[1] This proceeding for judicial review, addressing the constitutionality of the Respondent's collection proceedings against the Applicant for a tax debt (US $273,986.44) owing to the Internal Revenue Service of the United States of America (hereafter, the IRS), resulted in the Court finding in favour of the Applicant and awarding "three-quarters of the Applicant's costs in accordance with column III of ... Tariff B." The parties noted before me that the only items in dispute in the Applicant's Bill of Costs ($51,287.46 total) are two claims of 6 units each under item 3 for supplemental affidavits; the claim of $1,800.00 under item 14(b) for second counsel; the doubling of fees after December 8, 1999 under Rule 420, and the claims of $2,344.00 and $14,012.43 respectively for photocopies and for Michael Moran, a US attorney. The parties agreed to reduce item 6 (September 13, 1999 motion) to $300.00 and to delete item 12 (Statement of Facts). The parties agreed on the applicable rates of post-judgment interest on costs.
The Respondent's Position
[2] The Respondent argued that two of the claims under item 5 (October 6, 1999 Hearing Record and November 10, 1999 Application Record), agreed to before me, already address the services claimed under item 3. The Respondent acknowledged the presence of additional counsel, but argued that the clear and specific language of item 14(b), requiring a direction of the Court, precludes any entitlement here as the Court did not so direct.
[3] The Respondent argued that the Applicant is not entitled to double fees under Rule 420. The Respondent asserted that it could argue the constitutionality of the Convention Between Canada and the United States With Respect to Taxes on Income and on Capital, 1980, as amended (hereafter, the Convention), but that its only role relative to the tax debt was assistance to the IRS in collection of taxes owing in the United States. The Respondent argued that it could not deal with the settlement proposals as the validity of the tax debt itself was not the subject of the judicial review. The Applicant was told to contact the IRS directly. The Court affirmed that position in its interlocutory decisions and in its costs decision. The settlement negotiations, in which the Respondent did not participate, between the IRS, who was not a party to the judicial review, and the Applicant, were irrelevant for issues on the judicial review. The Respondent should be considered successful for the purposes of Rule 420 because the Court did not make any negative inferences relative to non-disclosure of details of the underlying tax debt and, although it found in favour of the Applicant on the Charter of Rights and Freedoms issue, it found in favour of the Respondent on the legislative competency issue.
[4] The Respondent argued that the evidence supporting the claim for photocopies does not meet the test of Diversified Products Corp. v. Tye-Sil Corp. 34 C.P.R. (3d) 267 at pp. 275-76. These charges, being in-house, are not assessable. The Respondent argued that allowing even the Tax Court of Canada rate of $0.20 per page would be arbitrary given insufficient evidence on the actual cost, given the charges here are based on an estimate and given the absence of evidence addressing relevance. The Respondent argued that the Ikon Office Solutions charge of $2,013.47 for photocopies and binding, agreed to subject to production of the invoice (the Applicant has now done so), as well as additional amounts of $47.00 and $35.41 at university libraries, are adequate compensation for photocopies with particular regard to those associated with the application record.
[5] The Respondent argued that the charge for Michael Moran, a US attorney, should be deleted because no admissible expert evidence on US tax law was introduced. The Respondent opposed the Applicant's attempt to introduce Mr. Moran's opinion letter as an exhibit to a Canadian solicitor's affidavit. The Applicant withdrew said affidavit at the hearing and the Court's decision did not rely at all on Mr. Moran's opinion. The Respondent conceded that an invoice confirms that Mr. Moran did render a service, but argued that his opinion letter did not advance the litigation because it addressed the correctness of the calculations underlying a US tax debt not in issue at the judicial review. The Respondent argued that the Court's comments on due process were not relevant to its disposition of the Charter and constitutional issues, and that the Court's decision did not extinguish the US tax debt. The Respondent noted that these same arguments apply to settlement considerations under Rule 420 as said tax debt was located solely in the United States and the only issue in this Court was whether a collection process could occur in Canada. The Respondent argued that, if the Applicant had settled the US tax debt with the IRS, the judgment on the Charter and constitutional issues could still have issued, but the reality is that this Applicant's purpose was avoidance of collection and not settlement. Finally, the Court in Camp Robin Hood Ltd. v. The Queen [1982] 1 F.C. 19 at p. 38, Apotex Inc. v. Wellcome Foundation Ltd. (1998) 159 F.T.R. 233 at p. 250, and Bayliner Marine Corp. v. Doral Boats Ltd. (1987) 11 F.T.R. 192 at p. 196 concluded that an expense is not allowable merely because it was incurred.
