Rivers v. R., [1997] 2 CTC 2318, 97 DTC 175

Rip T.C.J.:

Reasons for Judgment & Order

The issue is whether the appellants’ solicitor, Donald Zaldin, should be personally liable for any of the respondent’s costs in the appeals of D. Bruce Rivers and others, the names of whom appear in Schedule “A” attached to these reasons (referred to as the “JKM & A appeals”).

Relevant Facts

During the early 1980s a tax avoidance strategy was developed by J.K. Maguire & Associates (“JKM & A”), a Toronto financial consultant. Essentially the tax avoidance strategy was threefold: the investment club strategy, the BP Canada strategy and the convertible hedge strategy. Revenue Canada began investigating taxpayers who were clients of JKM & A and wrote to them requesting documentation. After extensive investigation and no response from the taxpayers, Revenue Canada wrote to JKM & A in 1988 proposing six test cases. JKM & A never replied to this proposal. In November 1989 the Minister of National Revenue (“Minister”) confirmed reassessments for these six JKM & A clients. “In a letter to the Tax Court, Revenue Canada stated that it viewed these cases as representative. At no time did in-house counsel for JKM & A, Mr. Zaldin, the counsel on the six files respond to the view of Revenue Canada.” [1] These six appeals were filed with the Court prior to 1991 and are not part of the appeals now before me. Eventually Revenue Canada reassessed over 300 taxpayers [2] for some or all of the taxation years, 1983 to 1987.

By letter dated July 11, 1996, respondent’s counsel filed with the Court the respondent’s Bill of Costs and a Book of Documents containing Court Orders in these appeals in support of motions returnable July 17, 1996. The Bill of Costs, including fees and disbursements, was in the amount of $98,476.64 for all the appeals. During the hearing on July 17, 1996 respondent’s counsel moved that appellants’ counsel, Donald Zaldin, be held personally liable for all of his clients’ costs since he failed to fulfill his obliga- tion under agreements and was in contempt of an earlier order of the Court. Also, counsel claimed Mr. Zaldin lengthened proceedings in these appeals. I asked Mr. Zaldin to forward written submissions why he should not be held liable for costs. (I had rejected the application by respondent’s counsel that the appellants be held jointly and severally liable for the costs.) These appeals include 290 Class A proceedings, two Class B proceedings and three Class C proceedings.

Donald Zaldin was called to the Ontario bar in 1975. Mr. Zaldin says that he joined JKM & A in March 1989. However, Mr. Zaldin says that for the first ten, eleven or twelve months of his time at JKM & A, he was working as a tax consultant and not as tax counsel.? [3] Mr. Zaldin’s testimony on this issue is confusing and in his later written representations he does not clarify, even though he said that he would, exactly when he began working as tax counsel on files which eventually became the JKM & A appeals. Additionally Robert Benyi, an employee of JKM & A, testified that from September 1988 until March 1989, JKM & A had no in-house counsel.^ [4] Presumably that means that JKM & A had tax counsel after March 1989.

Mr. Zaldin filed all the Notices of Appeal in the JKM & A appeals. All appeals were under the General Procedure. Most were so devoid of material facts that the Crown brought a motion that there was no cause of action disclosed in the Notices of Appeal. The Tax Court was not willing to strike out and thus prejudice the appellants due to the actions of their lawyer, Mr. Zaldin. In ordering the appellant to file an amended Notice of Appeal Sarchuk T.C.C.J. stated, at page:

The relevant parts of the Notice of Appeal in this instance are ambiguous as to the relief sought, and are so absent in substantive information as to the material facts relied upon, that in my view they do not comply with even the barest requirements of the Rule. This Notice of Appeal is simply not a proper pleading.

As I noted earlier, I have never seen a Notice of Appeal, prepared by a person trained in the law, that was so devoid of information. Counsel for the Appellant [Mr. Zaldin], who is not inexperienced, must know that in this proceeding the Appellant’s tax returns, which are referred to in the body of the pleading ... are not before this Court at this time.

In my view this is a case where the pleading is so flawed that it must be struck. However, since I am reluctant to impose upon the taxpayer the consequences of his counsel’s failure to provide the proper service — perhaps is the best way of putting it — I have chosen instead to order as follows.

