REASONS
RESPECTING SUBMISSIONS ON COSTS
Owen J.
[1]
Subsequent to the pronouncement of my judgment in
Sun Life Assurance Company of Canada v. The Queen, 2015 TCC 37, the Appellant
in that matter filed a motion for costs on the basis that it had made an offer
of settlement to the Respondent and had obtained a judgment more favourable
than the terms of the offer. The Applicant submits that it is entitled to
substantial indemnity costs under subsection 147(3.1) of the Tax Court of
Canada Rules (General Procedure) (the “Rules”) and
Tax Court of Canada Practice Notes Nos. 17 and 18. The Applicant seeks a lump sum
award of costs in the amount of $200,000, which approximates 80% of counsel
fees of $157,430.20 based on certain hourly billing rates, plus taxes of
$20,465.93 and disbursements of $21,356.28.
[2]
The Applicant says that the actual fees and
disbursements incurred by it in respect of the appeal were as follows:
(a) Fees
for the professional services of KPMG Law LLP in the amount of $319,795.12 plus
HST of $41,573.37 for a total of $361,368.49. The fee for professional services
is equal to one-quarter of the tax recovered of $1,279,180.49.
(b) The court fee for filing the Notice of Appeal in the
amount of $550.00.
(c) Disbursements
in the amount of $18,068.43, including HST, in respect of administrative
expenses, including long distance telephone calls, photocopies, fax charges,
printing and postage.
(d) Airfare
in the amount of $801.58, including HST, for the attendance of two counsel at
the settlement conference.
(e) Hotel
expenses in the amount of $1,521.92, including HST, for the attendance of two
counsel at the settlement conference.
(f) Taxi
expenses in the amount of $307, including HST, for the attendance of two
counsel at the settlement conference.
(g) A legal gown rental expense of $107.35, including HST.
[3]
The claim for substantial indemnity costs is based
on fees for professional services of $196,787.75 calculated as follows:
Justin Kutyan, partner: 108.2 hours at $1,130 per hour = $122,266
Vern Vipul, associate: 56.6 hours at $955 per hour = $54,053
Thang Trieu, associate: 18.75 hours at $785 per hour = $14,718.75
Wajiha Khan, law clerk: 23 hours at $250 per hour = $5,750
[4]
The Applicant made a settlement offer to the Respondent
by letter dated April 24, 2013. The letter stated:
Further to our recent discussions, Sun Life Assurance Company of
Canada (“Sun Life”) would be glad to submit a settlement offer for the above
mentioned file for an amount of $997,171, plus applicable interest.
We have provided a summary of our relevant calculations at Schedule
“A” hereto.
Basis for Calculations
In considering the settlement amount, please note the following:
• Input Tax Credits (“ITCs”) should be allowed on the
Taxable Office Space actually licensed to the Advisors (the “Licensed Office
Space”). On a square footage basis, $177,706.58 should be allowed with respect
to the Licensed Office Space.
• ITCs should be allowed with respect to the Common Space
to the extent that the Common Space is attributable to the Licensed Office
Space. Applying this allocation on a square footage basis, $477,383.96 of ITCs
should be allowed with respect to the Common Space attributable to the Licensed
Office Space.
• Sun Life is willing to prepare a settlement offer with
respect to the Vacant Space by allowing ITCs based on the percentage of the
Licensed Office Space to the total of the Licensed Office Space plus the Exempt
Office Space (i.e., approximately 59% during the Reportable Periods). 3
Applying this allocation, $342,080.47 of ITCs should be allowed with respect to
the Vacant Space (and including the related Common Space).
[Footnote 3:] This is determined by obtained by [sic]
dividing the total square footage of the Licensed Office Space by the total of
the square footage of the Licensed Office Space plus the Exempt Office Space.
[5]
Schedule “A” to the above letter included
detailed calculations for each financial centre based on floor space, as well
as colour-coded floor plans for eleven financial centres.
[6]
The Applicant says that substantially all of
KPMG Law’s professionals’ time spent on the appeal was spent on it after the
April 24, 2013 settlement offer. However, actual numbers were not provided. The
hearing was held for one day in Toronto in September 2014.