The Applicant's Position
[6] The Applicant argued that unusual circumstances here bring into play Rule 409 and various factors under Rule 400(3). Rule 400(3)(a) applies relative to a woman in her mid-seventies with health problems, and a husband with health problems, being chased by the Respondent, as an agent of the IRS, for her only asset. Rule 400(3)(c) applies as this was the first reported case on the Convention, an arrangement retroactive for ten years and the first opportunity for the United States to collect taxes in Canada. Rule 400(3)(g) and (h) apply further to the considerable work necessary to address this important public issue. Rule 400(3)(i) applies because the conduct of the IRS in delaying and refusing disclosure caused extra interlocutory expenses including the use of Mr. Moran to determine details of the issues of the US tax debt.
[7] Relative to item 3, the Applicant noted that the Respondent, having led the affidavit of a revenue officer (Mr. Ehrlich) of the IRS, initially agreed to produce him for cross-examination, but he later refused to appear. The Order dated July 30, 1999, resulting in part from the Applicant's need to obtain certain details of the US tax debt, was framed in very strong language, imposed a schedule of events including service of notice of the constitutional challenge on all attorneys general in Canada and provided for dismissal should the Applicant fail to adhere to the schedule. This required a degree of preparation beyond that ordinarily associated with a trial or hearing thereby justifying both claims within the wording of item 3.
[8] Relative to item 14(b) for second counsel, the Applicant argued that the unusual constitutional nature of this case, the two main issues being whether the Charter precluded the IRS from taking the Applicant's house and whether the Respondent could act as the collection agent for the IRS, necessitated engaging a second law firm. In effect, this case involved two hearings in one with one senior counsel addressing the constitutional issue and a second senior counsel addressing the Charter issue.
[9] Relative to double costs under Rule 420(1), the Applicant asserted that it was Mr. Ehrlich who initiated and suggested settlement terms. Mr. Moran's expertise was relevant for these settlement discussions. The Applicant argued that the evidence is that the Respondent, as a collection agent of the IRS, did not have the authority to settle. The Respondent actively encouraged the Applicant to deal directly with the IRS and that, coupled with the statements and proposals of the IRS, led the Applicant to believe that settlement negotiations had to be conducted directly with the IRS. The Applicant argued that Rule 420(1) does not require that settlement offers be made to a party. Therefore, the extensive settlement negotiations here with the entity really in control of this tax debt, the IRS, bring said Rule into play because the Court's decision extinguished the entire tax debt. If the debt does not exist under the Convention, the IRS is powerless to ask the Respondent for assistance. The Applicant argued that Yared Realty Ltd. v. Topalovic [1981] O.J. No. 2219, at paragraphs 6-11, holds that the law of costs applies in the case of a nominal party acting as a mere shadow for a non-party. Therefore, Rule 420(1) applies as the Court's decision was much more favourable to the Applicant than the settlement counter-offer by the IRS.
[10] The Applicant argued that the evidence supports the photocopy charge even if the amount appears large. The record discloses several interlocutory applications, involving voluminous documents and authorities, essential to frame complex tax, constitutional and Charter issues for the judicial review. As well, notice of the constitutional question had to be served on all jurisdictions in Canada.
[11] The Applicant argued further to J. Allen Carr v. the Minister of National Revenue [1995] T.C.J. No. 265 at paragraphs 57-59 that, although Mr. Moran was not called as an expert, his charges are assessable because his expertise confirmed the denial of due process in the United States relative to the Charter argument and framed the terms of a settlement offer. The Applicant conceded the lack of jurisdiction in this Court to address the US tax debt, but noted that the Court's decision acknowledged the improper treatment by the IRS.
Assessment
[12] It is irrelevant whether the supplemental affidavits claimed under item 3 address interlocutory proceedings or the substantive issues of the judicial review. Jurisdictions which capture partial indemnity in a tariff, such as Tariff B here, generally list discrete events for recovery of costs, which may not be exhaustive. The Applicant has received indemnification under items 5 and 13 and, in the circumstances here, that precludes recovery under item 3. As for item 14(b), Rule 409 permits an assessment officer to consider Rule 400(3) factors, but that does not mean, relative to Rules 405 and 407, the definition of assessment officer in Rule 2 and the constitution of the Court outlined in the Federal Court Act, s. 5, that an assessment officer can exercise the Rule 400(1) authority of the Court. I disallow the item 14(b) claim.