I also want to direct your attention, Mr. Zaldin, to section 152 of our Rules. ... [W]ith respect to a pleading, instructions are taken and the documents are prepared by the solicitor. When the pleadings are flawed it is difficult to attribute fault to the client, and yet it is the client who has to bear the costs. Rule 152, in a sense, is intended to rectify that situation in certain cases. Very frankly, it is something that I felt constrained to bring to the attention of counsel for the Appellant in this particular case as a cautionary note. [5]

Similar orders for particulars were made by Judges Bonner and Bowman. [6]

Numerous status hearings were held in the various appeals. Typical of the comments made by the judges of the Tax Court are the following comments by Bonner T.C.C.J., at page:

... I have real problems with your sense of time, Mr. Zaldin, as a result of the status hearings in the other cases. You seem to take a very leisurely approach to life. [7] .

To the same effect in a motion for adjournment in Rivers et al. v. The Queen, on June 30, 1994, the transcript records the following testimony:

Mr. Olsson [Counsel for MNR]: ... On looking closer at the rules, we were unable to ascertain the date Mr. Zaldin received the transcript, so instead of the time expiring today, under the rules one has to presume it took ten days for delivery of those transcripts by registered mail to him because we couldn’t find out when they were received. That time expires next Monday, so we will file our motion on Tuesday and hopefully he will move quickly and get his memorandum in, or, if he doesn’t. ...

His Honour [Judge Bonner]: He’ll face the wrath of the Court of Appeal.

Mr. Olsson: Perhaps I could ask him if he’s going to be able to make that deadline or is he seriously going to risk having them dismissed.

His Honour: What do you say?

Mr. Zaldin: I’m doing everything I can.

His Honour: Yes, I know. I’ve been hearing that since last October, Mr. Zaldin. [8]

The Minister had been unsuccessful in reaching agreement with JKM & À about a test case and so decided to push ahead one case, Schultz, supra. Mr. Zaldin did not file any list of documents, only the Minister filed a list of documents and Mr. Zaldin simply relied upon the Minister’s documents. As Henry A. Gluch, counsel for the Minister, stated in the July 17, 1996 Motion:

this was a document-intensive file, as all of these are, and all of these documents are in the possession of the Appellants, who presumably structured these matters. [9]

Some of the JKM & A appeals were classified as Hybrid Appeals. The pleadings in the Hybrid Appeals were filed between 1992 and 1993. (These appellants are listed in Part 2 of Schedule “A”.) The appellants failed to file and serve Lists of Documents within thirty days following the closing of pleadings as required by subsection 81(1) of the Tax Court of Canada Rules (General Procedure). Further the appellants failed to comply with an Order of Bonner T.C.C.J., approximately one year later in August 1994, whereby they were given a nine-month extension and required to file and serve Lists of Documents no later than May 19, 1995. The appellants also failed to comply with my Amended Order whereby they were required to file and serve Lists of Documents no later than June 1, 1995. The Crown was served with the appellant’s List of Documents in October 1995 and the only documents referred to are the Respondent’s List of Documents.

The Schultz case proceeded to trial and was decided by Beaubier T.C.C.J. on July 5, 1993. With respect to appellant’s argument that the Minister had not acted with all due dispatch, Beaubier T.C.C.J. held that the Minister had acted with all due dispatch and that in any event, the taxpayers could have appealed to the Tax Court within 90 days of filing their Notices of Objection. Schultz was appealed to the Federal Court of Appeal.

By Order dated August 18, 1994, Bonner T.C.C.J. ordered that all but 14 of the JKM & A appeals (the “Investment Club Appeals”) be heard at the same time on common evidence commencing June 26, 1995 (six-week duration) and that the remaining 14 appeals (the “Hybrid Appeals”) be heard at the same time or one immediately after the other commencing November 6, 1995 (four-week duration). Pre-hearing conferences were conducted before me on April 28, 1995 and May 10, 1995 regarding all the appeals.

