Citation: 2011 TCC 305
Date: 20110616
Docket: 2008-714(IT)G
BETWEEN:
ALBERTA PRINTED CIRCUITS LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR ORDER
Pizzitelli J.
Position of the Parties
[1]
The
Appellant has submitted that it should be entitled to costs on a solicitor and
its client basis for all counsel who appeared before the Court and that the Court
should exercise its discretion to award a lump sum for costs totalling
$911,798.09 inclusive of $500,000 for fees, $169,422.11 in expert witness fees
and the balance for disbursements and GST, all based on the Appellant having
three counsel throughout the process.
[2]
The
Respondent’s position is basically that the Appellant should only be entitled
to party and party costs in accordance with the Tariff for two counsel on all
matters prior to trial, save and except with respect to the Settlement Conference
on June 10, 2010, held before Rip C.J. at which Rip C.J. awarded the Appellant $1,000
which should stand. For trial time, the Respondent submits that the Appellant
should only be allowed party and party costs for two counsel for the
approximate four days and one hour of the trial dealing with the transfer
pricing issue, and that all other time at trial dealing with other issues and
argument should be treated so that each party bears its own costs, due to the
divided success of the Appellant. In addition, the Respondent submits the
Appellant should only be allowed 77.99% of the costs of preparation of its
expert witness report and his attendance at trial to reflect the percentage of
the Appellant’s monetary win in the matter.
The Law
[3]
As
both parties have alluded to in their representations, Rule 147 of the Tax
Court of Canada Rules (General Procedure) grants the Court discretion in
determining costs having regard to a number of factors that may be considered
in exercising such discretion found in subsection 147(3) and allows the Court
to award a lump sum in lieu of or in addition to any taxed costs as set out in
subsection 147(4) as well as gives the Court wide power pursuant to subsection
147(5) to award or refuse costs in respect to a particular issue or part of a
proceeding or to award a percentage of costs or costs on a solicitor and client
basis. Section 147 is reproduced below.
147 (1) The Court may determine the amount of the
costs of all parties involved in any proceeding, the allocation of those costs
and the persons required to pay them.
(2) Costs
may be awarded to or against the Crown.
(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 duration 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,
(a) to award or refuse costs
in respect of a particular issue or part of a proceeding,
(b) to award a percentage of
taxed costs or award taxed costs up to and for a particular stage of a
proceeding, or
(c) to award all or part of
the costs on a solicitor and client basis.
(6) The
Court may give directions to the taxing officer and, without limiting the
generality of the foregoing, the Court in any particular proceeding may give
directions,
(a) respecting increases over
the amounts specified for the items in Schedule II, Tariff B,
(b) respecting services
rendered or disbursements incurred that are not included in Schedule II, Tariff
B, and
(c) to permit the taxing
officer to consider factors other than those specified in section 154 when the
costs are taxed.
(7) Any
party may,
(a) within thirty days after
the party has knowledge of the judgment, or
(b) after the Court has
reached a conclusion as to the judgment to be pronounced, at the time of the
return of the motion for judgment,
whether or not
the judgment included any direction concerning costs, apply to the Court to
request that directions be given to the taxing officer respecting any matter
referred to in this section or in sections 148 to 152 or that the Court
reconsider its award of costs.
[4]
Notwithstanding
the highly discretionary power to award costs under Rule 147, Létourneau
J.A. in Canada v. Landry, 2010 FCA 135, [2010] F.C.J. No. 662 (QL) in
paragraph 22 confirmed the principle that such “discretion must be exercised on
a principled basis.”
[5]
In
order to exercise such discretion on a principled basis, I propose to deal with
the factors set out in subsection (3) of Rule 147:
(a) Result of the Proceeding
[6]
There
were four issues before the Court, namely:
1.
