Her Majesty the Queen v. Leroy R Creamer, [1977] CTC 20, 77 DTC 5025

Mahoney, J:—The issue is the meaning of the phrase “all reasonable and proper costs’’ as used in subsection 178(2) of the Income Tax Act.* [1] A secondary issue is whether this action was properly classified as a Class Il action under Tariffs A and B of the Appendix to the Rules of this Honourable Court.

The decision of my brother Dubé on the substantive issue raised in this action has been reported.! [2] Nevertheless, it is convenient to recite certain of the facts, as they appear on the record, germane to the question of costs. The defendant was employed throughout 1972 as a truck driver by Imperial Oil Limited delivering its products throughout southern New Brunswick from a base in St John. His total income for the year was $10,494.83. He was not reimbursed by his employer for the cost of his noon meal unless he was away from the terminal over 12 hours. In computing his taxable income for the year he claimed a deduction of $495 for 180 lunches at $2.75 each for which he had not been reimbursed. The Minister of National Revenue disallowed the $495 deduction and assessed accordingly. The plaintiff successfully appealed to the Tax Review Board.! [3]

The deduction could only be sustained if it were found that Imperial Oil Limited were “a person whose principal business was passenger, goods or passenger and goods transport” as stipulated by paragraph 8(1 )(g) of the Act. There were no other issues raised by the Statement of Claim in this action. The defence argued that the defendant was not employed by Imperial Oil Limited but by its Transportation Department—the argument accepted by the Tax Review Board—and, in the alternative, that the transport of goods was a principal business of Imperial Oil Limited in any case.

I shall deal first with the subsidiary issue. The material provisions of Tariffs A and B contained in the Appendix to the Rules are:

TARIFF A

COURT COSTS

GENERAL

1. (1) For the purpose of this Tariff, any step in a proceeding in the Trial Division shall be classified as being Class I, Class II or Class III.

(3) Unless the Court otherwise directs in respect of a particular step in a proceeding, or in respect of all steps in a particular proceeding,

(a) where a step is a step in a proceeding (other than a proceeding to which paragraph (b) applies) in which there is an amount involved on the face of the proceedings that is less than $5,000, it shall be classified as a Class I step,

(b) where a step is a step in a proceeding that is, or was in its inception, an appeal to the Trial Division or any other proceeding in the Trial Division where no judgment is being sought for payment of an ascertained amount, it shall be classified as a Class Il step,

(c) where a step is a step in a proceeding in which there is an amount involved on the face of the proceedings that is $5,000 or more and less than $50,000, it shall be classified as a Class II step,

(d) where a step is a step in a proceeding not otherwise covered by this paragraph, it shall be classified as a Class III step.

TARIFF B

AMOUNTS TO BE ALLOWED ON A PARTY AND PARTY TAXATION

1. Section 1 of Tariff A is applicable with necessary changes to this Tariff.

Certain of the subsequent provisions of both Tariffs provide for the payment of fees to the Registry and for the allowance of fees on a party and party taxation in varying amounts for the same step depending upon the class of the proceeding in which the step is taken.

Section 175 of the Income Tax Act regulates the manner in which appeals to the Federal Court, other than appeals required by section 180 to be instituted in the Federal Court of Appeal, are to be taken. This action was governed by section 175. Subsection 175(3) provides, In part, as follows:

175. (3) An appeal instituted under this section shall be deemed to be an action in the Federal Court to which the Federal Court Act and the Federal Court Rules applicable to an ordinary action apply, except . . .

None of the exceptions contained in the balance of the section nor in Rule 800 are material to the present issue.

In Columbia Records of Canada Ltd v MNR, [1972] CTC 324, an appeal from a taxing officer, my brother Gibson held:

I am of opinion that an appeal to the Trial Division of this Court under and pursuant to the Income Tax Act is (1) an “action” and not an “appeal” and (2) the judgment sought is “a final determination of the tax payable” and therefore is not a proceeding in which “no judgment is being sought for payment of an ascertained amount” within the meaning of those words in item 1 (3)(b) of said tariff “A”.

I fully agree with that decision. As to the proper classification of this action, less than $5,000 was involved and the only question is whether that fact was apparent “on the face of the proceedings’’.

The Statement of Claim contained the following:

7. The Deputy Attorney General of Canada respectfully submits that the Defendant, in computing his income for the 1972 taxation year, is not entitled to deduct the sum of $495.00 disbursed for meals as he was not an employee of a person whose principal business was passenger, goods or passenger and goods transport within the meaning of section 8(1)(g) of the Income Tax Act.

