Tax & Trade Blog

In Canada, legal costs are generally awarded to the successful litigant in a tax appeal (or in most civil cases for that matter) based on actual costs incurred, but are often a mere fraction of the actual costs that a litigant has incurred. As such, the first thing that many taxpayers contemplate when deciding whether to appeal a CRA assessment is whether or not it is worth it, particularly where it appears likely that the costs of a tax appeal will probably exceed the amount of tax in dispute.

While the decision on whether or not to appeal a tax assessment should be made on a case by case basis, the Tax Court of Canada (“TCC”) in Ike Enterprises Inc. v. The Queen, 2017 TCC 160 (“Ike Enterprises”) recently confirmed that in appropriate circumstances, a taxpayer can be awarded legal costs that exceed the amount of tax in dispute. In fact, the CRA was ordered to pay costs equal to approximately 140% of the amount in dispute!

A common step in the Tax Court of Canada litigation process is the Examination for Discovery (“Discovery”).  A Discovery is where each side (the taxpayer and the Canada Revenue Agency or “CRA”) will have the opportunity to examine witnesses from the other side, under oath.  This is typically done with the assistance of a tax lawyer, and affords each side the opportunity to ask questions and request documents relevant to the issues in the tax appeal.  The Witnesses are under oath and must answer questions truthfully, with the Discovery recorded, and transcripts produced after-ward.

Rules regarding cost awards and settlement offers are important tools to promote settlement in the context of general civil litigation and are generally seen as an important tool to minimize use of scarce court resources. 

In tax cases, settlement offers have historically tended not to play as important a role, which is perhaps attributable to the fact that tax appeal outcomes tend to be mostly binary in nature (i.e. a complete success or complete failure).  This differs markedly from most other civil litigation where the quantum of damages is often the central contested issue.  Furthermore, Canada’s Tax Court Rules have historically only considered settlement offers as one of many factors to be considered when making a costs award, without setting out more definite implications of settlement offers for awarding costs.

This may be changing under new Tax Court Rules 147(3.1) and (3.2) which grant a party “substantial indemnity” costs after the date of its offer to settle (defined to be 80% of solicitor and client costs in Rule 147(3.5)), if judgment is as or more favourable than the offer. 

Although these rules have recently operated in favour of successful appellant taxpayers (see for example: Sunlife (2015 TCC 171) and Repsol Canada Ltd. (2015 TCC 154))  the TCC’s cost award in Standard Life (2015 TCC 138) serves as a warning to taxpayers that they may be liable for significant costs, where a settlement offer from the Crown has been rejected.

Litigating parties must consider cost implications at every stage in litigation, which generally requires a cost-benefit analysis of starting litigation in the first place, proceeding with litigation at any given stage, and negotiating towards settlement.  In tax litigation, the cost-benefit analysis is often the same, and can be a comparatively simple exercise, requiring an analysis of anticipated costs of litigation, chance of success at trial or on appeal, consideration of the assessed amount in dispute, and the effect of a judicial decision on the taxpayer’s position going forward.  Court costs have generally not factored into this analysis, since they have historically been negligible.

Things are changing.