[7]
Subsections 147(3.1) to 147(3.8) were added to
the Rules effective February 7, 2014. Prior to that, the practice of the Tax
Court of Canada was conformed to the proposed text of the new rules by Practice
Note No. 17, effective January 18, 2010, and Practice Note No. 18, effective
January 31, 2011. The subsections of the Rules relevant in this
motion state:
(3.1) Unless otherwise ordered by the Court, if an appellant makes
an offer of settlement and obtains a judgment as favourable as or more
favourable than the terms of the offer of settlement, the appellant is entitled
to party and party costs to the date of service of the offer and substantial
indemnity costs after that date, as determined by the Court, plus reasonable
disbursements and applicable taxes.
. . .
(3.3) Subsections (3.1) and (3.2) do not apply unless the offer of
settlement
(a) is in
writing;
(b) is served no
earlier than 30 days after the close of pleadings and at least 90 days before
the commencement of the hearing;
(c) is not
withdrawn; and
(d) does not
expire earlier than 30 days before the commencement of the hearing.
(3.4) A party who is relying on subsection (3.1) or (3.2) has the
burden of proving that
(a) there is a
relationship between the terms of the offer of settlement and the judgment; and
(b) the judgment
is as favourable as or more favourable than the terms of the offer of
settlement, or as favourable or less favourable, as the case may be.
(3.5) For the purposes of this section, “substantial indemnity costs”
means 80% of solicitor and client costs.
[8]
On a plain reading of the wording of the above
provisions, if the conditions imposed by the new rules are met, the Applicant
is entitled to substantial indemnity costs, as determined by the Court, after
the date of the settlement offer unless the Court orders otherwise. In my view,
subsection 147(3.1) is a default rule that applies where a qualifying settlement
offer has been made but rejected and the Applicant has obtained a judgment that
is related to the terms of the offer and that is at least as favourable as the
offer. The purpose of the rule is to encourage parties to settle wherever
possible
by providing a default entitlement to substantial indemnity costs incurred
after the date of the offer. The default rule removes the usual impediment to
the award of enhanced costs.
Of particular note is the fact that the rule awards 80% of solicitor and client
costs without the need to satisfy the conditions typically imposed on the
granting of solicitor and client costs.
[9]
Under the new rule, the Court has the discretion
to determine what the substantial indemnity costs are in each case and the
discretion to override the default rule if the Court is of the view that the
circumstances warrant such an approach. The discretionary aspects of the rule
are consistent with the general proposition that costs awards are “quintessentially discretionary”.
[10]
As is the case with the discretion associated
with the award of costs generally, the discretion to determine what the
substantial indemnity costs are in each case and the discretion to override the
default rule should be exercised only on a principled basis: The Queen v. Martine
Landry, 2010 FCA 135 at paragraph 22. This requirement is implicit in
the observation of the Supreme Court of Canada in Sun Indalex Finance, LLC
v. United Steelworkers, 2013 SCC 6, [2013] 1 S.C.R. 271 at paragraph 247:
. . .
Discretionary costs decisions should only be set aside on appeal if
the court below “has made an error in principle or if the costs award is
plainly wrong”: Hamilton v. Open Window Bakery Ltd., 2004 SCC 9, [2004]
1 S.C.R. 303, at para. 27.
[11]
In the case of subsection 147(3.1) of the Rules,
the need for a principled basis to override the default rule is reinforced by
the fact that the rule states that “the appellant is entitled” to
substantial indemnity costs after the date of the offer. The entitlement
created by the new rule should not be taken away lightly.
[12]
The Federal Court of Appeal commented on the new
settlement costs rules, in obiter dicta, at paragraphs 30 and 31 of Transalta
Corporation v. The Queen, 2013 FCA 285:
30 For the aforementioned reasons and on the basis of the prior
jurisprudence of this Court, I cannot conclude that the Judge made a reviewable
error in concluding that the Minister was justified in rejecting the settlement
offer as it was put forward by the Appellant.
31 Further, since Practice Note 18 is not yet in force, it
cannot affect the discretion of the Court to allow further costs when it is
justified or to deny them when it is not. Even if the Practice Notes were in
force, proposed Rule 147(3.1) recognizes that judges of the Tax Court retain
discretion to not award enhanced costs. Were this not the case, the proposed
rule would interfere with the ability of Tax Court judges to fashion just and
appropriate cost awards, suitable to the particular circumstances of individual
cases.