CLAIM

The Deputy Attorney General of Canada, on behalf of Her Majesty, therefore claims that:

iii) it is ordered pursuant to the provisions of subsection (2) of Section 178 of the Income Tax Act, RSC 1952, c 148, as amended by s 1, c 63, SC 1970-71-72, that there shall be paid to the Defendant, after taxation thereof, all of his reasonable and proper costs in connection therewith.

The fact that the amount involved in this action was less than $5,000 does, in my opinion, appear on the face of the proceedings. The amount of taxable income involved appeared on the face of the proceedings; it was $495. It is to be assumed that the tax payable— the ascertained amount involved—will not exceed the taxable income involved. In any case, where subsection 178(2) is invoked by the Statement of Claim, the amount of tax involved—the ascertained amount—necessarily cannot exceed $2,500. I find that this action was not properly classified as a Class II action; it should have been classified as Class l.

In view of the disposition I intend to make of the main issue, I do not propose to give effect to the foregoing finding at this time. I should be surprised if the fees properly to be taxed under subsection 178(2) did not exceed those provided by Tariff B for a Class Il action. As to fees paid the Registry, the practical effect of such an implementation would merely be to shuffle debits and credits among various emanations of the Crown at some cost to the public, perhaps more than the excess of fees to be transferred.

I now turn to the quantum of costs required to be awarded under subsection 178(2). In his decision allowing the plaintiff’s appeal, Mr Justice Dube ordered as follows [p 681]:

The defendant may however find some consolation in the fact that pursuant to subsection 178(2) of the Act, there shall be paid to him all his reasonable and proper costs. If both parties cannot agree as to costs, there shall be taxation thereof.

The taxing officer considered that he had no authority to do anything but tax party and party costs on the basis of Tariffs A and B. There is no dispute as to his allowance of disbursements. He allowed fees of $775 for a Class II action.

The defendant seeks to recover fees paid or payable to his counsel in the aggregate of $3,921.35 based on 6.60 hours spent on the case by a senior counsel, charged at $80 per hour, 3.75 hours spent by another partner charged at $75 per hour and 77.80 hours spent by a junior associate charged at $40 per hour. I should note that counsel were not involved in the appeal to the Tax Review Board. The hourly rates are, in my view, entirely reasonable and there is, of course, no intimation that the time charged was not actually devoted to the case. At the same time, it does appear to have been an inordinate amount of time having regard to the issues defined by the pleadings.

The question is whether Parliament, in requiring, in the circumstances envisaged by subsection 178(2), that this Court “order the Minister to pay all reasonable and proper costs of the taxpayer” intended the Court to invoke one of the recognized classifications of costs, or whether it intended to create a new classification. There are now two recognized classifications of costs payable by one party to another: costs as between party and party and costs as between solicitor and client. I see no present, practical, value in perpetuating refinements developed in other jurisdictions and other times which, however meaningful there and then, serve no useful purpose here and now. Any relationship that either category bears to the account which a solicitor may properly render his own client is purely coincidental since that account may well embrace services ordered by and rendered to the client which were superfluous to the conduct of the action and, hence, under no circumstances for the ultimate account of the opposing party whatever the outcome.

Aside from decisions dealing specifically with subsection 178(2), to which I shall return, I have been unable to locate any authority dealing with the term “reasonable and proper costs” where the adjectives are conjoined.

Paragraph 22 of the Third Schedule to the Coal Act, 1938, 1-2 Geo VI, c 52 (UK), provided, in prescribed circumstances, that the Coal Commission constituted by the Act “shall pay the costs reasonably incurred by any person . . .”. In Williams v Sharpe, [1949] 1 Ch 595, the substantive issue was the identification of persons having a beneficial interest in freehold compulsorily taken by the Commission. The Court of Appeal held that, notwithstanding a number of previous decisions on the same point by the same trial judge, the costs of the appeal had been reasonably incurred and it directed they be paid, by the Commission, “as between party and party’’.* [4] There is no indication in the reasons that the option of solicitor and client costs was considered nor is there any indication of the nature of the award of costs by the trial judge. The Court of Appeal dismissed the appeal and, in considering costs, directed itself entirely to the question, in essence, whether or not, in the circumstances, it had been reasonable to take the appeal at all.

While the judgment of Jenkins, J, from which the appeal in Williams v Sharpe was taken, is, so far as I have been able to ascertain, not reported, at least three of his earlier decisions, to which the same statutory provision applied, are. In each he awarded costs “taxed as between solicitor and client’’.t [5] Under the circumstances, I have difficulty in accepting the Court of Appeal decision in Williams v Sharpe as authority for the proposition that the expression “costs reasonably incurred’’ means “costs as between party and party”.î [6]

In the Bankruptcy Act, RSC 1970, c B-3, it is provided:

168. (2) The court in awarding costs may direct that the costs shall be taxed and paid as between party and party or as between solicitor and client, or the court may fix a sum to be paid in lieu of taxation or of taxed costs, but in the absence of any express direction costs shall follow the event and shall be taxed as between party and party.

