The Tax Court’s Use of Costs Awards as a Tool to Control the Parties’ Conduct

Traditionally, the Tax Court only awarded costs that deviated from the Tariff annexed to the Tax Court of Canada Rules (General Procedure) (the “Rules”) in the presence of reprehensible, scandalous or outrageous conduct on the part of one of the parties.  The Tax Court’s new approach to costs, as articulated by the now Chief Justice of the Court in Velcro Canada Inc. v. R., 2012 TCC 273, allows the judges to fix costs on a principled basis in accordance with the factors enumerated in Rule 147(3) instead of by reference to the Tariff.  A review of the Court’s recent costs awards shows that among the various factors taken into account by the judges in the exercise of their discretionary power to award costs in excess of the Tariff, considerable weight is given to the conduct of the parties.

In Ford Motor Company of Canada, Limited v. R., 2015 TCC 185, the Court awarded the taxpayer a lump-sum of $40,000, which represented about 63% of the taxpayer’s estimated aggregate costs incurred in successfully defending the Crown’s motion to strike very substantial portions of its amended notice of appeal pursuant to the specified corporation rules under the Excise Tax Act (Canada).  The Court justified its costs award by relying on its finding that the Crown had tried to “use the specified corporation rules opportunistically, as a sword against a taxpayer appellant, notwithstanding that the clear purpose and design of the rules are to protect and shield the fisc.”  The Court also qualified the Crown’s failure to file any written submissions or other advance notice of its arguments (even though it had committed at least twice to do so) as “disappointing”.

The Court further criticized the Crown for adopting the position that there was no basis for enhanced costs in excess of the Tariff as there was no reprehensible, scandalous or outrageous conduct on its part.  The Court held that it is “not acceptable for the Crown to simply recite that tired old phrase, clearly taken out of context upon a proper review, without even acknowledging the considerable jurisprudence to the contrary, much less actually seeking to challenge it.”  In addition to the lump-sum of $40,000, the taxpayer was awarded 75% of its reasonable actual costs incurred in seeking to resolve the issue of costs.

In The Standard Life Assurance Company of Canada. v. R., 2015 TCC 138, the Court deviated from the Tariff in part because it determined that although the trial itself had been conducted in an efficient and professional manner by both sides, the taxpayer had engaged in window dressing throughout the proceeding to enable it to argue that it met the factual criteria of the judicial tests for carrying on business when it did not.  The Court held that the taxpayer’s actions to create and rely on an illusion to obtain a tax benefit was “reprehensible and should be discouraged.”

The Court’s propensity to use costs awards to express disapproval of a party’s conduct is further illustrated by the Court’s decision in Martin v. R., 2014 TCC 50, where the Court found evidence that the auditor had deliberately misled the taxpayer in the course of the audit.  Being critical of the conduct of the Canada Revenue Agency (the “CRA”), the Court included in the costs award an allowance for costs the taxpayer incurred during the audit and objection stages of her dispute with the CRA.  The inclusion of the costs allowance was overturned in 2015 FCA 95, where the Federal Court of Appeal held that conduct that occurs prior to a proceeding may only be taken into account in a costs awards if that conduct impacts on the “proceeding”, defined to mean “an appeal or reference”.  The taxpayer sought leave to appeal to the Supreme Court on June 15, 2015.

These cases, however, must be contrasted with the decision in Invesco Canada Ltd. v. R., 2015 TCC 92, where the Court rejected the taxpayer’s argument that because the taxpayer had been cooperative throughout and was ultimately successful in the appeal, the Crown should have known the frailties of its own case and allowed the taxpayer’s objection.  The Court held that the finding that a party’s legal position was erroneous should not amount to misconduct on the party’s part or mean that its position was frivolous or vexatious.

Since the new costs approach is relatively recent, it remains to be seen to what extent the significant weight given to the conduct of the parties by the Tax Court judges in the exercise of their discretion to award costs in excess of the Tariff may influence the conduct of the parties in future proceedings.