[13] Rule 419 brings Rule 420 into play for a judicial review. My decisions in Ronald Williams et al. v. The Minister of National Revenue 2001 FCT 106 (T-1646-97 on 20010222) at paragraphs [21]-[23] and Early Recovered Resources Inc. v. Gulf Log Salvage Co-Operative Association 2001 FCT 1212 (T-588-00 on 20011106) at paragraphs [7], [12] and [17] suggest that the application of Rule 420 is not necessarily straightforward. I agree that the Court's decision did not extinguish the US tax debt. Counsel for both sides, as officers of the Court under the Federal Court Act, s. 11(3), would have been obligated to advise the Court of a factor potentially affecting the best use of judicial time. I doubt that the Court would have permitted this judicial review to proceed on a moot issue if the underlying US tax debt had been settled.
[14] The instituting document addresses the Respondent's decision to collect the US tax debt. It outlines several grounds for judicial review including an assertion that the Applicant is not liable to pay the "Alleged Debt". That assertion could address the validity of the tax debt, but it more likely is associated with an intention to challenge, on constitutional and Charter grounds, the decision to collect in Canada on behalf of the IRS. The Notice of Constitutional Question, as served, includes in paragraph 23 the assertion that this "is not a taxation matter per se - and certainly not a Canadian taxation matter - but is a debt collection matter involving a foreign creditor ... to be resolved under general notions guiding the fair treatment of debtors broadly considered". The Applicant's subsequent position asserting difficulty with the calculation of the US tax debt itself may be consistent with the words "broadly considered." Paragraph [23] of the Court's Reasons dated 20000912 confirm that the Respondent was aware of the Applicant's Charter concerns almost three years prior to institution. It is irrelevant whether I think that the Respondent could have or should have reached the conclusions in paragraphs [67]-[71], concerning the potential for prejudice to individuals such as the Applicant, because the comment in paragraph [50] concerning the Respondent's discretion to refuse a request from the United States to collect suggests to me, relative to issues of costs, that the Respondent could not totally remove itself from the settlement process.
[15] This judicial review was instituted on June 30, 1999. The record indicates that the Respondent suggested in September 1999 that the Applicant approach the IRS directly, albeit with questions arising out of Mr. Ehrlich's affidavit. Settlement discussions then flowed from that contact with the IRS. Given the opportunity for international collection, the retroactivity of the Convention, and the passage of time from the initial consideration (1996) of the request for collection assistance, I think it unlikely that the Respondent could have realistically influenced the IRS to settle or extinguish the US tax debt which, in turn, would have made this judicial review unnecessary. As well, the Respondent argued for the constitutional issue that a tax debtor, faced with collection action under the Income Tax Act, can challenge the collection action, but not the underlying debt (paragraph 35 of Memorandum of Fact and Law filed November 25, 1999). However, from the perspective of Yared Realty Ltd. supra and of the absence of language in Rule 420(1) restricting its application to parties to the litigation, and given that the Applicant's dealings with the IRS could have directly affected collection proceeds regardless of lapsed time limits in the United States to formally challenge the tax debt, I conclude that the result was more favourable for the Applicant than for the Respondent and, in turn, for the IRS. As well, I note that the IRS, as part of its counter-offer dated May 23, 2000, included discontinuance of the judicial review as a term of settlement. The motivation for that term likely flowed from the wish to preclude any potential weakening of the Convention. Therefore, the Applicant shall have double fees from December 8, 1999.
[16] My conclusions for Rule 420 do not make it simpler to resolve the issue of Mr. Moran's role. An Order dated July 30, 1999, required, in paragraph 3, that the Respondent "provide particulars of the taxation imposed by the United States Internal Revenue Service with respect to the amount, penalty and interest claimed and indicate ... the particulars of the legislation under which tax reassessment was authorized ...." A second Order that same day adjourned an application to withdraw Mr. Ehrlich's affidavit pending determination of the constitutional challenge. The agreement to produce Mr. Ehrlich for cross-examination, and withdrawal of said agreement, occurred prior to the July 30, 1999 hearing. The record (paragraph 6 of Written Representations dated October 6, 1999) indicates that Mr. Moran was retained on August 20, 1999, because the Respondent's disclosure pursuant to paragraph 3 of the July 30, 1999 Order was allegedly inadequate. The final four paragraphs of Mr. Moran's report assert several errors in the IRS calculations and include the statement that "it seems clear that none of the calculations provided by the IRS are correct." Whether or not those errors were inextricably associated with the collection issues may be arguable depending on one's perspective, but it is clear that the Applicant pursued her position at the time this charge for Mr. Moran was incurred on the need to elicit information and clarification from Mr. Erhlich (paragraphs 14-29 of the Written Representations dated October 6, 1999).