Crown counsel, Henry A. Gluch and counsel for the appellants, Mr. Zaldin, entered into two agreements, dated April 28, 1995 and May 25, 1995, arising from the pre-hearing conferences pursuant to Rule 127. The parties agreed that the Investment Club Appeals would be resolved with the ultimate disposition of Schultz, at that time pending before the Federal Court of Appeal. They agreed that the only issue remaining to be decided was whether or not the Minister had exercised her subsection 165(3) duty to act with all due dispatch and, if not, what were the legal consequences. Further, the parties agreed that the issues in the Hybrid Appeals were also at issue in the Schultz appeal and that a decision in the Schultz appeal would resolve most, if not all, of the issues raised in the Hybrid Appeals. By Order dated June 6, 1995,1 adjourned the hearing of all of the appeals pending the ultimate disposition in Schultz and ordered the parties to forthwith advise the Court in writing of any decision of the Federal Court of Appeal and the Supreme Court of Canada and ordered that the parties execute Consents to Judgment within 30 days after leave to appeal Schultz to the Supreme Court was refused.

The Federal Court of Appeal handed down its decision in Schultz on November 2, 1995 dismissing the taxpayer’s appeal that the Minister had not acted with all due dispatch in confirming the reassessment. [10] The Supreme Court of Canada dismissed the application for leave to appeal with costs on May 23, 1996. Thus, the decision of the Court of Appeal in Schultz was upheld, which decision resolved all issues raised in these appeals.

By letter dated May 28, 1996, Crown counsel advised the Tax Court of the Supreme Court’s decision and advised Mr. Zaldin that Notices of Discontinuance should be filed in all of these appeals no later than Monday, June 24, 1996 in accordance with the Agreements of Counsel and with my Order. On Thursday, June 20, 1996, Mr. Zaldin advised Crown counsel that he had not yet received instructions to file Notices of Discontinuance. By letter dated Friday, June 21, 1996, Mr. Zaldin advised Crown counsel that Notices of Discontinuance would not be filed as his review of the Investment Club Appeals was not yet completed and his view was that the Hybrid Appeals should be reassessed without Judgment.

Despite having executed an agreement that Consents to Judgment would be executed within 30 days after leave to appeal was refused, Mr. Zaldin refused to execute same, necessitating the Minister’s application to the Court for a motion for direction. At the hearing of the motion on July 17, 1996, Crown counsel agreed that with respect to the Hybrid Appeals, he was agreeable to consent to judgment on the basis that they be referred back to the Minister on the basis of partnership and that otherwise the appeals be dismissed and the agency basis be allowed to stand. This appeared to clear the way for Mr. Zaldin to consent to an Order on that basis. At the hearing of the motion Mr. Zaldin was asked whether he would agree on that basis:

His Honour [Judge Rip]: Will you consent with Mr. —I’ll give the judgment, with consent of counsel, that these Hybrid Appeals would be allowed and referred back to the Minister for reconsideration and reassessment on the basis that the assessment be based on a partnership.

Mr. Zaldin: Is Your Honour asking if I’m agreeable to an order going —

His Honour: That’s right.

Mr. Zaldin: Before answering that, I’d just like to point out that there were no reassessments done in Schultz.

His Honour: I’m not asking that. There’s no need. I’m asking you a simple question.

Mr. Zaldin: I think that would be an appropriate order.

His Honour: Would be what?

Mr. Zaldin: An appropriate order.

His Honour: Mr. Gluch, will you agree to that?

Mr. Gluch: Yes.

His Honour: Okay. [11]

Counsel and I then spent the next four pages of the transcript confirming the details of the Order:

His Honour: ... The following judgment will be issued.

Mr. Zaldin: Excuse me, Your Honour, may I make a comment? Not by way of argument.

His Honour: What is the comment?

Mr. Zaldin: Thank you. Your Honour asked me whether or not previously the suggestion of Mr. — if we might resolve the matter on Mr. Gluch’s suggestion and I said that would be an appropriate order and then you said, you ordered consent, and might Your Honour just make an order?

His Honour: I want it with the consent of counsel. Are you consenting to it or not? What is your problem, Mr. Zaldin? Are you acting for all these people or not?

Mr. Zaldin: Yes. I am.

His Honour: So what is your difficulty?

Mr. Zaldin: I would prefer if Your Honour would make an order. I don’t have the authority to consent to that.

His Honour: Why do you not have the authority?

Mr. Zaldin: I don’t have the authority, Your Honour.

