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Tax Court Discretion with Costs: Canadian Tax Lawyer Guidance

Published: March 9, 2021

The Tax Court of Canada awarded discretionary costs by overriding subsection 147(3.1) of the Income Tax Act

The Canada Revenue Agency (CRA) denied BMO’s claim of $287,766,503 in capital losses on the basis the General Anti-Avoidance Rule (GAAR) applied to the relevant transactions. On January 30, 2018, BMO made a settlement offer and was able to obtain a judgement more favourable than the terms of its settlement offer. Both BMO and CRA agreed that BMO was entitled to substantial indemnity costs after January 30, 2018 consisting of i) substantial indemnity costs of $450,068.56; ii) reimbursement of disbursements in the amount of $80,781.67; and iii) reimbursement of non-recoverable HST in the amount of $69,036.52. Regarding the costs incurred before the settlement offer was made, the Canadian tax lawyer for BMO sought enhanced costs equal to 75% of the its actual costs plus reimbursement of the non-recoverable HST associated with those costs. However, the CRA argued the cost should be awarded in accordance with Tariff B of the Tax Court Rules (General Procedure) which generally prescribes a very low amount. For example, the maximum cost under Tariff B for a discovery of documents or inspection of property is only $200 and the cost awarded for preparation for and attendance at a pre-hearing conference is only $350.

The Tax Court made the decision to award BMO a lump sum costs award of $870,595.12 which included pre-settlement offer in the amount of $239,564.93 which was 35% of BMO’s actual costs of $684,471.24 and $31,143.44 in non-recoverable HST associated with those costs. The court found that although s.147(3.1) of the General Procedure rules uses Tariff B as a starting point for pre-offer costs, the Tax Court still had discretion to award such costs otherwise than in accordance with the Tariff in appropriate circumstances.

Tax Court Costs in dispute

The parties disagreed on the costs incurred by BMO prior to the settlement offer. BMO took the position that it was entitled to enhanced costs equal to 75% of its actual costs plus reimbursement of the non-recoverable HST associated with these costs, while the CRA submitted that BMO should only receive costs in accordance with Tariff B of the Tax Court of Canada Rules.

The Tax Court first reviewed the general wording of subsection 147(3.1) of the Income Tax Act and found that it supports the CRA’s position as it says unless otherwise ordered by the court, if an appellant makes an offer of settlement and obtains a judgement as favourable as or more favourable than the terms of the offer of settlement, the appellant is entitled to party and party costs to the date of service of the offer and substantial indemnity costs after that date, as determined by the court, plus reasonable disbursements and applicable taxes. However, the preamble to the subsection indicates that the court has discretion to order different costs. Justice Owen also stated in Sun Life Assurance Company of Canada v The Queen that the Tax Court retains the discretion to override the default rule if it is of the view that the circumstances warrant such an approach. Therefore, the Tax Court concluded that it did have the discretion to award costs otherwise than in accordance with the Tariff.

Subsection 147(3) factors

The Tax Court then delved into the factors set out in subsection 147(3):

  • Result of the proceeding

The degree of a party’s overall success is an important factor in determining whether costs should be awarded to a party. In the court’s view, this factor is only appropriate to consider if it is possible for a party to have had mixed success in the proceeding. However, when the only issue before the court is a black-or-white issue on which there is no potential for partial success, the fact that a party succeeded on that issue should not affect the quantum of costs awarded. Since BMO appealed on a black-or-white issue, the court decided to place no weight on this factor

  • Amount in issue

The amount involved in the appeal was $287,766,503 in capital losses, the court considered it to be a significant amount which leaned towards awarding higher costs.

  • Importance of the issue

The court found that the appeal neither advanced the current state of the law nor involved a number of issues. However, had the appeal been decided on the issue of misuse or abuse, it may have advanced the law and would presumably have been of greater public interest. Overall, this factor tipped towards slightly higher cost.

  • Complexity of the issues

The issues in the appeal were complex which warranted higher costs.

  • Volume of work

Generally speaking, the higher volume of work in the case would argue for higher costs. However, since the volume of work was directly correlated to the complexity of the issues, the Tax Court decided it was inappropriate to double count the same factor. Thus, no weight was given to this factor.

  • Settlement offers

Since the settlement offer already resulted in BMO getting substantial indemnity costs, the Tax Court concluded it should not be considered again in awarding pre-offer costs.

  • Conduct affecting the duration of the proceeding

The Tax Court found no evidence that would suggest the conduct of either party affected the duration of proceeding.

  • Improper, vexatious or unnecessary stages

There was no evidence of such indication in any stage of the proceedings.

  • Stages taken through negligence, mistake or excessive caution

There was no evidence that would indicate such in any stage in the proceedings.

  • Justification of expert witnesses

The parties already agreed on the costs and disbursements associated with BMO’s expert witness, therefore this factor should no longer be relevant.

Pro tax tips – The timing and content of the settlement offer are very important

The Tax Court of Canada settlement offer rules were designed to encourage early settlement ideally before the beginning of the Tax Court trial, however, in certain circumstances, limiting a party to tariff costs for all costs incurred before a settlement offer was made could defeat the purpose of the settlement rules. The Tax Court in this case pointed out the potential adverse effect of adhering to Tariff B costs and decided to override the default costs to award more appropriate costs. When a taxpayer receives a judgement better than the settlement offer he or she previously made, only the costs incurred post settlement offer are guaranteed to be enhanced. Therefore, the earlier the offer to settle is made the greater the cost recovery will be. However, the contents of the settlement offer are critical and this is where the skill of the experienced Canadian tax lawyer comes in.


"This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer."

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