Tax Court decision reminds CRA of litigation cost

A significant costs award and even-handed analysis provided by the Tax Court of Canada in a recent case will serve to remind the government that tax litigation carries financial consequences, Toronto tax litigator Peter Aprile tells The Bottom Line.

In Henco Industries Ltd. v. The Queen, Justice Campbell Miller awarded costs of more than $575,000 against the Canada Revenue Agency, confirming that judges have the discretion to exceed the allowable limits provision of the Tax Court tariff, says the article.

The case centred around the tax treatment of a $15.8 million payment by the Ontario government to developer Henco Industries, to acquire land in Caledonia that had been the subject of protest by First Nations groups in 2006.

“The main issue was Henco’s decision to characterize a $15.8 million payment as a non-taxable capital receipt. The CRA argued that the payment was net profit,” Aprile, principal of Counter Tax Lawyers, tells AdvocateDaily.

On this issue, he says, Henco was successful and parties then made submissions to the Tax Court with respect to the appropriate cost award.

“The key issue in the Henco cost decision was the amount of party-party costs appropriate, based, in part, on the result, the complexity, procedural history, and the parties’ conduct.”

Henco, he says, asked the Tax Court to award party-party costs equal to 75 per cent of legal fees plus disbursements – a total of more than $959,000. The government, however, argued that the cost award should be $47,463, based on its lawyer’s submissions on the value of the fees, disbursements and the Tax Court tariff, or alternatively, 20 to 50 per cent of Henco’s costs.

 Ultimately, Justice Miller set the cost award at 45 per cent of the solicitor-client costs and disbursements, totalling $576,673, says Aprile.

 This award, Aprile tells The Bottom Line, “strikes the right ‘art versus science’ that cost awards require.”

 “I believe that it is common ground amongst tax lawyers that the Tax Court tariff amounts are – to put it lightly – modest and insufficient to make an appropriate contribution to a party’s costs. It appears that the Tax Court shares this view. In Henco, Justice Miller held that Henco’s success warranted costs in excess of the tariff. However, Justice Miller acknowledged that an appropriate cost award in excess of the tariff is not exact and that reviewing the relevant factors is an attempt to achieve a fair result,” Aprile tells AdvocateDaily.

 Indeed, he says, Justice Miller held that certain factors favoured a higher cost award, including the fact that the procedural and evidentiary issues in this appeal would have relevance in other appeals. The judge also provided an interesting analysis of the volume of work in the appeal.

 “He acknowledged that it is difficult for counsel to predict the amount of evidence to establish a critical fact or – as in the Henco case – the underlying factual matrix. How much is too much? Counsel’s ability to discern the ‘correct amount of evidence’ is complicated in most cases based on the judge hearing the appeal and the events as they occur during the appeal,” Aprile tells AdvocateDaily.

 “In Henco, Justice Miller skilfully identified some of these difficulties and balanced these factors against the equity of causing the losing party to pay the costs associated with the winning party’s overflow of evidence.”

 Also, while settlement offers have been an important factor in obtaining increased cost awards and highlighted in recent caselaw, in Henco, the parties did not exchange settlement offers.

 “I suspect that the parties did not exchange any settlement offers because of the ‘all-or-nothing’ nature of the main issue under appeal. I hoped that Henco would provide the Tax Court with the opportunity to comment on settlement offers in the context of ‘all-or-nothing’ appeals and the impact on cost awards. I am confident that taxpayers and the government would benefit from this type of commentary. Unfortunately, we are left to wait for the next opportunity and costs decision.”

 Ultimately, Aprile tells AdvocateDaily, “Henco is now part of a line of Tax Court caselaw that indirectly encourages settlement, reminds the government that there is a cost to litigation, and reinforces that the Tax Court will award costs in excess of the tariff in appropriate cases.”