Mr. Zaldin: ... I’m not authorized to consent.

Mr. Gluch: Your Honour, did they withdraw their authorization within the last five minutes? I thought he was consenting a few moments ago.

His Honour: That’s what I understood, you consented —

Mr. Gluch: And now he’s not consenting, did —

His Honour: — that’s why I’m at a loss for words.

Mr. Zaldin: Your Honour, I didn’t say I consent, I didn’t use the word “consent”, I said I thought that would be an appropriate order of the Court.

His Honour: I thought you said you consented.

Mr. Zaldin: No, sir.

Mr. Gluch: Your Honour, he also had authority of his clients by virtue of the agreements where he said “I will file consents”. He knew this matter was before the Court.

His Honour: Tell me, did you have authority to sign the agreements?

Mr. Zaldin: Yes.

His Honour: And when did you lose the authority to pursue this further?

Mr. Zaldin: It’s not a question of loss of authority, Your Honour.

His Honour: Beg your pardon?

Mr. Zaldin: I don’t consider it to be a question of loss of authority.

His Honour: Then what is it?

Mr. Zaldin: Your Honour certainly has the jurisdiction, having heard my submissions, to make an order. [12]

I ordered Mr. Zaldin to make submissions as to why he should not be reported to the Law Society of Upper Canada for discipline and why he should not be personally responsible for the respondent’s costs. In addition, I asked counsel for the Minister to submit a draft judgment.

Minister’s Arguments

Respondent’s counsel argued during the July 17, 1996 motion that Mr, Zaldin should be personally liable for the respondent’s costs. The respondent submitted her Bill of Costs, on a party and party basis, of $98,479.64. She submitted that there had been a pattern of continual delay and noncooperation by Mr. Zaldin throughout the proceedings of the JKM & A appeals.

With respect to the only outstanding issue of whether the Minister acted with all due dispatch, respondent’s counsel submitted that the Schultz case, both at the Tax Court and the Federal Court of Appeal, had held that the Minister did reconsider with all due dispatch and, in any event, the remedy available to the taxpayer, if he is dissatisfied with the passage of time, is to appeal directly to the Tax Court without waiting for the Minister to conclude his reconsideration. Respondent’s counsel further submitted that subsequent to Schultz, two decisions of the Federal Court of Appeal, Ginsberg v. J?. [13] and Bolton v. Æ., [14] further clarified the Court’s ruling in Schultz and that therefore, there was no reason for Mr. Zaldin to withhold his consent, as all of the issues had been resolved.

Mr. Zaldin''s Arguments

In his letter of August 15, 1996, Mr. Zaldin’s primary argument was that Stone J.A., in the Federal Court decision in Schultz, said that if the Minister failed to act with all due dispatch then the reassessments would have to be vacated, but the Minister did not fail in such duty for reasons which included the failure of the taxpayer to submit information when requested at the audit stage. Mr. Zaldin said that in the vast majority of the appeals the taxpayers had submitted information at the audit stage and that this was different than the fact situation in the Schultz case. Further Mr. Zaldin said that he was not aware on June 24, 1996 of the June 11, 1996 decision of the Federal Court of Appeal in Bolton v. The Queen. In his submissions of August 15th, he seems to acknowledge that Bolton is a clear statement of the law with respect to the issue of all due dispatch, however at the hearing of the motion on discontinuance on July 17, 1996 he is unclear as to the effect of Bolton and states:

Mr. Zaldin: I did not read the Ginsberg decision to affect this. I read the Bolton — I read the decision of Mr. Justice Stone differently than what my friend submitted to you and I appreciate - [15]

Analysis

“With all due dispatch”

Mr. Zaldin argues that the decisions in the Schultz case did not resolve the issue of the consequences if the Minister did not act with all due dispatch. His main argument in Schultz and the other JKM & A cases was that the Minister had not acted with all due dispatch pursuant to subsection 165(3). Beaubier T.C.C.J. held that:

It is the Court’s view that, in the circumstances of this case, the actions of the Respondent were conducted with due dispatch given the conduct of JKM & A and the multitude of cases and matters for review respecting the transactions which are the subject matter of this case. The Appellants had a right to appeal pursuant to section 169 once they had filed their Notices of Objection and the appropriate time had lapsed. [16]

The Federal Court of Appeal upheld the decision of the Tax Court. Stone J.A. said:

I turn next to the issue of whether the Minister acted with “all due dispatch” in confirming his reassessments for the taxation years 1984, 1985, 1986 and 1987. If he failed to do so then the reassessments would have to be vacated. In this sense the issue is overriding.

