Tax Haiku:

CRA loses

Not just cases but also costs

and some face we think

By Jonathan Garbutt, Barrister & Solicitor, and Raminder Pandher, student-at-law


Taxpayers appealing assessments from the Canada Revenue Agency (“CRA”) to the Tax Court of Canada (the “TCC”) always face well-trained, experienced lawyers from the tax division of the Department of Justice (“Justice”). This may seem intimidating; especially since most taxpayers electing to go to court are unprepared to stand in front of a judge, or have no case and are simply stalling for time, or are just taking the CRA to court for the “hell of it” (to each their own).

Nevertheless, it is important to recognize that the CRA and Justice are not unbeatable. In fact, not only did the CRA lose in a recent series of judgements by the TCC, they got slaughtered. From a credit union litigating very complex issues to the “stay-at-home” mom, taxpayers have succeeded in Court while the CRA has been taken to the woodshed.

The Court has mechanisms in place to ensure that the cost of successfully litigating an issue will not be entirely coming out of the pocket of the taxpayer. Moreover, the TCC has begun to recognize the significant role costs play in tax litigation. In a welcome departure from the Tax Court’s traditional practices, the judgements discussed below highlight cases where taxpayers were not only successful against the CRA but were also awarded costs.

Awarding Costs

As with any type of litigation, taxpayers have to expend resources if they want to fight for their rights in Tax Court. The Court sets out a schedule of fees, called Tariffs, which list certain expenses taxpayers can recoup based on the amount in appeal, stage of proceeding, etc.[1] Traditionally, the costs that have been awarded by the Tax Court to a successful taxpayer have been no more than a small fraction of the out-of-pocket costs actually incurred in pursuing the appeal. However, the TCC has begun to depart from this rigid structure in certain circumstances, and has total discretion in terms of the amount of costs, the allocation of costs, and who must pay them.[2]

Factors to be considered by the TCC in exercising this discretionary power include: the result of the proceeding; the amounts in issue; the importance and complexity of the issues; settlement offers; the volume of work; conduct that shortened or unnecessarily lengthened the duration of the proceeding; the denial, neglect or refusal 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; and whether the expenses to have an expert witness was commensurate with the nature of the proceeding.[3]

Additionally, the TCC may consider “any other matter relevant to the question of costs.”[4] This gives the TCC even broader discretion to consider other factors it thinks relevant on a case by case basis.

CRA Punished for Abusive Conduct

The Martin[5] case was won by my former colleague, David Piccolo, and articling student, Jonathan Crangle. Moreover, my buddy Rob Madden had the file when it was originally at Thorsteinssons LLP (the tax bar is a small small world…) . The appellant in this matter, Mrs. Martin, was reassessed by the CRA under section 160 of the Income Tax Act[6] (the “Act”) for having received assets from her late husband while he owed a tax debt. Her position was that she provided services to her late husband’s dermatology business, and also owned the building that the practice operated in, but did not receive rent. Therefore, she clearly provided “fair market consideration” for the assets she received, and, thus, section 160 did not apply to her.

The issue arose due to the conduct of the CRA. Back in 1994, a CRA auditor informed Mrs. Martin and her late husband that he could not pay her a salary for the work she did as his receptionist and bookkeeper and could not pay her rent either. This is, was, and always will be utter hogwash. Moreover, the CRA has acknowledged that the taxpayer was “misinformed” by the auditor. As Justice Boyle noted, the fact that she was not paid fair market consideration for her work and proper rent not only increased her husband’s tax bill beyond what was his legal obligation, but also adversely affected Mrs. Martin’s capacity to save for retirement and CPP benefits.[7]

However, the CRA inexplicably continued to fight the case that she did not provide “fair market consideration” for the property transferred to her all the way to trial, through three different law firms. In this judgment, Justice Boyle cited a previous decision where he stated, “[t]here are perhaps some arguments and some cases that the Canada Revenue Agency just should not pursue” because it amounts to abuse of taxpayers.[8] Sure, the Crown has to see the law enforced, but there are also instances where the government should not only know that they are in the wrong, but, more importantly, know that the taxpayer has the evidence to prove it.

This was one of those cases where the CRA stubbornly refused to admit that they were wrong and persisted with going to trial, and Justice Boyle was not afraid to say it. The case reported by Justice Boyle was in respect of the hearing for costs. The Crown thought that the taxpayer should get their costs according to the standard tax court schedule of costs. The taxpayer argued for solicitor-and-client costs (basically everything), and considering she had spent a staggering amount (at least $80,000!) fighting a case that never should have happened, this may have been appropriate.

Court Awards $410,000 in Costs in Response to Aggressive CRA Tactics

Spruce Credit Union received a dividend from Stabilization Central Credit Union of British Columbia, a deposit insurance corporation, and was assessed by the CRA under subsection 245(3) and paragraph 137.1(4)(c) of the Act. The Credit Union had spent almost $860,000 in legal fees fighting, and eventually winning, their appeal.[9] The appeal involved a determination on whether the dividend was a deductible inter-corporate dividend. The appeal also dealt with the issue of whether the Act’s General Anti-Avoidance Rule (“GAAR”) applied to the receipt of the dividend to re-characterize it as other than a deductible dividend received.

The issue decided by Justice Boyle in this judgement was on the subject of costs.[10] Justice Boyle ordered the Crown to pay approximately 50% of the Credit Union’s counsel fees ($410,000). This case is a huge win for any sophisticated party looking to fight the CRA.

