Canadian Tax Haiku of the Week:

Tax Court costs; Maybe

Judges put aside Tariff

Hooray! … if you win


“[T]he Tax Court of Canada is quite prepared to put aside Tariff in favour of a more detailed analysis based on the factors set forth in Rule 147(1).” – Justice Campbell J. Miller[1]

In case you have not read out previous blogs, or do not know much about the Canadian legal system, just as an FYI, in Canada, if you win in court the other side (the loser) has to pay your court costs. This is referred to as the “English” costs rule, as opposed to the American costs rule where each side has to bear its own legal fees regardless of the outcome. The English system tends to discourage frivolous lawsuits and is a major incentive to settle cases as early in the process as possible. What most people also do not know is that the same rules apply in Tax Court of Canada (TCC) cases; if you win, the Crown has to pay your legal bills! The inverse is also true; if your case is a waste of time, the court may impose costs on you as well. Historically costs in the TCC were set by regulation, referred to as the “Tariff”, so in many cases, even if the taxpayer won, the cost of legal fees, and particularly expert testimony, far exceeded what was allowable as costs under the Tariff. Based on a long-line of recent decisions, it appears that the Tax Court has caught up to this reality and has shown a willingness to exceed the Tariff in certain situations.[2]

Specifically, the TCC has once again[3] imposed a significant costs award against the Canada Revenue Agency (CRA), illustrating that tax court judges are willing to exercise their discretion to exceed the allowable limits provision of the Tariff.[4] The listed tariff amounts are usually insufficient to cover the taxpayer’s actual costs of litigation.

Rule 147

Rule 147 of the Tax Court Rules gives the factors to consider in determining a fair and appropriate costs award:

147(1) The Court may determine the amount of the costs of all parties involved in any proceeding, the allocation of those costs, and the persons required to pay them. . . .

(3) In exercising its discretionary power pursuant to subsection (1), the Court may consider:

the result of the proceeding,
the amounts in issue,
the importance of the issues,
any offer of settlement made in writing,
the volume of work,
the complexity of the issues,
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,
(i.1) whether the expense required to have an expert witness was justified given

the nature of the proceeding, its public significance and any need to clarify the law,
the number, complexity or technical nature of the issues in dispute, or
the amount in dispute; and
any other matter relevant to the question of costs.
Each individual factor is to be considered within the context of all the factors under Rule 147(3) when determining whether to grant increased costs. As Justice Rothstein (as he was then) ruled long ago: “An award of party-party costs is not an exercise in exact science. It is only an estimate of the amount the court considers appropriate as a contribution towards a successful party’s solicitor-client costs.”[5]


It was left to Justice Miller to balance these factors in order to determine a fair and appropriate costs award for the taxpayer, Henco Industries Limited (“Henco”).[6] The actual costs incurred to Henco during the litigation process totaled $1,203,770. Henco was seeking 75% of this figure (plus disbursements of $56,517.76 for a total cost award of $959,345.82). The Crown argued either for costs based on tariffs (a paltry $27,550 plus disbursements of $19,913.77) or an award between 20-50% of Henco’s actual costs.

Justice Miller set the cost award at 45% of the solicitor-client costs and disbursements ($576,673). In doing so Justice Miller recognized that determining an appropriate cost award depended on a number of interplaying factors, in order to achieve a fair result.[7]

A costs award is not determined on the results of individual arguments but rather on the overall outcome of the judgement. Thus, although not successful on all issues, Henco was wholly successful on the major substantive issues.[8] Henco was wholly successful on the characterization of the $15,800,000 payment received by Henco as a non-taxable capital receipt.[9]

When looking at the issues, the question is not how important the issues are to the individual taxpayer, but rather whether the decision on the issues will have significant precedential and jurisprudential value. Justice Miller found that the issues decided in Henco, such as finding a payment to be a non-taxable capital receipt and the interpretation of contracts, will have relevance beyond the taxpayer’s appeal.[10]

Additionally, the amount of tax was significant.[11] Justice Miller also found the substantive and procedural issues were well-researched, well-presented and well-argued by the parties.[12] These factors were also strongly considered by Justice Miller in justifying an award beyond Tariff.