In my view, the appellants have not shown that the Tax Court Judge erred in concluding that the Minister had acted with “all due dispatch” in the circumstances. These transactions were indeed numerous and complicated.

I am also of the view that the appellants could have appealed the reassessments pursuant to paragraph 169(l)(b)[sic] of the Act. ...

The delays on the part of the Minister in confirming his reassessments did not stand in the way of the appellants launching and pursuing appeals in the Tax Court of Canada under that paragraph. ... The appellants can scarcely be heard to complain of undue delays on the part of the Minister when, had they wished to do so, they could have attacked his reassessments in the Tax Court of Canada notwithstanding that they had not yet received his confirmations. [17]

Mr. Zaldin appears to base his whole argument on Justice Stone’s obiter dicta, at the beginning of his discussion on all due dispatch, that if the Minister failed to act with all due dispatch the reassessments would have to be vacated. Stone J.A. clearly states that if the Minister fails to act with all due dispatch, the taxpayer’s remedy is to appeal to the Tax Court. Mr. Zaldin says that he does not read Schultz to hold that in the event that the Minister breached paragraph 165(3)(&) that the taxpayer’s only remedy was to appeal pursuant to paragraph 169(l)(b). [18]

However, the decision of the Federal Court of Appeal in Bolton v. Minister of National Revenue, released on June 11, 1996, almost two weeks prior to the June 24, 1996 deadline to consent to judgment, makes it clear that Mr. Zaldin was wrong. Hugessen J.A. writes that:

In the case of The Queen v. Ginsberg ... decided last week, we held that Parliament did not intend that the Minister’s failure to examine a return and assess tax “with all due dispatch”, as required by subsection 152(1), did not deprive him of the statutory power to issue an assessment. The reasoning in that case applies with even greater force here: Parliament clearly did not intend that the Minister’s failure to reconsider an assessment with all due dispatch should have the effect of vacating such assessment. If the Minister does not act, the taxpayer’s recourse is to appeal pursuant to s. 169. [19]

In my opinion, Mr. Zaldin had no reason not to consent to judgment. First, the Bolton decision was absolutely definitive on the issue. Second, Stone J.A.’s comment in Schultz is clearly obiter. Mr. Zaldin’s opinion that there was another remedy for the taxpayer beyond appealing to the Tax Court is clearly unsupportable, in my view, and he knew that at the time.

Personal Liability of Solicitor for Costs

The applicable legislation is the Tax Court of Canada Rules (General Procedure)'.

Liability of Counsel for Costs

152(1) Where a counsel for a party has caused costs to be incurred improperly or without reasonable cause or to be wasted by undue delay, misconduct or other default, the Court may make a direction,

(a) disallowing some or all of the costs as between the counsel and the client,

(b) directing the counsel to reimburse the client for any costs that the client has been ordered to pay to any other party, and

(c) requiring the counsel to indemnify any other party against costs payable by that party.

(2) A direction under subsection (1) may be made by the Court on its own initiative or on the motion of any party to the proceeding, but no such direction shall be made unless the counsel is given a reasonable opportunity to make representations to the Court.

(3) The Court may direct that notice of a direction against a counsel under subsection (1) be given to the client in the manner specified in the direction.

Rule 152 has only been used once. In Austin v. /?., Sarchuk T.C.C.J. held the taxpayer’s counsel personally responsible for 75 per cent of the Minister’s costs of $4OO. [20] Judge Sarchuk said that the taxpayer’s Notice of Motion was fundamentally without merit, poorly researched, ill-considered and virtually impossible to support in law and the taxpayer’s counsel ought to have known this. The result was a motion without a bona fide expectation of success which unnecessarily lengthened the proceeding and caused costs to be improperly incurred.