[17] The Applicant then appeared on September 13, 1999, seeking an Order compelling the Respondent to comply with paragraph 3 of the July 30, 1999 Order, production of Mr. Ehrlich for cross-examination and production of the letter, and associated information, from the IRS to the Respondent requesting collection assistance. The Court adjourned all matters and directed that the parties seek clarification of the July 30, 1999 Order concerning the status of the Ehrlich affidavit and whether the Respondent had complied with paragraph 3. The Respondent took the position (Written Representations dated October 12, 1999) that the Ehrlich affidavit was filed in opposition to an interlocutory application on behalf of the Applicant no longer in issue and that it would be improper to permit the Applicant to use it at the judicial review itself. The Court's Reasons (October 28, 1999) dismissed the motion for compliance with said paragraph 3, for production of Mr. Ehrlich and for production of the request for collection assistance, and stated that paragraph 3 of the July 30, 1999 Order had been erroneously included given that the initial stage of this dispute would be the Applicant's Charter issues.
[18] I doubt that the Applicant would have approached the Respondent or the IRS with settlement proposals but for the decision by the Respondent to proceed with the request by the IRS for collection assistance. I have previously allowed disbursements for foreign counsel in certain circumstances (Reasons dated 19990729 in T-1941-93: James L. Ferguson v. Arctic Transportation Ltd. et al.). While I am not necessarily convinced that the Applicant would have hired Mr. Moran regardless of the wording of the July 30, 1999 Order, I think that the Applicant would not have attempted settlement of this US tax debt at this stage of her life but for the Respondent's decision to proceed with collection, and therefore the costs associated with Mr. Moran would not have been incurred but for said decision. Mr. Moran's opinion, initially to address Mr. Ehrlich's evidence in the context of interlocutory proceedings for which no costs were awarded, was ultimately used for additional purposes such as settlement negotiations relevant in the context of the judicial review, and my conclusions above for Rule 420, for which costs were awarded. It seems clear that the December 8, 1999 settlement proposal was substantially based on his report. His report appears to be beyond the expertise of even Canadian counsel as senior and as experienced as the Applicant's. Counsel for both sides had from July 30 to August 18, 1999 to consider steps, including questioning the propriety of paragraph 3 in the July 30, 1999 Order, which might have precluded or reduced the costs associated with Mr. Moran. The Respondent proceeded on August 18, 1999, with a response pursuant to said paragraph 3. I think that the Respondent must therefore accept the consequences of some associated costs. However, the Applicant should bear some responsibility for the difficulty posed by said paragraph 3. In the circumstances of this litigation, I allow a reduced amount of CDN $9,000.00.
[19] One criticism of photocopy charges over the years is that they sometimes include copies of authorities irrelevant or marginally relevant to the issues. Consistent with my rationale in Carlile v. The Queen, 97 D.T.C. 5284, and Local 4004, Airline Division of Canadian Union of Public Employees v. Air Canada on March 25, 1999, in T-323-98, and with the sentiment (addressing counsel fees) of Lord Justice Russell in Re Eastwood (deceased):
... In our view, the system of direct application of the approach to taxation of an independent solicitor's bill to a case such as this has relative simplicity greatly to recommend it, and it seems to have worked without it being thought for many years to lead to significant injustice in the field of taxation where justice is in any event rough justice, in the sense of being compounded of much sensible approximation... my emphasis, (1974) 3 All E.R. 603 at page 608
I allow a reduced amount of $1,200.00.
[20] The Applicant's Bill of Costs, presented at $51,287.46, is assessed and allowed at $42,088.45.
(Sgd.) "Charles E. Stinson"
Assessment Officer
Vancouver, B.C.
February 7, 2002
FEDERAL COURT OF CANADA
TRIAL DIVISION
NAMES OF COUNSEL AND SOLICITORS OF RECORD
DOCKET: T-1216-99
STYLE OF CAUSE:Judy Chua v. The Minister of National Revenue
PLACE OF HEARING: Vancouver, B.C.
DATE OF HEARING: September 25, 2001
ASSESSMENT OF COSTS - REASONS: Charles E. Stinson
DATED: February 7, 2002
APPEARANCES:
L.M. Little, Q.C. for Applicant
Timothy Walker
Linda L. Bell for Respondent
SOLICITORS OF RECORD:
Thorsteinssons
Vancouver, B.C. for Applicant
Morris Rosenberg
Deputy Attorney General of Canada for Respondent
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