[13]
The Court observed that even if subsection
147(3.1) of the Rules was in force the Tax Court of Canada still retained
discretion not to award costs in accordance with the new rule. This would allow
judges of the Tax Court to fashion just and appropriate costs awards suitable
to the particular circumstances of individual cases. This is not an invitation
to override the default entitlement conferred by the new rule but an
acknowledgement of the discretion to do so. As indicated by the Federal Court of
Appeal in Catherine Leuthold v. Canadian Broadcasting Corporation et al.,
2014 FCA 174, the Court must be guided by the express wording of the rules
applicable to costs:
[10] Ms. Leuthold argues that the law is clear that costs are not to
be used to penalize a party, nor are they to be punitive or crippling in
nature. She argues that an award of costs of some $80,000 is punitive and a
penalty for a person whose gross annual income is approximately $20,000 per
year.
[11] I agree with Ms. Leuthold’s statements of
principle but those principles have to be applied in light of the objective
sought to be achieved through Rule 420, which is to deter parties from
incurring costs and inflicting them on others by creating a financial incentive
to compromise their claims. The incentive, in the case of the double costs
rule, is the avoidance of a penalty. I do not think it is contentious to say
that doubling the costs a party would otherwise have to pay, or imposing costs
on a modestly successful party, is a penalty. As a result, it does not assist
Ms. Leuthold to say that costs should not operate as a penalty. Costs should
not operate as a penalty unless the Rules specifically intend them to do so.
[Emphasis added.]
[14]
The Respondent does not dispute the fact that an
offer was made by the Applicant that satisfied the conditions in subsection
147(3.3) of the Rules, nor does the Respondent dispute that there is a
relationship between the terms of the offer and the judgment and that the Applicant
obtained a result more favourable than the offer. The Respondent submits that she
could not legally accept the offer because of the “all-or-nothing” nature of the appeal.
[15]
I do not quarrel with the principle that the Respondent
cannot accept an offer of settlement that is not supportable on the facts and
the law. The Federal Court of Appeal described this principle in CIBC World
Markets Inc. v. The Queen, 2012 FCA 3 as follows:
24 CIBC World Markets cites 1390758 Ontario Corporation v.
The Queen, 2010 TCC 572 at paragraph 36 and Smerchanski v. Minister of
National Revenue, [1977] 2 S.C.R. 23 for the proposition that courts have
enforced settlements that apply tax law to agreed facts. That is true. But the
Minister’s power to agree to facts is limited by the Galway principle —
the Minister cannot agree to an assessment that is indefensible on the facts
and the law. Nothing in 1390758 Ontario and Smerchanski undercuts
the Galway principle.
[16]
I do not agree, however, that this principle
applied to the settlement offer made by the Applicant to the Respondent on
April 24, 2013. The legal issue before me in the appeal was whether the
methodology adopted by the Applicant to determine its input tax credits was
fair and reasonable in the circumstances given the dual purpose of the leased
office space. In allowing the appeal, I made the following observations at
paragraphs 35 and 40 of the reasons for judgment:
Subsection 141.01(5) presupposes that a particular acquisition has
more than one purpose and in such a case requires the person acquiring the
property or service to determine the extent to which the property or service is
acquired for the purpose of making taxable supplies for consideration or for
other purposes. The method used to make this determination must be fair and
reasonable and must be used consistently throughout the year. Subsection
141.01(5) thus requires that the method chosen by Sun Life to determine the
extent to which a dual-purpose property or service is acquired by it for the
purpose of making taxable supplies for consideration or for other purposes be
fair and reasonable.
. . .
I can see no reason why the general approach to determining
reasonableness in these cases would not also apply to determining whether a
particular method is “fair and reasonable”. That is to say, what is “fair and
reasonable” is a question of fact and requires the application of a measure of
judgment and common sense. The determination is not based on the subjective
view of either the Appellant or the Respondent but is based on the view of an
objective observer with knowledge of all the pertinent facts. It is also
important to recognize that the tax authorities cannot simply substitute their
approach for that of Sun Life and that there may be more than one method that
is fair and reasonable in the circumstances (see Ville de Magog v.
The Queen, supra).
[17]
The question of whether the particular method
used by the Applicant to determine its ITCs was fair and reasonable may have
required a yes or no answer. However, that does not mean that only one method
for determining those ITCs could be considered fair and reasonable in the
circumstances. As recognized by the Federal Court of Appeal in Ville de
Magog v. The Queen, 2001 FCA 210, the nature of the test is such that there
may be more than one method for determining ITCs that is fair and reasonable in
the circumstances.
[18]
The Applicant made a settlement offer that
reduced the amount of ITCs claimed in its appeal from $1,279,180.49 to $997,171:
a reduction of $282,009.49 or 22%. The Applicant provided a rationale for the
amount offered and detailed calculations based on that rationale. I do not see
any legal impediment to the Respondent concluding that the method adopted by
the Applicant in the settlement offer was fair and reasonable in the
circumstances. In his written representations, counsel for the Respondent did
not provide any reasons why the method adopted by the Applicant in the
settlement offer could not be considered fair and reasonable for the purposes
of subsection 141.01(5) of the Excise Tax Act.