The Supreme Court of Canada, in a recent decision, Young v. Young, approved the detailed analysis of the B.C. Court of Appeal on the issue of an award of costs against a lawyer. [21] The legislation at issue is essentially similar to the legislation here. In the B.C. Court of Appeal decision, Cumming J.A., in his analysis of the law in this area, cited the seminal case, Myers v. Elman, a 1940 decision of the House of Lords. [22] Justice Cumming held that Orders requiring solicitors to pay costs personally are sparingly made and only in clear cases. A mere mistake or error of judgment is not generally sufficient, but a gross neglect or inaccuracy in a matter which it is a solicitor’s duty to ascertain with accuracy may suffice. The jurisdiction is not merely punitive but compensatory. The Order is for payment of costs thrown away or lost because of the conduct complained of.

Cumming J.A. notes that the object is to compensate the litigant, not to punish the solicitor, although the effect of such an Order will necessarily be punitive in so far as the solicitor is concerned. In Canada, he notes the jurisdiction of provincial Law Societies to discipline members of the legal profession. However, he confirms the jurisdiction of the court to award costs against a lawyer for an abuse of the process of the court.

In Sonntag v. Sonntag, costs were awarded against a solicitor where it was shown that his actions resulted in costs being unnecessarily incurred and wasted. [23] In Chrysler Credit Canada Ltd. v. 734925 Ontario Ltd., the court held that:

The obligation to approve an order, to which there is no legitimate objection, is owed to the court and to the other solicitors as well as to the client. [24]

Mr. Zaldin has, in my opinion, caused costs to be incurred unnecessarily throughout the JKM & A appeals. Several judges have spoken of his pattern of behaviour throughout. Although it is not clear exactly when he began negotiating with Revenue Canada on these files (which led to appeals), it is clear that he did not facilitate an efficient resolution of the matters. He sought continual adjournments; he failed to produce documents after several orders to do so; he filed the most inadequate Notices of Appeal that Judge Sarchuk had ever seen; he was continuously late with affidavits and notices; and lastly, after agreeing to execute Notices of Discontinuance he, without a legitimate objection in my opinion, did not do so. Therefore, he should be held liable for some of the respondent’s costs.

Mr. Zaldin submits that any costs against him should relate only to the final motion in Rivers and not to all the JKM & A appeals. While ordinarily a solicitor’s behaviour in one case should not be considered in another case, the JKM & A appeals are different, in my view. The JKM & A appeals, because of their common facts, should be considered as a related group of cases. Undoubtedly, it would have been more efficient for the cases to be heard on common evidence or as the Minister proposed, for there to be a test case. While Mr. Zaldin says that he was not associated with JKM & A at the time when the Minister proposed a test case, I am convinced that he could have agreed to a test case upon taking over the files leading to the JKM & A appeals. Even if I accept Mr. Zaldin’s evidence as to when he took over the files (and this is far from clear), he has been involved in the JKM & A appeals for over six years. I have been unable to find any case on the issue of whether a solicitor should be held liable for costs in related cases. However, because the JKM & A appeals are so unique, because the facts in all the appeals are intimately connected and because of Mr. Zaldin’s behaviour throughout all the appeals, I submit that it is reasonable to hold him liable for a portion of the respondent’s total costs for the JKM & A appeals.

The respondent’s costs, on a party and party basis, are $98,479.64 for the JKM & A appeals; there were 294 taxpayers. I am ordering each appellant to pay $300.00. [25] Not all appeals proceeded in the normal course. For example, there were ten status hearings in the Class A proceedings and two in the Class B proceedings; Motions for Particulars were heard in two appeals and other motions heard in five other appeals. [26] Not all appellants were heard. But all appeals depended on progress (or lack thereof) in other appeals. In the circumstances, all appellants should be treated equally. Mr. Zaldin will be ordered to pay the balance of the respondent’s costs of $10,279.64. This amount is arbitrary but is warranted considering Mr. Zaldin’s behaviour which I have set out in some detail, and the Minister’s itemization of costs. An Order will issue that Mr. Zaldin be personally liable for a portion of the respondent’s costs in the amount of $10,279.64. He is not to be compensated by any of the appellants for that amount. The Registrar of this Court is instructed to send a copy of the Order and these reasons to all of the appellants personally.

Motion granted in part.