The CRA took the position that there must be unusual and exceptional circumstances to warrant an award of costs not based upon the Tariff. The Court considered both of the CRA’s arguments “quite weak.”[11] To reach his judgement, Justice Boyle relied on the fact that the Credit Union was successful on both points of appeal,[12] the issues addressed were of broad importance to many interests;[13] and the facts and regulatory issues involved were very complex.[14] Justice Boyle also gave weight to the considerable preparation time required by this litigation[15] and that the CRA’s case was weak on key points.[16] Justice Boyle held that Tariff amounts were “inappropriate, insufficient, and unsatisfactory” in this case.[17]

This case demonstrates that the TCC won’t stand for instances where the CRA is unnecessarily aggressive or takes weak legal positions on complex matters of broad importance. If they continue to do so, it may result in more substantial awards of costs against the CRA.

CRA Chastised for Conduct

In Kingon[18], over $12 million was claimed by Kingon in capital cost allowance (“CCA”) relating to a licence that it purchased to market a heart drug. The CRA denied the entire CCA claim on a number of grounds. One of those grounds was that the Minister believed that the licence was an unregistered tax shelter. In this judgement, Kinglon successfully brought a motion to strike various portions of the Reply relating to the issue of whether the license was a tax shelter.[19]

In awarding costs, Justice Boyle was mindful that Kinglon was successful on this motion and, more importantly, that the CRA made a conscious choice to draft the Reply in a vague manner and refused to commit to a particular position on the facts.[20] As a result, Justice Boyle did not think that an award of costs in accordance with the Tariff was appropriate. He award costs to Kinglon in the amount of $3,000.

Justice Boyle further stated that the CRA is given a powerful advantage in tax litigation through the ability to plead assumptions of fact. But with great power comes great responsibility. The CRA has the responsibility to ensure “that the facts pleaded as assumptions be complete, precise, accurate and honestly and truthfully stated so that the taxpayer knows exactly the case and the burden that he or she has to meet”. This responsibility was clearly not met.

Stay at Home Mom Beats the CRA

Ms. Sheila Di Florio successfully appealed a GST assessment in which the CRA alleged that she was a partner with her husband (they have since divorced) in the business of selling drugs. [21]Mrs. DiFlorio denied any significant involvement in the drug business.[22] She admitted to running errands and visiting stables, but stated that she did not know what her husband was doing. The court agreed, and found no evidence to contradict Ms. DiFlorio’s assertion that she was “a stay at home mom,”[23] and allowed her appeal with actual costs incurred for counsel.

In the previous cases, the TCC awarded costs to sophisticated parties disputing complex legal issues. Here, the TCC awarded costs to individuals with simple matters. Again, the CRA did not meet their evidentiary responsibility. The Court has demonstrated its displeasure when the CRA brings weak arguments to court, dances around issues, and fails to meet their evidentiary burden.

Court Awards Costs for Travel

Mr. McDavid, a transport truck driver, won his appeal against the CRA regarding input tax credits (“ITCs”) and expenses incurred for business purposes.[24] The case was heard in New Brunswick where Mr. McDavid lived when the appeal began. Mr. McDavid later moved to Alberta for his work, along with his spouse Carolyn Ryan, but the appeal continued to be heard in New Brunswick. Ms. Ryan flew to New Brunswick for the trial and successfully testified on the basis that she had prepared all of the claims and was very familiar with her husband’s activities.

Counsel for the taxpayer argued for solicitor-client costs on the basis of a pre-trial settlement offer of 50% of the disputed amounts.[25] The court declined to make such an order but did allow Ms. Ryan all of her costs for travel from Alberta to New Brunswick for discovery, settlement conferences and trial.[26]


Although it can be costly, and risky in some cases, to take a tax matter to trial, the Canadian legal system is not without the means to impose significant costs on the government if the CRA and Justice abusive of taxpayers. Of course, the prerequisite to winning costs at the TCC is having a good, winnable case. The TCC, in our opinion, should have awarded both Mrs. Martin and Spruce Grove their costs on a full-indemnity, “client-and-his/her-solicitor” basis. We are not quite there yet, but at least the TCC (or at least Justice Boyle) is trying to curb the worst of the Taxpayer abuse. That being said, in the vast majority of cases the TCC awards costs in favour of the Crown, and taxpayers would be wise to seek counsel before they waste the TCC’s time with frivolous or hopeless cases. Knowing the difference between a good winnable case and a hopeless waste of time is tough, and requires the assistance of competent legal counsel.


[1] Tax Court of Canada Rules (General Procedure), SOR/90-688a, Schedule II [the Rules].

[2] Ibid Rule 147(1).

[3] Ibid Rule 147(3).

[4] Ibid Rule 147(3)(j).

[5] Martin v. The Queen, 2014 TCC 50 [Martin].

[6] Income Tax Act, RSC 1985, c 1 (5th Supp) [the Act].

[7] Martin, supra note 5 at para 20.

[8] Jolly Farmer Products Inc. v The Queen, 2008 TCC 693 at para 26.

[9] Spruce Credit Union v The Queen, 2012 TCC 35.

[10] Spruce Credit Union v. The Queen, 2014 TCC 42 [Credit Union]

[11] Ibid at para 52.

[12] Ibid at para 33.

[13] Ibid at paras 36-38.

[14] Ibid at paras 45-47.

[15] Ibid at paras 40-44.

[16] Ibid at paras 52.

[17] Ibid at para 51.

[18] Kinglon Investments Inc v The Queen, 2014 TCC 131 [Kinglon].

[19] Rule 53(1)(d)

[20] Kinglonsupra note 17 at para 30.

[21] DiFlorio v The Queen, 2014 TCC 67 [DiFlorio].

[22] The business allegedly carried on by the DiFlorio’s involved the production and sale of prohibited performance enhancing 3drugs for racehorses in Ontario.

[23] DiFloriosupra note 20 at para 44.

[24] McDavid v The Queen, 2014 TCC 112 [McDavid].

[25] Ibid at para 61.

[26] Ibid at para 64.