Whether
the Appellant and APCI, Inc. (“APCI”) were dealing at arm’s length;
2. Whether
the reassessments in question were statute barred by the application of
Articles IX(3) and XXVII(3) of the Agreement Between Canada and Barbados for
the Avoidance of Double Taxation and the Prevention of Fiscal Evasion With
Respect to Taxes on Income and on Capital, CTS 1980/29 (the “Treaty”);
3. Whether
the Minister of National Revenue (the “Minister”) was correct in including
transfer pricing adjustments of $894,263, $1,065,727 and $1,422,775 in the
Appellant’s income for the 1999, 2000 and 2001 taxation years respectively
pursuant to subsection 247(2) of the Income Tax Act (the “Act”);
and
4. Whether
subsection 247(3) penalties were properly assessed with respect to the transfer
pricing adjustments above.
[7]
With
respect to issue 4 above, there was no dispute that such penalties would apply
against any transfer pricing adjustments finally decided upon. With respect
to the other three items, the Respondent was successful with respect to both
issues in 1 and 2 above and the Appellant was successful with respect to 77.99%
of the monetary transfer pricing adjustments in issue 3 above. This is a split
decision in that the Respondent was successful on two of the three main issues
in dispute while the Appellant was successful on one of the issues that dealt
with 77.99% of the assessment amount in dispute. I will comment more on these
issues and the results in the context of the volume of work and conduct of the
parties.
(b) Amounts in Issue
[8]
Both
parties are of the view that having regard to the three years involved, the
amount involved, resulting in $1,033,210 in potential taxes owing and $248,850
in penalties thereon, were not extraordinarily large. The Appellant takes the
position that the amounts were relatively small. With respect to the Appellant,
such amounts are significant no matter how one perceives them, although not so
significant when compared to the amounts involved in the other transfer pricing
cases referred to by the Appellant and discussed in my reasons, like the General
Electric Capital Canada Inc. v. Canada, 2010 TCC 490, 2010 DTC 1353 [General
Electric] and GlaxoSmithKline Inc. v. Pharmascience Inc., 2008 FC
849, [2008] F.C.J. No. 1070 (QL) cases. Nonetheless, both parties were, as a result
required to expend much time in preparation for their cases, some of which
could have been avoided as I will comment on later.
(c) Importance of the Issues
[9]
While
I agree with the Respondent that this was not the first transfer pricing case
to be decided, I do not agree with the Respondent that this was a normal tax
appeal decided on its facts. At play in this decision was the applicability of
the hierarchy of methods used to determine transfer pricing adjustments and the
issues of bundling and unbundling products or services which played a large
role in my decision. In my view, these issues may be of assistance in resolving
future disputes as they dealt with the points of law dealing with the
applicability of the hierarchy of methods enunciated in the Information
Circular of Canada Revenue Agency (“CRA”) and the OECD Commentary transfer
pricing guidelines.
(d) Offers of Settlement
[10]
There
were no offers to settlement at play here to consider.
(e) Volume of Work
[11]
The
parties had agreed to a Partial Statement of Facts and as well as to Joint
Books of Documents consisting of 13 volumes of documents. There is no doubt
that notwithstanding the not so extraordinary amount in dispute for this type
of case, the volume of work and materials involved was great by both sides. Regrettably,
in my view, the volume of work could have been cut in half had the parties
admitted or conceded certain issues which I will discuss in greater detail when
evaluating the conduct of the parties. Like other factors herein, this particular
factor is a double-edged sword.
