Published: December 19, 2024
Last Updated: December 19, 2024
In August 2024, the Tax Court of Canada delivered its judgment in Watts v The King, 2024 TCC 100, awarding the Crown (CRA) costs beyond the standard tariff amounts, commonly referred to as “enhanced costs,” in a lump sum of $30,000.
In making this decision, the Tax Court exercises its broad discretion in awarding costs provided under subsection 147(3) of the Tax Court of Canada Rules (General Procedure) in response to the conduct of the appellant taxpayer, Miriam Watts, which the Court found to be improper.
Improper Conduct of the Taxpayer
For context, Lawrence Watts, the husband of the appellant Miriam Watts, was subject to a search warrant carried out by the CRA. The documents seized from the search were used to convict Lawrence of creating false tax returns leading to fraudulent refunds. Lawrence was imprisoned as a result.
The CRA then assessed Miriam under section 160 of the Income Tax Act for property transferred by Lawrence to the couple’s corporation, then to a trust, and finally to purchase a home in Miriam’s name. The Tax Court dismissed Miriam’s appeal and affirmed the assessment In Watts v The King, 2023 TCC 11, in January 2023.
Between Lawrence and Miriam, the couple had brought three motions to allege violations of their Charter rights in relation to the search warrant and to allege a breach of an order of the Ontario Superior Court. The motions were repeatedly dismissed, and the constitutional legitimacy of the search was confirmed at multiple court levels, including the Ontario Superior Court of Justice, the Ontario Court of Appeal, and the Federal Court, with leave to appeal denied by the Supreme Court of Canada.
The CRA, on the other hand, alleged that Miriam’s conduct was vexatious, entitling the Crown to enhanced costs, beyond the tariff provided in Schedule II of the Tax Court of Canada Rules (General Procedure).
Factors and Principles in Cost Awards
Subsection 147(3) of the Tax Court of Canada Rules (General Procedure) provides a list of factors to be considered in determining costs, including, among other factors, the result of the proceeding, the amount in issue, the importance of the issue, the complexity of the issue, the conduct of the parties, the offer of settlement by the parties, the volume of work involved, etc.
The Tax Court has explained that none of the above factors is determinative, and all relevant factors must be considered in conjunction. The Tax Court also reiterates the principles in awarding costs, which are that (1) the costs should be compensatory, not punitive; (2) while being compensatory, the awards are not meant to be fully compensatory of the actual costs; and (3) while the court has broad discretion in awarding costs, the amount must be reasonable, not arbitrary.
Offers of Settlement and Cost Implications
The judicial system encourages the parties to come to an agreement rather than battling it out in court. Either party can make an offer of settlement to the other party before the trial. If the offer is reasonable and the offeree declines the offer, there are cost consequences to the offeree.
Specifically, under subsection 147(3.1) of the Tax Court of Canada Rules (General Procedure), if the taxpayer makes an offer which the CRA declines, and the taxpayer later obtains a judgment as favourable as, or more favourable than, the terms of the offer, the taxpayer is entitled to party and party costs to the date of service of the offer and substantial indemnity costs after that date, plus reasonable disbursements and applicable taxes.
Similarly, under subsection 147(3.2) of the Tax Court of Canada Rules (General Procedure), if the CRA makes an offer which the taxpayer declines, and the taxpayer later obtains a judgment as favourable as or less favourable than the terms of the offer or fails to obtain a judgment, the CRA is entitled to party and party costs to the date of service of the offer and substantial indemnity costs after that date, plus reasonable disbursements and applicable taxes.
For clarification, party and party costs are generally in accordance with the tariff provided in Schedule II of the Tax Court of Canada Rules (General Procedure) unless enhanced costs are warranted, as discussed in this case. Substantial indemnity costs mean 80% of the solicitor and client costs.
In this case, since neither party made an offer of settlement, the above rules were not applicable. However, these rules, which could result in substantial cost consequences, are important to keep in mind. When in doubt, seek advice from experienced Canadian tax lawyers.
Application to the Case Gives Rise to Enhanced Costs
Applying the factors and principles to the determination of costs in this case, the Tax Court found that the taxpayer’s three motions of essentially the same legal challenge unnecessarily lengthened the proceeding and added a significant volume of work and a significant level of complexity onto the Canadian tax litigation lawyer for the CRA.
Although the taxpayer’s allegations were baseless and failed repeatedly, the CRA still had to defend three separate motions involving the Charter and the Criminal Code provisions. As such, the CRA should be entitled to enhanced costs.
As for the quantum of costs, the Tax Court accepted the added costs of $100,000 presented by the Canadian tax litigation lawyer for the CRA and awarded it $30,000, beyond the standard tariff but only 30% of the actual costs, not fully compensatory.
Pro Tax Tips – Tax Litigation Costs Must be Considered Carefully
This case highlights the importance of costs associated with tax litigation. A litigant should be aware of costs beyond the normal costs, such as court fees and lawyer fees. While court fees are standardized, lawyer fees in litigation are typically hourly based.
These costs can already be high by themselves. But if the conduct of a party is not forthcoming, the party may be subject to additional costs as the result of the extra weight unnecessarily put onto the opposing party.
All the costs add up and can become a major financial burden for the litigant. Therefore, it is advisable that a taxpayer consult with experienced Canadian tax lawyers as soon as possible to chart the most optimal litigation strategy and avoid potentially unwanted costs.
FAQ
I am just a taxpayer, whereas the CRA is part of the federal government. If the actions of the Canadian tax litigation lawyer for the CRA cause an unnecessary burden to me, shouldn’t the CRA be punished for abusing its position of power?
Costs awards are meant to be neither punitive nor fully compensatory. If the CRA indeed causes an unnecessary burden to you and the relevant factors have been established that enhanced costs are warranted, you will be awarded enhanced costs above the standard tariff, but not to the extent of your actual costs or an extra amount as a penalty.
I believe the Crown’s actions violate my rights. Why shouldn’t I keep pursuing legal actions to my satisfaction?
The judicial system is not for anyone’s personal revenge. There are rules and procedures designed to ensure justice is served through fair and impartial processes. You are entitled to pursue legal action to assert your rights, but not to harass the system for your own agenda.
Repeatedly taking actions of the same legal nature can be vexatious, unnecessary and improper, inviting enhanced costs to be awarded against you. Therefore, in the context of tax law, it is important to seek advice from experienced Canadian tax lawyers to have a legal strategy laid out and refrain from making costly mistakes.
DISCLAIMER: This article just provides broad information. It is only up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the article. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.
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