How should the Tax Court award costs where the taxpayer’s appeal was allowed but no changes were made to the assessment at issue?
This unusual situation was considered by the Tax Court in Kruger Incorporated v. The Queen (2016 TCC 14).
In the main appeal (2015 TCC 119, under appeal to the Federal Court of Appeal (A-296-15)), the Tax Court had allowed the taxpayer’s appeal on the basis that certain foreign exchange option contracts should be valued in accordance with subsection 10(1) of the Income Tax Act (see our previous post here). However, success in the appeal was divided because certain of the taxpayer’s other foreign exchange option contracts were to be valued on a realization basis, as assessed.
The Tax Court asked the parties to provide submissions on costs.
The taxpayer asked for costs on the basis that the appeal had been allowed. The Crown asked for costs on the basis that the result of the proceeding was substantially in its favour as to the amounts in issue and the determination of the issue.
Interestingly, after the Court’s decision allowing the appeal, the parties discovered that the underlying assessment would not change. The Tax Court called this an “anomaly”.
The Tax Court stated that, despite its decision allowing the appeal, the Crown was the successful party. The case law on costs cautions against awarding amounts based on the success of particular arguments (see, for example, General Electric Capital Canada Inc. v. The Queen (2010 TCC 490)). However, the Tax Court noted that this was not a case in which a party won a Pyrrhic victory, as each party had been successful to different degrees.
The Court considered the factors listed in section 147 of the Tax Court of Canada Rules (General Procedure), including the amounts in issue, the volume of work, the complexity of the matter, and the conduct of the parties. The Court noted that two of the Crown’s witnesses were of significant assistance to the Court.
The Court concluded that no rule prohibits a judge from distributing costs between the parties, although this is not encouraged. In this case, it was appropriate to recognize the Crown’s success.
The Court awarded costs to the Crown in respect of two witnesses, and 50 percent of all other costs. In the Court’s view, this was an unconventional but reasonable award.