(f) Complexity of the Issues
[12]
This
factor is also a double-edged sword for the parties. On the one hand, the issue
of whether the parties were at arm’s length involved an analyses of a complex
set of facts and actions on the part of the Appellant, APCI and its principles
with much documentation scanning several tax jurisdictions. The transfer
pricing issue was in my view not a complicated one on its facts, but complicated
in analysing the applicability of the appropriate transfer pricing methodology
and obligations of the parties in following the hierarchy set out in the CRA’s
Informal Circular and OECD guidelines which was ignored by the Respondent,
involving analyses of competing and contrary expert opinion reports. The
applicability of the limitation period in the Treaty on the other hand
was a question of pure law in my view with little assistance given by the
Appellant who basically argued the matter was already before the Federal Court
of Appeal in Sundog Distributing Inc. v. Her Majesty the Queen, Federal
Court of Appeal, Court File No. A-327-10, which I understand has been
withdrawn. The number of issues involved in this case and the interrelation
between the issues of arm’s length and the applicability of both the Treaty
and transfer pricing rules added substantially to the complexity of the case,
but in my opinion unnecessarily so. If the parties had acted differently, the
length of this trial could have been cut in half in my opinion and at least one
if not two of the issues could have been avoided altogether.
(g), (h) and (i) Generally the
Conduct of the Parties
[13]
As
is evident from the above, the conduct of the parties particularly in
unnecessarily lengthening the trial and in refusing to admit facts or issues
caused this trial to go at least four days longer than necessary. I do not
suggest that either party acted improperly, vexatiously or negligently nor
through mistake or excessive caution within the meaning of paragraph (i)
of Rule 147(3). Both sets of counsel presented their cases admirably and
professionally and in fact agreed as to the applicability of the fourth issue
dealing with penalties up front to whatever transfer adjustments were finally
decided upon by this Court. This, of course, saved no doubt much Court time.
[14]
On
the other hand, however, the Appellant in particular could and should have
admitted it had de facto control over APCI and hence was not at
arm’s length to it having regard to the overwhelming evidence in favour of
such finding. Likewise, the Appellant in my view had a very weak case in
arguing the applicability of the limitation period in the Treaty, and in
fact made little argument on the issue, instead suggesting the Court wait out
the decision of the Sundog appeal, involving the same counsel, which was
ultimately withdrawn. Four days of the Court’s time was taken on these issues,
excluding the time it took to address these in a day of argument, which meant
another four days, plus one hour was spent on the transfer pricing issue.
[15]
As
for the transfer pricing issue, while I agree with the Appellant that the
Respondent failed to follow the preferred transfer pricing methodologies
recommended in CRA’s Information Circular and hence “dropped the ball,” I cannot
say the Respondent on the evidence should have admitted to the Appellant’s
comparables without question. On the other hand, if the Respondent had
practiced what it preached and followed the external and internal cup methods,
it may well have come to the conclusion I did in finding the prices charged for
the set up function was an arm’s length price or submitted other comparables to
rebut it or adjust it. Since the Respondent failed to take such approach, we
will never know what time may have been saved, although I would think that at
least the Court’s time could have been spend properly addressing the issue.
With respect to the square-inch fee, neither side followed the suggested path
on this issue, and accordingly, the Appellant, on whom the onus lies, was not
very successful on that part of the argument. In this regard, even the
Appellant’s expert report did not follow the method it championed when
addressing the square-inch fee, and accordingly, its report was valuable only
to the extent of the unbundled set up fee. I might also add that while I found
in favour of the Appellant in deciding the set up function did not include the
other work undertaken by APCI for which the square-inch fee was applied, I do
not find that the Respondent was wrong in refusing to admit that fact as there
was evidence to support its argument, notwithstanding that I ultimately
disagreed and found in the Appellant’s favour on such assumption.
(j) Other Issues
[16]
At
the beginning of the trial counsel for the Appellant notified the Court that
Mr. Jacobson was not well and might have to get up and leave the Court from
time to time, due to his recent illness. During the trial, Mr. Jacobson never
addressed the Court, leaving the conduct of the trial to his colleague,
Mr. MacIsaac and his assistant, Elsy D. Gagné. Under the circumstances,
I do not think it fair that, since Mr. Jacobson’s presence appears to
have been more in the nature of an observer, the Respondent should be paying
his fees for attendance at trial. While I mean no disrespect to Mr. Jacobson, a
review of his accounts attached to the written submissions of the Appellant also
show many meetings and discussions with Mr. MacIsaac as well as a review of the
same pleadings and documents Mr. MacIsaac charged in his accounts to review
prior to the time of the trial. No submissions were made as to his respective
role or contribution to the Appellant’s case or the presentation of it.