That provision was enacted in 1949§ [7] and was in effect when the Ontario Court of Appeal awarded ‘all proper costs and expenses” and a Registrar in Bankruptcy found: [8] I

The order does not direct costs to be paid as between solicitor and client.

Having reached that conclusion, the learned Registrar might well have decided that he had no alternative, in view of the express terminology of the section, but to tax the costs ‘‘as between party and party”. He chose instead to survey, at some considerable length, a variety of precedents dealing mainly with a court’s jurisdiction as to costs and concluded (at p 225), without reference to the express provision of the Bankruptcy Act, that

“proper costs’’ herein are limited to party and party costs throughout and should be taxed on a party and party scale.

Under the circumstances, that decision is questionable authority for the proposition that

An award of “all proper costs and expenses’’ is limited to party and party costs, and does not mean costs as between solicitor and client.* [9]

No doubt such an award is not an “express direction”, as required by subsection 168(2) of the Bankruptcy Act, that costs be taxed and paid “as between solicitor and client” but it is by no means an express direction, outside the purview of that Act, that they be taxed and paid “as between party and party”.

Subsection 36(2) of the Expropriation Act, RSC 1970 (1st Supp), c 16, requires that in the circumstances therein set forth

. . . the Court shall direct that the whole of such party’s costs of and incident to the proceedings, determined by the Court on a solicitor and client basis, be paid by the Crown.

This provision is cited by the plaintiff in support of the proposition that since Parliament had in mind the significance of the term “costs . . . on a solicitor and client basis” when it enacted the Expropriation Act during the Second Session of the 28th Parliament, it must have meant something different when it spoke of “all reasonable and proper costs” in subsection 178(2) of the Income Tax Act, enacted during the Third Session of the same 28th Parliament.! [10]

The fact is that numerous legislative enactments, in force long before Parliament adopted subsection 36(2), had provided, in the circumstances envisaged by that subsection, for payment of ‘‘full costs” to the expropriated owner and that the courts had held the term “full costs” to mean costs as between solicitor and client. Similarly, where the award of costs in such circumstances was in the discretion of the court rather than directed by the legislation, the discretion was commonly exercised to the same result. Likewise, when it enacted subsection 21(3) of the Trade Union Act, RSC, 1970, c T-11, Parliament simply recognized what judges had long held in the exercise of their discretion: that in the circumstances of an action contemplated by section 21, necessarily taken by trustees in the execution of their trust, costs ought to be awarded to them on the scale as between solicitor and client.

My brother Walsh had occasion to consider this matter in The Queen v Lavigueur, [1973] CTC 773; 73 DTC 5538. In that case, the amount of tax involved in the action was only $222.19 but it appears that the tax implications for future years were, in the aggregate, most substantial. In dealing with costs in his reasons, Mr Justice Walsh recited a number of contentions advanced on behalf of the defendant as to the significance of subsection 178(2) including the proposition that ‘all reasonable and proper costs . . . extends to solicitor and client fees . . . over and above these taxable court costs”. He concluded: “I am in agreement with these contentions” but issued the following caveat (p 784 [5546]):

. . . While in view of the difficulty of the issue these reasonable and proper costs would be more than the mere taxable costs allowed in a Class I action into which category this action would fall, they must nevertheless be kept in moderation and not exceed proper solicitor and client fees which the defendant might reasonably be expect?d to pay himself but for subsection 178(2) in an action in which the amount in issue did not exceed $2,500. If the parties cannot agree on the amount of costs to be taxed on this basis under Rule 349 they may appeal same to the Court.

A check of the Court file in that case indicates that the parties did agree. Costs were not taxed.

In The Queen v Pascoe, [1976] 2 FC 277, Preston, Prothonotary, gave reasons for his taxation of a bill of costs in an action to which subsection 178(2) applied, at least to the action in the Trial Division ([1975] CTC 58; 75 DTC 5024). The Crown’s appeal to the Federal Court of Appeal ([1975] CTC 656; 75 DTC 5427) was successful to the extent that the original assessments which had been disallowed by the Tax Review Board and partly restored by the trial judge were fully restored by the Court of Appeal. The trial judge had awarded costs as provided in subsection 178(2) and these, according to the Prothonotary’s reasons, had “already been paid” when he was called upon to tax the costs which the Court of Appeal had awarded in the following terms:

There shall be paid to the Defendant, after taxation thereof, all of his reasonable and proper costs both in the Trial Division and in this Court.

