The Real Cost of Going to Tax Court: What Canadian Taxpayers Should Know Before Appealing

Overview: What Is the Real Cost of Fighting the CRA in Tax Court?

When a taxpayer disagrees with a Canada Revenue Agency tax assessment or tax reassessment, the dispute will normally begin with a Notice of Objection. If the dispute is not resolved at the objection stage, the taxpayer may have the right to appeal to the Tax Court of Canada.

The real cost of going to Tax Court, however, is much broader than the court filing fee. A taxpayer should consider legal fees, expert expenses, the time required to prepare the case, continuing interest on unpaid tax, the strength of the evidence, settlement opportunities and the possibility of an adverse costs award.

As David J. Rotfleisch, a Law Society of Ontario Certified Specialist in Taxation, explains, “a technically strong tax position may still produce a poor financial result if the cost of proving that position is disproportionate to the amount of tax at stake.”

Background: How Much Does a Tax Court of Canada Appeal Cost?

The Tax Court appeal process generally has two procedural streams: Informal Procedure and General Procedure. Informal Procedure provides a simpler and less formal process for eligible disputes, while General Procedure follows more detailed litigation rules.

A taxpayer may generally elect Informal Procedure where the disputed federal tax and penalties for a taxation year are $25,000 or less, or where the disputed loss is $50,000 or less (a GST/HST appeal may elect Informal Procedure at up to $50,000 in dispute). Disputes above these thresholds must proceed under General Procedure. This threshold, not the taxpayer’s preference, is usually what determines which cost regime applies.

There is no filing fee for an Informal Procedure appeal. General Procedure filing fees currently range from $250 to $550, depending on the amount in dispute (Class A, up to $50,000, $250; Class B, $50,000 to under $150,000, $400; Class C, $150,000 or more, $550).

Those figures can be misleading if viewed as the “cost” of an appeal. The filing fee may be one of the smallest expenses. A taxpayer may need a Canadian tax lawyer to review the CRA tax audit file, identify the relevant law, prepare pleadings, review thousands of pages of documents, communicate with the tax litigation lawyer acting for the CRA, prepare witnesses and conduct the hearing. Under General Procedure, examinations for discovery and other pre-trial steps may add substantially to the cost.

There may also be disbursements for expert witnesses, accountants, transcripts, document production and other litigation expenses.

Key Issues: Legal Fees, Interest and Hidden Tax Litigation Costs

Before appealing, a taxpayer should consider whether the amount in dispute justifies the expected litigation expense. A $20,000 dispute and a $2 million dispute may raise equally valid legal issues, but the economics of pursuing each appeal are very different.

Time is another hidden cost. A business owner may spend many hours locating records, meeting with a Canadian tax litigation lawyer, reviewing documents and preparing to testify.

Interest is also important. For income tax disputes, the CRA will generally postpone collection action on disputed amounts while the Tax Court appeal is outstanding. However, interest continues to accrue on unpaid amounts. A taxpayer who ultimately loses may therefore face a larger liability than the amount originally disputed. A taxpayer can reduce or eliminate this interest exposure by paying all or part of the disputed amount at any point during the appeal; if the appeal succeeds, the amount paid is refunded together with interest, so an early payment does not forfeit the right to recover if the taxpayer ultimately wins.

Evidence can also drive costs upward. Cases involving unreported income, shareholder benefits, net-worth assessments, complex transactions, valuation disputes or gross-negligence penalties may require substantial documentary or expert evidence, as discussed further in the firm’s analysis of the burden of proof in tax litigation.

Findings: If You Win in Tax Court, Who Pays Your Legal Fees?

Winning does not automatically mean the CRA will reimburse the taxpayer’s entire legal bill, and the cost regime differs depending on which procedure applies.

Under Informal Procedure, there is no filing fee and no formal Tariff-based costs process. The Court may nonetheless order the Minister to pay certain costs where the taxpayer is more than 50 percent successful, and a taxpayer proceeding informally will generally not be required to pay the CRA’s costs unless the Court finds the taxpayer unduly delayed the appeal.