[19]
The Respondent also says that her conduct was
irreproachable, that her position had a reasonable degree of sustainability,
and that there were no unusual circumstances that would justify an increased
award of costs against the Respondent. While I do not quarrel with these
contentions, the objective of subsection 147(3.1) of the Rules is to provide a
default entitlement to substantial indemnity costs with respect to qualifying
settlements. None of the factors identified by the Respondent suggest to me
that the default rule should not apply. To conclude otherwise would, without
justification, materially water down the “entitlement” otherwise created by the
plain words of the rule – an entitlement that is consistent with the purpose of
the rule and the context in which it is found. If anything there would need to
be unusual (in the sense of exceptional or extraordinary) circumstances that
lead me to conclude that I should exercise my discretion to override the
default rule on the basis of a principled analysis. As stated by counsel for the
Respondent in his written representations, there are no unusual circumstances
in this case. Consequently, the default rule in subsection 147(3.1) should be
applied in accordance with its terms.
[20]
This leaves me with the question of whether the Applicant’s
request for a lump sum award of $200,000 is in accordance with subsection
147(3.1) of the Rules. The rule provides for party and party costs up to the
time of the settlement offer and 80% of solicitor and client costs after the
date of the offer, plus reasonable disbursements and applicable taxes. The Applicant
has not broken down its request so as to address the pre-settlement and
post-settlement periods other than to state in an affidavit that substantially
all of KPMG Law’s professionals’ time spent on the appeal was spent on it after
April 24, 2013. It behooves counsel to be precise about the time spent and the
activities undertaken before and after the settlement offer in issue so that the
Court can make an accurate determination of costs under subsection 147(3.1) of
the Rules. The phrase “substantially
all” is not a precise term.
[21]
With respect to the determination of solicitor
and client costs on which substantial indemnity costs are based, the basic rule
is that such costs are intended to provide a full indemnity for all costs
reasonably incurred. This principle was stated by Cattanach J. in Scott
Paper Co. v. Minnesota Mining and Manufacturing Co., [1982] F.C.J. No. 917(QL)
as follows:
The underlying purpose of an award of costs on the basis of those
between solicitor and client is to provide complete indemnification for all
costs, including fees and disbursements, reasonably incurred in the course of
defending or prosecuting the action but excluding the costs for extra services not
reasonably necessary.
[22]
The costs awarded under subsection 147(3.1) of
the Rules are 80% of solicitor and client costs. Given the automatic 20%
discount built into the rule, it is appropriate to adopt as the starting point
all costs reasonably incurred.
[23]
The task falls on the court to assess whether
the costs claimed were reasonably incurred and each case must be addressed on
its own facts. However, a couple of points are worth noting. First, an
assessment of the time spent on an appeal should be made on the basis of the
circumstances in existence at the relevant time. It is not the role of the court
to use hindsight to second-guess the judgment of counsel regarding the amount
of time spent on an appeal. Second, the best evidence of the appropriate rate
for the legal services provided by counsel will generally be the rate charged
by counsel for those services. In other words, it is generally reasonable to
assume that the rates that were in fact charged were the product of the market
in which they were charged and reflected the reasonable cost of the services
provided to the client in that market.
[24]
There are, however, two caveats to this second
point. First, it must be clear that the client agreed to pay the rates being
charged for the services provided. Hypothetical rates do not meet that criterion.
Second, special arrangements, such as a contingency fee arrangement with an
embedded risk premium, are unlikely to reflect market rates. In the words of the Supreme
Court of Canada in Walker v. Ritchie, 2006 SCC 45, [2006] 2 S.C.R. 428
at paragraph 28:
. . .
Unsuccessful defendants should expect to pay similar amounts by way
of costs across similar pieces of litigation involving similar conduct and
counsel, regardless of what arrangements the particular plaintiff may have
concluded with counsel.
[25]
In this case, the Applicant seeks 80% of
solicitor and client costs that are based on the total time spent on the file
and the following hourly rates: Justin Kutyan, partner, $1,130 per hour; Vern
Vipul, associate, $955 per hour; Thang Trieu, associate, $785 per hour, and
Wajiha Khan, law clerk, $250 per hour. Mr. Kutyan was called to the bar in
2007, Mr. Vipul in 2004 and Mr. Trieu in 2008.
