan J.A. concerning the discretion of a judge in this Court to award such costs on sound principles, I was informed by Mr. Gibson (counsel for the Respondent) that the Respondent had offered to pay costs to the Appellant on a party/party basis in any event of the cause with respect to the application under section 174. That offer was made on April 9, 1996. It was not accepted; and this motion was heard by me on May 29, 1996. I will not award any costs to either party on the motion before me.

Neither party awarded costs.