Under General Procedure, the Tax Court has broad discretion over costs. The Court may consider factors such as the result, amount in dispute, importance and complexity of the issues, volume of work, conduct of the parties and written settlement offers. In Velcro Canada Inc. v The Queen, 2012 TCC 273, the Tax Court moved away from treating the Tariff schedule as the default measure of costs and placed greater weight on these factors, an approach the firm’s own analysis of the Tax Court’s discretion with costs discusses in the context of a large corporate costs award where the Court departed from Tariff B amounts.

A successful taxpayer may therefore recover only part of the actual legal expenses. In appropriate circumstances, however, the Court may award enhanced costs, and in exceptional cases may award solicitor-client costs, which can approach a full reimbursement of legal fees.

Settlement offers can be particularly important. Under the General Procedure rules, a qualifying written offer can affect the costs ultimately awarded. In certain circumstances, a successful taxpayer who obtains a judgment at least as favourable as the offer may become entitled to substantial indemnity costs after the offer. Substantial indemnity costs are generally calculated at up to 80% of solicitor-and-client costs. Courts have held that a qualifying offer must involve a genuine degree of compromise: in McKenzie v The Queen, 2012 TCC 329, the Tax Court clarified that an offer conceding nothing of the taxpayer’s own claim will not trigger this enhanced-costs entitlement.

As David J. Rotfleisch notes, “a costs award should never be confused with a guarantee that a successful taxpayer will be made financially whole; unrecovered professional fees remain part of the real cost of litigation.”

Practical Implications for Canadian Taxpayers: Is Taking the CRA to Tax Court Worth the Cost?

Before commencing an appeal, a taxpayer should consider:

• the amount of tax, penalties and interest actually in dispute;
• the strength of the documents and witness evidence;
• weaknesses that the Crown may exploit;
• expected legal fees and disbursements;
• interest that may continue accumulating;
• the possibility of an adverse costs award; and
• whether a legally supportable settlement is realistically available.

Settlement strategy can significantly change the economics of a case. Canadian tax disputes must generally be settled on a legally supportable basis, making a properly structured principled tax settlement important. A Tax Settlement Conference held under General Procedure can also give the parties a structured opportunity to test settlement positions before trial.

A taxpayer should therefore consider settlement throughout the proceeding rather than treating trial as the only successful outcome. A Tax Court settlement can sometimes preserve much of the taxpayer’s position while avoiding further legal fees, accumulating interest and trial risk.

Takeaway: Calculate the True Cost Before Fighting the CRA

A Tax Court appeal is both a legal decision and an economic decision. A strong legal position is important, but the taxpayer should also consider professional fees, evidence, interest, litigation risk, settlement opportunities and possible costs awards.

As David J. Rotfleisch advises, “the right question is not simply whether a taxpayer can fight the CRA, but whether the expected tax benefit, available evidence and litigation strategy justify the financial cost and risk of taking the fight to Tax Court.”

The most economical strategy may sometimes be to litigate aggressively. In another case, it may be to make or accept a principled settlement offer before additional expenses accumulate. The correct approach depends on the facts, evidence and amount at stake.

PRO TAX TIPS: PREPARE A COST-BENEFIT ANALYSIS BEFORE FILING A TAX COURT APPEAL

Before filing a Tax Court appeal, compare the tax, penalties and interest at stake with the likely legal fees, disbursements, continuing interest and risk of an adverse costs award. Also consider the strength of available documents and witnesses and whether an early settlement could produce a better financial result. Our top Canadian tax lawyers can review the tax reassessment, identify weaknesses in the CRA’s case, evaluate the evidence, estimate the procedural complexity and develop a litigation or settlement strategy designed to protect the taxpayer’s position while controlling unnecessary costs.

FREQUENTLY ASKED QUESTIONS

How much does it cost to appeal to the Tax Court of Canada?

There is no single price for a Tax Court appeal. The overall cost depends on the procedure used, complexity of the dispute, amount of evidence, need for expert witnesses, length of discoveries and whether the matter settles or proceeds to trial. Professional fees will often be much more significant than the court filing fee.

Do I qualify for Informal Procedure?

A taxpayer may generally elect Informal Procedure where the disputed federal tax and penalties for a taxation year are $25,000 or less, or where the disputed loss is $50,000 or less. A GST/HST appeal may elect Informal Procedure where the amount in dispute is $50,000 or less. Disputes above these thresholds must proceed under General Procedure.

