http://decisions.fca-caf.gc.ca/fca-caf/decisions/en/item/109123/index.do 
Canada v. Martin (April 15, 2015 – 2015 FCA 95, Dawson (author), Webb, Near JJA).
Précis: This is a decision on an appeal by the Crown from a costs award made by Justice Boyle in the Tax Court. The Crown assessed Mrs. Martin on payments made to her by her late husband at a time when he had income tax arrears. The Tax Court found that Ms. Martin had provided consideration for the funds transferred in that she worked as her husband’s assistant and also provided office premises to him. Her appeal was allowed in the Tax Court, a result that the Crown did not appeal. Justice Boyle declined to award solicitor-client costs but did award costs of $10,635 which was roughly twice the Tariff. He did this to reflect his displeasure at CRA’s providing incorrect advice to the Martins and doggedly sticking to their position necessitating an appeal to the Tax Court by their “inconsistent and irrational conduct” (the language of Dawson JA – Boyle J. wrote that the Crown had not been “consistent and rational”). Mrs. Martin incurred legal fees of roughly $66,000 prior to the institution of her appeal and roughly $5,400 thereafter. The Federal Court of Appeal allowed the Crown’s appeal, without costs. The Court of Appeal held that Rule 147 of the
Tax Court of Canada Rules (General Procedure) (the “Tax Court Rules”) did not permit a costs award in respect of expenses incurred prior to the institution of an appeal, i.e., at the audit and objection stages. The Court of Appeal reduced the costs award to the Tariff amount of $4,800 plus disbursements and taxes.
The Court of Appeal also dismissed, without costs, Mrs. Martin’s claim for solicitor-client costs in the amount of $73,151.22 for the audit, objection and Tax Court stages.
Decision: The facts in the Martin decision did not paint CRA in a particularly good light:
[7] The Canada Revenue Agency assessed Mrs. Martin as a result of payments received from her husband in the 1999 through 2004 taxation years. During those years Mrs. Martin’s husband was indebted to the Minister of National Revenue on account of income taxes. Mrs. Martin appealed the assessment on the basis that she provided consideration for the amounts transferred to her in the form of services she provided to her husband’s medical practice and premises she owned and made available to the medical practice. The Judge fully accepted Mrs. Martin’s evidence (appeal reasons, at paragraph 2).
[8] Mrs. Martin began working in her husband’s medical practice in 1989. She was paid a salary from 1989 to 1994 and in 2001 and 2002 (appeal book, at page 39).
[9] In his reasons, the Judge noted that:
i. In a prior audit conducted in 1994, the Canada Revenue Agency accepted the reasonable arm’s length value of the services provided by Mrs. Martin. The values accepted for the 1989, 1990, 1991 and 1992 taxation years were respectively: $30,000.00; $32,000.00; $34,000.00; and $36,000.00 (appeal reasons, at paragraphs 9 and 10).
ii. The Canada Revenue Agency acknowledged that during the 1994 audit Dr. Martin was told that in future he could not pay a salary to his wife and deduct the amount of salary from his income (appeal reasons, at paragraphs 11 and 21). This was incorrect and contrary to the assessment that flowed from the 1994 audit.
iii. As a result, thereafter Mrs. Martin was not paid in the years 1995 through 2000. In 2001 she was paid $25,000.00 and in 2002 she was paid $24,700.00 (appeal reasons, at paragraphs 10 and 11; cost reasons, at paragraph 5).
iv. For each year in the period from 1995 through 2004 the reasonable amount of salary which would have been paid in an arm’s length relationship for the services provided by Mrs. Martin was $38,000.00 per year.
v. Additionally, Mrs. Martin was owed $37,500.00 by her husband in consideration of unpaid rent (appeal reasons, at paragraph 19).
vi. In total, Mrs. Martin was entitled to additional consideration in the amount of $267,800.00 from her husband. This was sufficient to allow the appeal and vacate the assessment (appeal reasons, at paragraph 20).
vii. There are issues the Canada Revenue Agency should not pursue. This was a case where the essential facts were not in dispute. No new or novel argument was advanced by the Crown (costs reasons, at paragraph 21).
viii. It was also relevant to the award of costs that prior to trial the Canada Revenue Agency credited Mrs. Martin for her unpaid services in the years in which the relevant transfers were made from Dr. Martin to his wife. However, the Canada Revenue Agency refused to recognize as consideration accrued unpaid services. This conduct was characterized by the Judge as inconsistent and irrational (costs reasons, at paragraph 22).