Accordingly, this is a circumstance where, there being the possibility of
unnecessary duplication of legal services, then in fairness to the Respondent
and the Appellant, that the parties be given the opportunity to plead their
arguments for his fees claimed prior to the trial to the taxation officer for
consideration by him or her.
Claim for Solicitor and Client
Costs and Lump-sum Costs
[17]
Having
regard to my above analyses of the factors to be considered under Rule 147(3),
I cannot agree with the Appellant that this is a case in which solicitor and
client costs should be awarded. As the Respondent pointed out, former Chief
Justice Bowman in both Continental Bank of Canada v. Canada, 94 DTC
1858 and in Alemu v. R. [1999] 3 C.T.C. 2024 (sub nom. McGorman
v. R.) applied the principle that the general rule is that costs and
disbursements are awarded on a party and party basis in accordance with the
Tariff, unless there are circumstances which warrant a departure. I find
“no misconduct by the Respondent nor undue delay, inappropriate
prolongation of the proceedings, or unnecessary procedural wrangling” on its
part that would justify the award of costs on a solicitor and client basis as
requested by the Appellant within the criteria of the Continental Bank
decision above. In fact, the conduct of the Appellant in not admitting to its
non-arms length relationship to APCI in particular, in light of the
overwhelming evidence is reason as well not to award such higher costs.
[18]
As
for the Appellant’s request for lump-sum costs, while I appreciate its
reference to paragraph 10 of Rothstein J.’s decision in Consorzio Del
Prosciutto Di Parma v. Maple Leaf Meats Inc., 2002 FCA 417, relied upon by
Hogan J. in the General Electric case, confirming the Court has “discretion
to depart from the Tariff, especially when it considers an award of costs
according to the Tariff to be unsatisfactory,” I do not agree the use of the
Tariff would be unsatisfactory here. In fact, I believe this is a case where
the Respondent in particular should have the ability to question the claim for
costs in regards to Mr. Jacobson to ensure no duplication of time.
Conclusion
[19]
In
my view, the Appellant was successful to the extent of reducing its assessed
transfer price adjustment by 77.99% and has made a prima facie case for
costs on a party and party basis in accordance with the Tariff. The fact that
it lost on two of the three issues fought over, does not lessen the extent of
its win. While I find its conduct above should further deny its claim for
solicitor and client costs, I do not find that on the whole, seen in
conjunction with the Respondent’s conduct in ignoring its own rules, that the
Appellant should be denied less than full party and party costs in accordance
with the Tariff, save and except that it shall be entitled to no more than the
$1,000 awarded by Rip C.J. in connection with costs on the Settlement Conference
and save further that, having regard to the limited value of its expert witness
report, it should only be given an award for expert witness fees based on
77.99% of the whole fees.
[20]
Accordingly,
the Appellant shall be entitled to party and party costs in accordance with the
Tariff throughout this matter, save and except as set out below:
1. With
respect to the Appellant’s expert witness costs, the Appellant shall be
entitled to 77.99% of the expert witness fees including to prepare its report,
save and except that the Appellant shall not be entitled to any costs for
the Appellant’s expert witness attendance at the Settlement Conference for
which Rip C.J. already awarded $1,000 nor shall the Appellant be entitled to
any further fees for attendance at such Settlement Conference.
2. The
Appellant shall not be entitled to any costs in respect of the attendance of R.
Paul Jacobson at trial. Any fees and disbursements of R. Paul Jacobson or his
firm prior to trial shall be subject to review by the taxation officer to
ensure no unnecessary duplication of fees.
Signed at Ottawa, Canada, this 16th day of June 2011.
“F.J. Pizzitelli”
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