http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/146132/index.do
Mariano v. The Queen (August 4, 2016 – 2016 TCC 161, Pizzitelli J.).
Précis: This is the ruling of the Tax Court on costs arising in an appeal blogged earlier on this site. The actual appeal decision involved a somewhat complex charitable donation program involving gifts in kind of software licenses by donees and the issuance of charitable receipts to them in an amount roughly 3 or more times their cash actual outlay. The trial was unusually long for Tax Court proceedings (25 days) and ended with the Appellants losing on all points they raised. Among other points the Court concluded that there was no donative intent and the valuation of the gifts was simply inflated. The appeals were dismissed with costs.
In light of the length and complexity of the trial, the Tariff B fees claimed were a modest $41,075. The nub of this decision however was the question of costs paid by the Crown to retain a valuator for the software licenses to respond to the expert evidence adduced on behalf of the Appellants. The full amount claimed by the Crown in respect of such fees was $422,286.20 (the total disbursements were $491,136.95). The Court carefully went through each of the objections on behalf of the Appellants and rejected them all with the exception of deleting the costs of Mr. Mizrahi and Mr. Tobias [two members of the valuation team] in attending to hear the evidence of witnesses at trial and in preparing the Respondent’s counsel to cross-examine the Appellants’ witnesses. It is not clear how much that reduction would amount to; the matter was left to be determined by a taxing officer if the parties are not able to agree upon the reduction. It seems likely that the Appellants are facing a net costs award of $300,000 plus. The 7 Appellants and the 5 Bound Appellant (who agreed to be bound by the results of the appeal) were made liable on a pro rata basis but the Promoter was liable without limitation.
Decision: The Court rejected the argument that the Appellants could not reasonably have expected such large expert witness fees. They were in large part the parties that necessitated the expenditure:
[46] The Appellants have not directly attacked the quantum of legal fees claimed by the Respondent on the Tariff basis as being unreasonable. The Appellants attack, in reality, the Respondent’s claim for expert witnesses as not being reasonably expected. Frankly, I see no merit to the Appellants’ argument that such level of expert fees were unexpected for several reasons:
1. The Appellants submitted 2 expert reports and witnesses for trial. The issues are well set out in both pleadings and it is clear the Appellants expected to and did utilize expert witnesses to substantiate their own claim for values of the licences in issue, being the in-kind portion of the purported gift. Their positions and actions, including using expert witnesses, was what necessitated the Respondent’s need for expert witnesses, to effectively rebut their own, which was done with great success.
2. The Appellants have not provided information as to the amounts either they expended or had expended on their behalf for expert witnesses, making a comparison of expert fees impossible and their submissions as to the Respondent’s quantum somewhat meaningless. In Hague v Liberty Mutual Insurance Co. [2005] OJ No. 1660, cited in The Law of Costs, Second Edition, Volume 1, Mark M. Orkin, at pages 2-37 and 2-38, the Court stated:
One might fairly ask how the expectation of the parties is to be found out as part of the costs process. In my view, it is not to be obtained directly from the parties through, say, affidavits being filed. Any such affidavit evidence would inevitably be completely self-serving and of no assistance to the court. Rather, it would appear that the expectation of the parties will fall to be determined in one of two ways. It may be determined by the unsuccessful party revealing what his/her/its costs were on the same matter as some measure of what was to be expected. The unsuccessful party is, of course, not required to reveal that information but, if they choose not to do so, they may impair their ability to make any meaningful submissions on this aspect of the process….
3. The Appellants were represented at different times by three sets of experienced tax litigation counsel and the pleadings, particularly the Respondent’s Reply, were long and detailed such that the Appellants and their counsel knew the case they had to meet and the several issues to be addressed, including the valuation of software licence issues necessitating expert witness. I find it incredulous the Appellants were not aware or were not told this would be expensive and time consuming litigation that was initially set down for 8 weeks over two cities, Vancouver and Toronto, notwithstanding the Court travelled to Halifax to hear the Appellants’ own witness, at their request. As so clearly expressed in 155569 Canada Ltd. v 248524 Alberta Ltd., [1999] AJ No. 623 (ACQB) at paragraph 48:
…The common law’s approach to costs is structured and cohesive. It is understood that a party to litigation knows or should know that, other than in exceptional cases, if it loses the lawsuit, it will have to pay not only its own costs, but a hefty proportion of those of the party opposite as well….
I agree with the Respondent that if it is the Appellants’ contention that it was not fully appraised of such risks, then that is a matter between the Appellants and their counsel.
4. The Appellants executed a Direction as part of the Program documentation that specifically referred to the contribution of 3 percent of the cash donations made to the Program foundation up to a maximum of $750,000 to a legal defense fund to pay legal fees in the event of a reassessment by the Canada Revenue Agency (“CRA”). The existence of a $750,000 legal defense fund is certainly evidence that the costs of litigating would be very large.
I do not accept that the Appellants did not reasonably expect such a level of costs in the circumstances. Rather, it is clear that the Appellants expected the costs of litigation to be very high in these matters and should have known that that the risk of success was unclear, if not even low, due to the many recent decisions of the Federal Court of Appeal on the issue of donative intent.