Is there a filing fee for an Informal Procedure Tax Court appeal?

There is no filing fee for an Informal Procedure appeal. However, “no filing fee” does not mean “no cost.” A taxpayer may still incur legal fees, travel expenses, witness expenses, accounting costs and other disbursements necessary to properly prepare and present the appeal.

How much are the filing fees under General Procedure?

General Procedure proceedings are divided into classes based on the amount in dispute. The current filing fees are $250 for Class A proceedings, $400 for Class B proceedings and $550 for Class C proceedings. These fees are relatively small compared with the professional costs that complex litigation can generate.

What is the difference between Informal Procedure and General Procedure?

Informal Procedure provides a simpler and less formal process for qualifying disputes. General Procedure involves more formal litigation requirements and may include pleadings, documentary discovery, examinations for discovery, motions and other pre-trial procedures. Consequently, a General Procedure case can require considerably more professional time and expense.

Do I need a tax lawyer to go to Tax Court?

An individual can generally represent himself or herself before the Tax Court. However, tax litigation can involve complicated legislation, evidentiary requirements and procedural rules. A Canadian tax lawyer can identify the legal issues, organize evidence, examine witnesses, negotiate with the tax litigation lawyer acting for the CRA and present the taxpayer’s legal position before the Court.

Will the CRA pay my legal fees if I win my Tax Court appeal?

Not necessarily. A successful taxpayer may receive a costs award, particularly under General Procedure, but an ordinary costs award does not necessarily equal the taxpayer’s actual lawyer’s bill. A taxpayer can therefore win the underlying tax dispute and still personally bear a substantial portion of the legal expenses. Under Informal Procedure, the Court may order the Minister to pay certain costs where the taxpayer is more than 50 percent successful, but there is no formal Tariff-based costs process.

Can I be ordered to pay the Crown’s costs if I lose?

Yes. Under General Procedure, the Tax Court can award costs to or against the Crown. When determining costs, the Court can consider matters including the result, complexity, amount at stake, volume of work, conduct of the parties and written settlement offers made during the litigation. Under Informal Procedure, a taxpayer will generally not be required to pay the CRA’s costs unless the Court finds the taxpayer unduly delayed the appeal.

Does interest stop accumulating when I appeal to Tax Court?

No. Although CRA collection action on disputed income tax amounts is generally postponed while a Tax Court appeal is pending, interest generally continues to accrue on unpaid amounts. A taxpayer can pay all or part of the disputed amount to limit additional interest and receive a refund with interest if successful.

Can a settlement offer reduce the cost of a Tax Court case?

Yes. Settlement can avoid additional discovery, motions, trial preparation and hearing expenses. A properly drafted written settlement offer can also have important cost consequences under General Procedure, provided it involves a genuine degree of compromise. This makes settlement strategy a financial consideration as well as a legal consideration during a Tax Court proceeding.

What are substantial indemnity costs in Tax Court?

Under the General Procedure rules, substantial indemnity costs are calculated as 80% of solicitor-and-client costs. A qualifying written settlement offer can potentially trigger substantial indemnity costs after the offer when the statutory and procedural requirements are satisfied and the eventual judgment is sufficiently favourable to the party making the offer. In exceptional circumstances, the Court may also award solicitor-client costs, which can approach a full reimbursement of legal fees.

Can a Tax Court appeal settle before trial?

Yes. A tax appeal can settle before trial if the parties can reach a resolution that is supportable under the applicable tax law and facts. Settlement may substantially reduce future professional fees, interest exposure, preparation time and uncertainty, making early settlement analysis an important part of effective tax litigation strategy.

How can I reduce the cost of fighting a CRA tax reassessment?

Start with good records and an early assessment of the strengths and weaknesses of the case. Organize tax returns, contracts, bank statements, correspondence and supporting documents before litigation becomes extensive. Our Canadian tax lawyers can narrow the disputed issues, identify the evidence that actually matters and pursue a principled settlement where appropriate.

DISCLAIMER: This article provides broad information. It is only accurate 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 as tax advice. 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.