[26]
The issue I have with this claim is that there
is no evidence that the client agreed to pay these rates as the fee actually
charged was a percentage of the amount recovered. In my view, a contingency fee
such as this does not reflect market rates for the services provided but is a
special arrangement negotiated by the parties. The Respondent cannot be
expected to reimburse the Applicant for the costs incurred under such a special
fee arrangement, and hypothetical rates are not an appropriate proxy for the
rates that would have been charged under a more conventional fee arrangement.
[27]
In a circumstance such as this, the role of the Court
in applying subsection 147(3.1) of the Rules is to determine the solicitor and
client costs appropriate to the particular circumstances, having regard to the
general experience of the Court.
[28]
The three lawyers identified by the Applicant
are members of a national law firm and are based in downtown Toronto. The
relevant market is therefore downtown Toronto. The hearing addressed the
interpretation of provisions in the Excise Tax Act that to my mind
cannot be viewed as simple or straightforward. The amount in issue was almost
$1.3 million.
[29]
In the circumstances, one could reasonably
expect that the legal fees incurred by the Applicant for the appeal would be at
the top end of the range identified by general experience. In other words,
litigation involving similar conduct and counsel would likely involve hourly
rates at the high end of the range.
[30]
In Stetson Oil & Gas Ltd. v. Stifel
Nicolaus Canada Inc., 2013 ONSC 5213, the Court identified the rates
claimed by the senior Toronto lawyers involved as being $880 for the
plaintiff’s lawyer and $700 to $800 for the defendant’s lawyer. The Court noted
that the $880 rate had to be adjusted downward as it was unlikely that a
constant rate was in place for the duration of the file.
[31]
An annual survey of lawyers’ hourly rates
conducted by Canadian Lawyer magazine indicated that in 2014 the average
hourly rates among law firms with more than 25 lawyers were $280 for a one-year
call, $318 for a five-year call, $488 for a ten-year call, $505 for a twenty-year
call and $605 for lawyers of more than 20 years’ standing.
[32]
Taking all this into account, I have concluded
that the following hourly rates are reasonable in these particular
circumstances for determining solicitor and client costs: Justin Kutyan,
partner, $800 per hour; Vern Vipul, associate, $550 per hour; Thang Trieu,
associate, $400 per hour; and Wajiha Khan, law clerk, $100 per hour. I have no
reason to question the number of hours accumulated on the file by each of these
individuals.
[33]
I have already commented on the lack of
precision in attributing time to the periods before and after the settlement
offer. In light of this, I will assume that “substantially all” means 90%, which
is a common benchmark in the tax area that has been adopted by the Canada
Revenue Agency in interpreting the phrase. Hence, 90% of the time should be
compensated at the above rates in determining solicitor and client costs. This
yields the following amounts (rounded to the nearest dollar):
Justin Kutyan, partner: 108.2 hours times .9 times $800 per hour =
$77,904
Vern Vipul, associate: 56.6 hours times .9 times $550 per hour =
$28,017
Thang Trieu, associate: 18.75 hours times .9 times $400 per hour =
$6,750
Wajiha Khan, law clerk: 23 hours times .9 times $100 per hour =
$2,070
[34]
The total of these amounts is $114,741. The
substantial indemnity costs are 80% of the solicitor and client costs, which is
$91,792. I set the party and party costs at $1,050 taking into account the amount
allowed for a Class C action involving two counsel under paragraph 1(a)
of Tariff B. The total is therefore $92,842.
[35]
In addition, the Applicant claimed disbursements
of $21,356.28 (including HST, where applicable) and HST of 13% on the
professional fees. The Respondent did not challenge the disbursements, which I
will allow in full net of any of the HST applicable to the disbursements that
is recovered by the Applicant through input tax credits. The Applicant will
also be allowed costs equal to the 13% HST applicable to professional fees of
$92,842, but again only to the extent that the HST on such professional fees is
not recovered by the Applicant through input tax credits.
[36]
The recovery of input tax credits in respect of
the professional fees is to be determined by reference to an appropriate
proportion of the actual HST paid by the Applicant on the professional fees of
KPMG Law LLP charged for this appeal.
[37]
If the parties cannot agree on the amount of tax
that should be paid by the Respondent to the Applicant as costs then the
parties may apply to the Court to have that matter determined.
Signed at Ottawa, Canada, this 3rd day of July 2015.
“J.R. Owen”
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