The cost of inadvertent settlement offer disclosure: Technology Venture Corporation v The King

Overview

The Tax Court of Canada Rules (General Procedure) provide that a party may be entitled to substantial indemnity costs if the party makes a settlement offer and ends up obtaining an outcome at trial as favourable as or more favourable than that offer. In Technology Venture Corporation v The King (2025 TCC 157), the appellant was denied substantial indemnity costs because the settlement offer, in addition to being sent to the respondent, had inadvertently been sent to the Court.

Costs and settlement offers

Rule 147 grants the Court broad discretion to make costs awards. This power is discretionary, but not arbitrary; it must be exercised on a principled basis. Costs are intended to be compensatory and not punitive. Factors that the Court may consider are listed in rule 147(3), and include the result of the proceeding, the amounts in issue, the volume of work, the complexity of the issues, and any matter relevant to the question of costs.

Rules 147(3.1) and (3.3) contain the threshold requirements for an appellant to seek substantial indemnity costs based on a settlement offer. Rule 147(3.1) provides that an appellant may be entitled to substantial indemnity costs after the date of a settlement offer if the appellant obtains a judgment as favourable as or more favourable than the terms of the settlement offer. Pursuant to rule 147(3.3), the settlement offer must:

1. be in writing;
2. be served no earlier than 30 days after the close of pleadings and at least 90 days before the commencement of the hearing;
3. not be withdrawn; and
4. not expire earlier than 30 days before the commencement of the hearing.

Substantial indemnity costs for the purpose of this rule means 80% of solicitor and client costs (per rule 147(3.5)).

Of particular note, rule 147(3.8) also provides that no communication respecting a settlement offer shall be made to the Court (other than to a judge in a litigation process conference who is not the judge at the hearing) until all of the issues, other than costs, have been determined.

The decision

In Technology Venture, the parties were engaged in litigation before the Tax Court of Canada relating to the Minister of National Revenue’s reassessments that had characterized securities portfolios as income earning activities rather than investments on account of capital. Shortly after pleadings closed, the appellant had made a settlement offer to the respondent. The appellant was ultimately successful at trial and the judgment was more favourable to the appellant than the settlement offer. Accordingly, the appellant sought substantial indemnity costs pursuant to rule 147(3.1) in the amount of $326,417.50 (80% of its legal fees from the time the offer was made) and $194,705.59 in disbursements.

The threshold requirements of rules 147(3.1) and (3.3) were met. However, apparently unbeknownst to the appellant or its counsel, a copy of the appellant’s settlement offer had been sent to the Court on the same day it was delivered to the respondent. The cover letter for the settlement offer that was served on the respondent ended with “c.c.: Tax Court of Canada”, and the fax transmission cover page and verification report confirmed that a copy was sent to the Court. The appellant was unaware that the Court had received a copy of the offer and Justice Hill, the presiding judge, likewise was not aware of its existence until the respondent raised the issue in the motion for costs.

The respondent argued that substantial indemnity costs should not be awarded because the appellant failed to comply with the confidentiality requirement in rule 147(3.8). In that regard, the Tax Court of Canada Rules do not specify the consequences of breaching rule 147(3.8). The appellant argued that there was no prejudice from the error since Justice Hill was not aware of the offer until after she had rendered her decision on the substantive issues. However, after analyzing the text, context, and purpose of rule 147(3.8), Justice Hill concluded that it is a mandatory requirement because to hold otherwise would render the rule meaningless and undermine the purpose of the substantial indemnity costs provisions as a whole.

Justice Hill explained that rule 147(3.8) is consistent with settlement privilege, which is the common law rule that protects settlement communications between parties. Settlement privilege promotes honest and frank discussions between the parties. Similar to settlement privilege, rule 147(3.8) allows a settlement offer to be disclosed after the substantive issues are decided so that entitlement to substantial indemnity costs may be determined.

Justice Hill emphasized that the appellant did not file any affidavit evidence supporting its claim that the disclosure was inadvertent. Such evidence might have led to a different outcome.

While Justice Hill concluded that the appellant was not entitled to substantial indemnity costs, she did award 45% of the appellant’s legal fees and disbursements based on the results of the proceeding and the appellant’s settlement offer.

Conclusion 

Settlement privilege must be respected and settlement discussions should remain between the parties. Technology Venture underscores this principle, showing that breaching settlement privilege and the confidentiality requirement in rule 147(3.8), even inadvertently, can have real-world financial impacts. The result is arguably harsh but tax litigators must now recognize that even an inconsequential breach of the Rules could invalidate an otherwise-qualifying settlement offer.