It would be unlikely, in the circumstances, that the Court of Appeal intended to convey anything different by its use of the term “reasonable and proper costs” than is conveyed by subsection 178(2). At the same time, it should be noted that the award of costs by the Court of Appeal was without reference to that provision, which applies only to an appeal “from a decision of the Tax Review Board”. I am unaware of any procedure by which an “appeal”, as opposed to an application under section 28 of the Federal Court Act, RSC 1970 (2nd Supp), c 10, could be taken from the Board direct to the Federal Court of Appeal. Certainly, in the Pascoe case the appeal was from the Trial Division. The award of costs on that scale by the Court of Appeal was in the exercise of its discretion, not because it was bound by subsection 178(2) to do so.

If, in saying at page 278,

I do not think it is proper to interpret “all reasonable and proper costs’’ to include all costs properly collectable under the terms of a solicitor and client taxation.

the Prothonotary had in mind “solicitor and client’’ in the context cf the account which a solicitor might successfully tax against his own client, I am in agreement with his result. If, however, he had in mind the solicitor and client costs properly to be taxed and recovered by one party to an action from another, I find myself in disagreement with him and, more unfortunately, him in disagreement with Mr Justice Walsh. However, his description of the circumstances and his reference to “a full solicitor and client bill” in his reasons lead me to believe that we are all on the same wavelength.

I have no doubt that Parliament had only one purpose in mind in enacting subsection 178(2). It was not altruistic. As part of the tax reform package, Parliament made it easier and even less expensive than theretofore for a taxpayer to appeal his assessment to the Tax Review Board. It wanted to enable the Crown to bring to this Court for decision important questions of principle in cases which, because of the small amount of tax involved, the taxpayer would likely abandon, regardless of principle, rather than incur the expense involved in defending an action in this Court, even successfully, if conventional rules as to party and party costs pertained.

The instant case exemplifies what Parliament had in mind. The taxable income involved is $495. The total tax involved, federal and provincial, is about $160. Even for the entire balance of his normal working life, the defendant’s tax savings, as a result of the Tax Review Board decision, could scarcely have reached $4,000 in constant, 1972, dollars. But the Tax Review Board decision did not apply only to the defendant; it was a precedent for scores, if not hundreds, of truck drivers similarly employed by Imperial Oil Limited and thousands, perhaps tens of thousands, similarly employed by others in the delivery of their employer’s goods. The principle was important, not in terms of the defendant’s income tax for 1972 or even for his working life, but in terms of the overall application and administration of the Act. Had the defendant not resisted the action to judgment, he would have had to pay the tax involved but the Tax Review Board decision would have been the precedent invoked by hundreds, or thousands, of similarly situated truck drivers in filing their future tax returns.

Parliament did not, in enacting subsection 178(2), intend to create a new classification of costs nor did it employ the term “all reasonable and proper costs” as a synonym for party and party costs. It is the Crown, not the taxpayer, that decides, notwithstanding the picayune amount directly in issue in the case, that the principle is so important that it should sue. It does not sue only because it wants that money—in this case, $160; if that were all that was involved it probably would not sue at all. It sues because it wants the decision of the Tax Review Board varied or reversed. Parliament intended that, when so sued, the taxpayer be able to defend himself, as he may be competently advised, undeterred by the expense involved, so long as it is reasonably and properly incurred.

While the taxpayer is not to be deterred by financial considerations from undertaking his defence, he is not being given a licence to squander public funds in a frivolous or luxurious manner, nor are those whom he retains. If they charge a fair fee for time necessarily spent in the defence of the action, they may expect their client to be put in funds, or reimbursed, for its payment. If they charge more he and they may have a problem, depending on their arrangements and his ability to pay.

As I have indicated, I consider the hourly rates charged herein to be reasonable and the number of hours spent to have been inordinate. I have an amount in mind which I should, after a review of all the material on hand, be prepared to fix as a reasonable and proper fee in lieu of further taxation. At the same time, the defendant ought to have the opportunity to tax the bill of costs as between solicitor and client. If he takes that opportunity, the taxing officer will have to go into matters not explored on the party and party taxation and the defendant may be able to convince him that, having particular regard to the importance and complexity of the issue and without too much weight being given the small amount directly involved, the investment of some 90 hours of his solicitors’ time was reasonably necessary to a proper defence of the action.

The bill of costs will be remitted to the taxing officer for taxation as between solicitor and client. If the defendant wishes to waive further taxation and the plaintiff consents, he may apply under Rules 324 and 344(7), and I will fix costs.