Tax court costs awards may prompt CRA to settle before trial

By Staff

Parties who are successful against the Canada Revenue Agency (CRA) in tax court are entitled to the reimbursement of some costs, which may act as a strong incentive for the taxman to settle a case before trial, says Canadian tax lawyer David J. Rotfleisch.

In one recent case, for example, Rotfleisch, founding tax lawyer with Rotfleisch & Samulovitch Professional Corporation, says the Tax Court of Canada awarded a mining company $10.25 million in costs for legal fees following a judgment in the company's favour in a dispute with the CRA regarding reassessments for three tax years.

The mining company asked for a lump-sum costs award for legal fees of more than $20 million — 70 per cent of fees incurred — plus disbursements of $17.9 million, a decision on which is still pending.

As the decision notes, the company claimed that this level of costs was foreseeable and was a direct result of the CRA’s actions, adding that the actual legal fees and disbursements incurred in connection with the appeals were about $57 million — although it didn’t claim for this amount.

On its part, the CRA submits that the award sought by the company was “punitive and tantamount to substantial indemnity and that such costs should be awarded only where the conduct of a party has been reprehensible, scandalous or outrageous.”

In its decision awarding costs, the court noted that $10.25 million “appropriately reflects the success of the Appellant, the amounts in issue and the complexity of the issues and appropriately contributes to the costs incurred by the Appellant for counsel fees without being either extravagant or punitive to the Respondent.”

“ … [In] the absence of obvious excess, it is not the role of the Court to second-guess counsel’s judgment regarding the work required to fully prepare for an appeal. However, I also observed that, in circumstances involving significant stakes for the appellant, efficiency and frugality may take a back seat to thoroughness. In my view, compensating the Appellant for 35% of counsel’s fees adequately addresses the latter observation,” noted the tax court.

As Rotfleisch tells, tax court rules awarding substantial costs were amended a number of years ago — prior to that, he says, there was no incentive for the CRA to settle before trial.

“Many cases proceeded to trial even though the CRA had a very poor chance of success,” he says.

“Now, with the proper use of settlement offers, experienced Canadian tax lawyers frequently settle cases without proceeding to trial,” adds Rotfleisch.

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