I also do not agree with the Appellants’ contention that even the Respondent did not reasonably expect its costs of litigation to be so high. The Appellants of course take this position only with respect to the Respondent’s claimed expert witness fees, arguing that the proposal given by FTI to the Respondent, dated June 20, 2011, for a range of between $235,000 and $325,000, was exceeded as obviously the final invoices totalled $422,000. The Appellants’ submissions note that actual proposal rates were lower than actual rates charged. For instance, the expert witness, Mr. Neil Mizrahi’s rate was quoted at $400 per hour in the 2011 proposal but actual rates charged on the invoices ranged between $400-500 per hour. Frankly, as the Respondent has argued, the proposal was dated in June of 2011 at which time the trial was, according to such proposal, scheduled for between November 21 to December 2, 2011. We know that the trial was later scheduled for June, 2012 but the Appellants requested two adjournments which pushed the ultimate trial date to March of 2015 and so it is not unexpected that fees rates would rise over a four year period. Moreover, the proposal is clear that fees would be charged on the basis of actual time spent in conducting the engagement based on its hourly rates, for which 2011 rates were listed and that the proposal only gave an estimate of total fees to be charged. In any event, there is no basis in law argued to suggest the Respondent’s actual disbursements should not be used as the basis for its claim, subject to the Appellants rights to challenge its reasonableness and quantum.
[47] The Appellants have not provided any evidence as to what its own expert witness, particularly Mr. Dobner, quoted and charged so it is not possible to weigh the reasonableness of the Respondent’s witness fees relative to their own or whether their final bills exceeded proposal estimates as a comparison.
[48] I am not prepared to find that the expert witness fees of the Respondent were not reasonably expected by the Appellants nor the Respondent herself based on the Appellants’ arguments. I will address the Appellants’ arguments regarding the quantum of the Respondent’s claimed expert fees shortly.
[49] What is clear to me however is not that the Appellants did not reasonably expect legal fees and disbursements to be at the level of those claimed by the Respondent, but rather that the Appellants, like the Bound Appellants, expected the Promoter of the Program to pay them. This is clear from the evidence at trial of the Directions signed by the Appellants referencing the defense fund and the evidence the Appellants’ expert witness fees were paid for by the Promoter who engaged its services. It is also clear from the Appellant Mariano’s letter to this Court dated February 22, 2016 on costs where she stated “I had been under the premise that GLGI would finance the cost of litigation”. It is further evidenced by the admissions in argument that the Promoter paid the Appellants’ counsel fees whom it engaged, as well as the submissions of some of the Bound Appellants. I will discuss this matter in more detail when addressing the issue of what persons should pay the costs as contemplated by Rule 147(1) above.
The Court did however agree to reduce the fees by the amount of time spent by the valuators in attending to hear the evidence of witnesses at trial and in preparing the Respondent’s counsel to cross-examine the Appellants’ witnesses:
[76] Secondly, the Appellants object to the fees charged by Mr. Mizrahi and Mr. Tobias in attending at trial to listen to the testimony of the Appellants’ expert witness, Mr. Dobner, as well as the general witnesses called by the Appellants during the opening 7 days of trial and relies on GlaxoSmithKline Inc. v Pharmascience Inc., 2008 FC 849, where the Court gave specific instructions to the taxing officer at paragraph 6 that:
…Any time spent by Pharmascience’s witnesses in preparing Pharmascience’s counsel to examine GSK’s expert witnesses or in attending the examination of any other witness shall not be recoverable.
[77] The Respondent argues that the serious deficiencies in the Appellants’ expert witness report made it necessary for its own expert witness to attend such portion of the hearings in order to assist it to more effectively cross-examine the expert witness. Frankly, the expert witness report and any deficiencies were available to the Respondent before the trial and the testimony of the Appellants’ expert witness generally consisted of presenting its expert report to the Court. I am not only convinced such attendance was not necessary for the Respondent’s able counsel to properly cross-examine the Appellants’ expert witness, I am also convinced the Appellants’ counsel would not have consented to the Respondent’s uncommon request to allow its expert witness to sit in on other testimony if the Respondent had indicated at the time it would be seeking to claim costs for such accommodation.
[78] Accordingly, any fees and disbursements charged by Mr. Mizrahi and Mr. Tobias in attending to hear the evidence of any witnesses at trial or in preparing the Respondent’s counsel to cross-examine the Appellants’ witnesses shall not be permitted. While a copy of the April 15, 2015 invoice covering the time during these events was attached to the Appellants’ cost submissions such invoice does not set out the details to assist the Court to determine such reduction in expert witness fee. Therefore the taxing officer will be directed to determine such reduction based on the actual fees charged by such above persons in the said invoice if the parties are not able to agree amongst themselves within 30 days of the date of this Order.
It is not clear how much that reduction would amount to; the matter was left to be determined by a taxing officer if the parties are not able to agree upon the reduction. It seems likely that the Appellants are facing a net costs award of $300,000 plus.
It is interesting that the costs sought before this reduction were roughly in the same range as the total tax involved in the 7 appeals at issue:
[22] Taken together, the total combined federal and provincial tax credits in dispute do not equal the costs claimed, although they came close at about $392,409. However, if one adds the charitable tax credits claimed by the Bound Appellants according to the relevant pleadings, then the total amount of charitable tax credits claimed is very significant relative to costs. If one looks at the amount of the proposed donations claimed giving rise to the tax credits; such amounts are very significant relative to costs; more than double. Having regard to the above, this factor is not determinative either way and so I give little weight to this particular factor in the circumstances.
This is probably the largest reported Tax Court costs award in connection with a tax shelter arrangement. It may well cause taxpayer to reconsider how such cases are litigated in the future.