While not a driving factor in this cost award, Justice Miller also considered the substantial volume of work involved.[13] Similarly, while the complexities of the issues in Henco were not of the same nature as found in Spruce Credit Union or Velcro, Justice Miller did acknowledge that there were a number of issues in Henco that were not exactly “straightforward.”[14]

Justice Miller stated that a settlement offer is to be given significant weight in a cost award.[15] Interestingly, in Henco the parties did not exchange settlement offers. Justice Miller did to state whether the lack of a settlement offer could affect any costs award by the Tax Court.

Additionally, for the conduct of the parties shortening or lengthening the litigation to be determinative, it must be clear that a party has acted unreasonably in its conduct.[16] This was unclear to Justice Miller and did not play a role in the costs award.

The Aftermath

After Henco, the Rule 147 analysis was also followed in Klemen[17] and Otteson[18] to award costs in excess of Tariff to taxpayers where the tax amounts in issue were rather modest.

In Klemen, the taxpayer sought a lump sum costs award of $50,000 plus disbursements (approximately 75% of the actual solicitor-client costs of $66,647.50). After assessing the relevant factors, Justice Hogan granted an award of approximately 30% of solicitor-client costs ($20,000) plus disbursements

In Otteson, Justice Hogan again awarded the taxpayer a costs award of 20% ($13,000), plus disbursements. The taxpayer sought a lump sum costs award in the amount of 30% ($20,000).


These decisions demonstrate that the Tax Court will awards costs in excess of the tariff if the situation warrants, and should be encouraging to other taxpayers looking to take the CRA to court. Since the expense of taking a tax case all the way to trial can be quite significant, it is comforting to see that the Tax Court has recognized the need to go beyond the Tariff. More importantly, as an increasing number of cases require expert testimony in order to clarify complicated issues, it is quite beneficial to taxpayers to know that if they prevail, these costs will have to be borne by the Crown.

At the same time, one would think that this string of adverse cases might begin to encourage the Crown, given their duties to minimize expenses, to provide a reasonable settlement offers at some time during the process. The only way that this issue could become even more favourable to the taxpayer would be if the taxpayer had made an offer that was rejected without a counter-offer by the Crown. This suggests that taxpayers need to consider making an offer to the Crown, even if they think they are going to win, as doing so would allow the taxpayer to argue even more strongly for over-Tariff costs in the event of victory. As with everything in tax, there is a trade off; if a taxpayer is receives a reasonable offer from the Crown, and does not prevail at trial, or only gets what was offered, their capacity to argue for extra costs may well be significantly reduced.

By Jonathan N. Garbutt, Barrister & Solicitor and Raminder Pandher, Student-at-law

This blawg is provided on a “For your information” basis and is not intended to constitute legal advice, and should not be taken as such.

[1] Henco Industries Limited v. The Queen, 2014 TCC 278 at para 2.

[2] Spruce Credit Union v. The Queen, 2014 TCC 42; Velcro Canada Inc. v. The Queen, 2012 TCC 273; Sommerer v. The Queen, 2011 TCC 212; Jolly Farmer Products Inc. v. The Queen, 2008 TCC 693; General Electric Capital Canada Inc. v. The Queen, 2010 TCC 490; and Dickie v. The Queen, 2012 TCC 327.


[4] Tax Court of Canada Rules (General Procedure), SOR/90-688a [Tax Court Rules].

[5] Consorzio del Prosciutto di Parma v Maple Leaf Meats Inc., 2002 FCA 417

[6] Henco Industries Limited v. The Queen, 2014 TCC 278 [Henco].

[7] Ibid at para 3.

[8] Ibid at para 5.

[9] Ibid at paras 4-5; Henco Industries Limited v. The Queen, 2014 TCC 192

[10] Ibid at paras 9-10.

[11] Ibid at para 6.

[12] Ibid at para 11.

[13] Ibid at paras 13-16.

[14] Ibid at para 17.

[15] Ibid at para 12.

[16] Ibid at para 20.

[17] Klemen v. The Queen, 2014 TCC 369 [Klemen].

[18] Otteson v. The Queen, 2014 TCC 362 [Otteson].