Costs uncertainty in the Tax Court (continued)
Two Tax Court decisions within one week show the difficulty of predicting costs awards in tax litigation
In a previous post, I wrote about the uncertainty in costs in tax litigation, particularly after the Federal Court of Appeal decision in Bowker.
Two recent decisions from the Tax Court on costs, released within a week, demonstrate this uncertainty. The two decisions involve successful taxpayers in similar cases recovering different amounts of costs based, it seems, on somewhat different principles.
The taxpayers in both Prospera Credit Union and Emergis Inc. successfully challenged CRA assessments against them.
Both taxpayers spent significant amounts in legal costs to prosecute their case. In Prospera, the taxpayer spent approximately $260,000. In Emergis, the taxpayer spent $325,431.
Both cases involved large amounts of tax. The CRA had reassessed approximately $800,000 in GST against the taxpayer in Prospera. The CRA had denied a deduction of approximately $8,900,000 from the taxpayer’s income in Emergis (resulting in, presumably, income tax of some fraction of this amount).
Both cases involved important legal issues that the Tax Court found weighed in favour of increased costs.1
Both cases proceeded relatively smoothly, with minimal or no discoveries and short hearings. In both cases, the Tax Court considered the factors in the Tax Court cost rules related to the process of litigation to be neutral or irrelevant.2
At the end of the litigation, both successful taxpayers asked to be reimbursed for 75% of their legal costs.
The Tax Court rejected these requests. The Court awarded different amounts of costs, based on what appear to be somewhat different principles:
In Prospera, after considering the factors in the Tax Court’s rules, the Court awarded the taxpayer 7.5% of its costs, noting this award was roughly double the tariff amounts in the Tax Court’s rules.3
In Emergis, the Court wrote that, if there are adequate reasons for departing from the tariff amounts, it must be determined whether the costs should be awarded at the lower or upper range established by the case law.4 The Court indicate this range “could be as low as 20% with a mid-range of 35-50%”.5 The Court selected 20%, an amount at the low end of this range.
Different outcomes in apparently similar cases are not necessarily surprising. Every piece of litigation is different, and trial judges have a unique perspective on the appropriate amount of costs to award.
Still, these two decisions show that it is hard for a taxpayer to predict their legal costs if they challenge a significant tax liability, the issues are important, the litigation goes smoothly, and they succeed. They could recover costs close to the tariff, as in Prospera, or somewhere in the range of 20 to 50%, described in Emergis. A “rule of thumb”, where the successful party usually recovers a certain percentage of their costs, adjusted up or down based on the factors in the rules, might give taxpayers (and the CRA) more certainty and predictability in tax disputes.
Prospera, para. 11; Emergis, para. 36.
Prospera, paras. 17-20; Emergis, paras. 45-50. The factors in Rule 147(g), (h), and (i) relate to the conduct of the parties and are the following:
the conduct of any party that tended to shorten or to lengthen unnecessarily the duration of the proceeding;
the denial or the neglect or refusal of any party to admit anything that should have been admitted;
whether any stage in the proceedings was improper, vexatious, or unnecessary, or taken through negligence, mistake or excessive caution.
Prospera, para. 22.
Emergis, para. 14.
Emergis, para. 16.