Canada v. Bowker and the uncertainty of costs awards in tax litigation
TLDR: It would be helpful for taxpayers to know how much of their legal fees they can likely recover if they win in Tax Court. Taxpayers have little way of knowing from the rules or decisions of the Tax Court. In the case of Bowker, the Tax Court tried to set out a rule of thumb but this year, the Federal Court of Appeal overturned that decision.
A taxpayer deciding whether to challenge the CRA in court generally wants to know: If they win, how much can they expect the CRA to pay towards their legal fees? If they lose, how much can they expect to pay towards the CRA's legal fees?
For some taxpayers, the rules about costs might make the difference of whether it is worth going to Tax Court at all. In Bowker v. The Queen,1 the taxpayer was challenging a penalty imposed by the CRA. The penalty was about $139,000. The taxpayer took her case to trial and won. But she spent about $195,000 in legal fees. For this taxpayer, the amount of costs she can recover might make the difference between a meaningful victory and a pyrrhic one.
The rules of the Tax Court don’t give a clear answer to taxpayers like Ms. Bowker. The rules say the Tax Court may fix costs "with or without reference" to an attached tariff.2 But the Tax Court says the tariff is not even a “starting point”.3 And the amounts in the tariff are almost negligible compared to the fees that lawyers typically charge.
The rules also provide eleven factors that the Tax Court may consider in awarding costs.4 The last of these factors is "any other matter relevant to the question of costs".
The Tax Court, through its decisions, could supplement these rules. For instance, the Tax Court could say that, in an ordinary case where neither party behaved particularly badly, the successful party will usually receive a particular percentage of their legal fees.
The Ontario courts use such a rule of thumb. Generally, a successful party in a civil case in Ontario can expect to receive a cost award of approximately 60% of their legal fees.5 This amount can be adjusted up or down based on a similar list of factors as found in the Tax Court’s rules. And the Ontario courts will scrutinize the fees to ensure they are not excessive.
In Bowker, the Tax Court tried to establish a similar rule of thumb. After considering some authorities, the Tax Court concluded that a successful party should receive a range of 50% to 75% of costs "unless there are exceptional circumstances".6
The Federal Court of Appeal, in a decision this year, found this was a mistake.7 Specifically, it was a mistake for the Tax Court to set a range of 50-75%, and then seemingly consider only how each of the factors from the rules “moves the needle” within that range.8 Furthermore, a cost decision “must be grounded in the Court’s past practice and jurisprudence”.9 Presumably, the Tax Court’s decision was not sufficiently grounded in the Tax Court’s earlier decisions, some of which awarded amounts lower than 50-75%.
Unfortunately, the Federal Court of Appeal’s decision leaves taxpayers like Ms. Bowker without much of an idea what will happen at the end of their case. Hopefully, a future decision could improve this. The Federal Court of Appeal’s reasons don’t explicitly preclude the Tax Court from using a rule of thumb for costs. Rather, it seems the Tax Court would have to ensure a rule of thumb was flexible and could be reconciled somehow to its past decisions.
As it happens, another Tax Court decision on costs is under appeal right now.10 In that case, the Tax Court suggested the appropriate range was 30-75% and awarded the Crown 60% of its costs. The coming decision from the Federal Court of Appeal might help clear things up.
2022 TCC 43.
Rule 147(4).
Univar Holdco Canada ULC v. The Queen, 2020 TCC 15, para. 49.
Rule 147(3).
James v. Chedli, 2020 ONSC 4199, para. 14, 790668 Ontario Inc. v. D'Andrea Management Inc., 2015 ONCA 557, para. 23.
Para. 28.
Canada v. Bowker, 2023 FCA 133.
Para. 25.
Para. 31.
Grenon v. The Queen, 2021 TCC 89.