[10] It was agreed by the parties that under the relevant Tariff, Mrs. Martin was entitled to a counsel fee of $4,800.00 and disbursements of $634.23. Her actual legal fees before the Tax Court were $4,625.00. Additionally, in the Judge’s view it was relevant that after the Canada Revenue Agency became aware of the incorrect advice communicated to the Martins in the 1994 audit, Mrs. Martin paid legal fees of approximately $21,000.00 to Thorsteinssons while pursuing her objection to the assessment. In total she paid approximately $54,000.00 to Thorsteinssons and approximately $12,000.00 to McInnes Cooper at the audit stage (costs reasons, at paragraphs 9, 10, 11, 12 and 23).
[11] It is in this context that the Judge awarded costs, inclusive of disbursements, in the amount of $10,635.00.
However Dawson JA concluded that Rule 147 of the Tax Court Rules precluded a costs award in respect of expenses incurred prior to the commencement of an appeal in the Tax Court:
[21] Rule 147 is set out in the appendix to these reasons. Briefly, Rule 147 allows the Tax Court to determine the amount of the costs of all parties to a “proceeding” (Rule 147(1)). “Proceeding” is a defined term. In Rule 2 it is defined to mean “an appeal or reference”. In exercising its discretion on costs the Tax Court may consider a number of factors, including the conduct of any party that tended to shorten or to lengthen unnecessarily the duration of the “proceeding” (Rule 147(3)(g)) and whether any stage in the “proceeding” was improper, vexatious or unnecessary (Rule 147(3)(i)(i)). The Tax Court has discretion to award or refuse costs in respect of a “part of a proceeding” (Rule 147(5)(a)).
[22] Read in the context of the definition of “proceeding”, the Judge erred in principle in allowing an amount incurred in respect of costs unrelated to the appeal which were incurred at the objection stage. Those expenses, by definition, were not incurred as part of the appeal “proceeding”. The error is made manifest when one considers that it resulted in an award of more than twice as much as Mrs. Martin’s actual counsel fees for preparing, filing and pursuing her notice of appeal through to judgment in the Tax Court (costs reasons, at paragraph 15). As a result, I would allow the appeal and set aside the order as to costs issued by the Tax Court. It follows that the appellant should pay costs to the respondent in the amount of $4,800.00 plus disbursements and taxes.
Thus the appeal was allowed, without costs. Mrs. Martin’s cross-appeal for solicitor-client costs of roughly $73,000 was also dismissed, again without costs.
Comment: This decision is troublesome. The Court of Appeal did not take exception to Justice Boyle’s finding that CRA acted in an irrational and inconsistent fashion or that they mislead the Martins at the audit stage. While one can understand Justice Dawson’s technical conclusion that a “proceeding” only commences with the filing of a Notice of Appeal she seems to have given no consideration to the fact that, by statute, a notice of appeal cannot be filed until a taxpayer has gone through the objection and, normally, audit stages, i.e., that they are necessary preconditions to any Tax Court appeal. Moreover no consideration was given to the inherent jurisdiction of the Tax Court to control its own process (notwithstanding the language of Rule 147) – which one would think could include a costs award against a party unnecessarily extending an appeal by acting in an inconsistent and irrational manner.
The most troubling aspect of this decision is that it would appear to leave CRA with the ability to act with seeming complete impunity at the audit and objections stages. In
Canada (National Revenue) v. JP Morgan Asset Management (Canada) Inc., 2013 FCA 250 the Federal Court of Appeal dismissed JP Morgan’s claim for a review of what they alleged to be CRA’s having “acted arbitrarily, unfairly, contrary to the rules of natural justice and in a manner inconsistent with CRA’s treatment of other taxpayers” [para. 103] at the audit stage. The Court of Appeal held that such matters were exclusively within the jurisdiction of the Tax Court.
If both Martin and JP Morgan are correct then the result appears to be that the audit and objection stages in tax appeals are a lawless hinterland where the taxpayer proceeds at his or her own peril.
One would think the Martin decision would benefit from a review by the Supreme Court of Canada. While the amount involved is small the underlying policy issues concerning the jurisdiction of federal courts over CRA’s conduct at the audit and objection stages are a matter of national importance.