Tax Court hits CRA with $575,000 costs award

The Tax Court of Canada has ruled the allowable limits provision of the TCC tariff is not definitive and judges have the discretion to exceed amounts set out in it.

The court’s June 9 decision in Henco Industries Ltd. v. Canada [2014] T.C.J. No. 147 pegged costs against the Canada Revenue Agency more than $575,000 — a significant amount, said William Innes, a tax lawyer with Rueter Scargall Bennett in Toronto. “It’s probably one of the largest cost decisions the tax court has ever issued,” he said.

The size of the award is likely to have ramifications on the CRA and taxpayers moving forward. It is anticipated both sides will want to think even more carefully about proceeding to tax court with the potential threat of large costs decision looming over them. Tax experts indicated the consideration may have a greater impact on the CRA, which until now has not faced cost awards of this magnitude. (The CRA is unable to comment on specific cases).

“The amount of the award — and the even-handed analysis that underlies the decision — will remind the government that the tax litigation will carry financial consequences,” noted Toronto tax lawyer Peter Aprile.

The decision levels the playing field, said Geoffrey Shaw, a litigation lawyer with Cassels Brock & Blackwell in Toronto who co-represented Henco Industries Limited.

“The CRA will have to think twice before it levies substantial penalties and assessments,” said Shaw. “If there is a monetary disincentive, it throws a wrench nto the works.”

The case involves Henco Industries, the owner and developer of Douglas Creek Estates in Caledonia, Ont., which became the site of a major protest by members of First Nations groups in early 2006. Protestors occupied the property and erected barricades, halting all development by Henco. The company obtained court orders requiring the protestors to vacate the land, which the Ontario Provincial Police were unable to enforce. After rezoning the land to preclude all development, the Ontario government paid $15.8 million to Henco under an agreement of purchase and sale to acquire the land, ensure the removal of the court orders, and secure a release from Henco, among other things.

The primary issue in the tax case was the proper treatment of the $15.8 million payment, which Henco characterized as a non-taxable capital receipt. The CRA argued that the payment was net profit. Following a seven-day trial, Justice Miller Campbell ruled in favour of Henco, finding that the entire $15.8 million payment was a non-taxable capital receipt. That verdict then gave rise to the issue of costs.

Henco asked the tax court to award costs equal to 75 per cent of legal fees plus disbursements. The government lawyer argued that cost award should be $47,463, based on the value of the fees and disbursements and the tax court tariff. The government also put forward an alternative accounting in case this figure was rejected: 20 to 50 per cent of Henco’s costs. The court settled on 45 per cent.

“The 75 per cent was overreaching,” said Innes. “Justice Miller concluded he would go to the high end of the Crown’s suggested range.” The range put forward by the government was noteworthy in and of itself, he added.

“It’s not common to see them go that high. It may be that having read the tea leaves in the trial, primarily entirely in favour of the taxpayer, the Crown thought it should err on the side of greater generosity than it normally would.”

Arriving at costs of 45 per cent was not an exact science. Numerous factors had to be taken into consideration including the importance of the tax issue before the court. Also weighing on the court was how much work was really necessary to demonstrate a successful case at trial.

“It is a conundrum to determine just how much of a successful litigant’s exhaustive exploration of evidence is justifiably to be footed by the losing side,” Justice Miller wrote.

“The Henco cost award decision strikes the right ‘art versus science’ that cost awards require,” Aprile said.

“We’re going to see more of these,” said Innes. “The tax court will move more in the direction of provincial courts, which have high awards.”

The trend has already emerged, said Shaw. “When a taxpayer is faced with a substantial amount of tax at issue, the courts will look to the real costs and reward the taxpayers accordingly.”

Shaw cautioned, however, that it is not only the CRA that will have to think carefully before proceeding to the tax court. Taxpayers and their accountants will want to assess the benefits and the financial risks that the Henco decision highlights.

“It’s a rewarding and cautionary tale. What happens when the CRA is successful in one of these cases and costs are assessed the other way? It’s possible.”