http://decisions.fca-caf.gc.ca/site/fca-caf/decisions/en/item/64992/index.do 
Transalta Corporation v. Canada[1] (December 6, 2013) involved an unsuccessful bid in the Tax Court for substantial indemnity costs after the date of an offer by the taxpayer. The offer was rejected by the Crown and the result at trial was more favourable for the taxpayer than the offer it had made. The taxpayer appealed the issue of costs to the Federal Court of Appeal:
[4] The real issue in this appeal is not about the Tax Court’s substantive decision. It is rather about substantial indemnity costs unsuccessfully sought by the Appellant in relation to the Crown’s refusal to accept a settlement offer the Appellant made several months prior to the trial.
[5] Indeed, on April 28, 2011 the Appellant made a settlement offer to the Minister to have him deny the deduction of certain Performance Share Ownership Plan (PSOP) bonuses paid in cash in the 2004 taxation year to employees of non-Canadian resident subsidiaries of the Appellant (cash bonuses). In addition, this offer provided that the Minister would allow the remainder of the PSOP bonus deductions. The Respondent rejected the offer on June 3, 2011.
[6] Having been successful before the Tax Court, the Appellant requested party and party costs to the date the settlement offer was made, substantial indemnity costs in the amount of $265,000 thereafter, reasonable disbursements on the appeal and the costs on the motion for costs calculated at 80% of solicitor and client costs plus reasonable disbursements. The Appellant’s request was largely based on Practice Note 18 of the Tax Court (described below) and the fact the result at trial was more favorable for the Appellant than a settlement offer it had made.
[7] It is important to point out that even though the Respondent did not provide reasons for rejecting the offer at the time it did, it conceded, prior to trial, that the PSOP cash bonuses were in fact deductible. Therefore, the appeal proceeded only on the issue of deducting the shares bonuses.
The court then reviewed the current rules of the Tax Court with respect to costs.
It also reviewed two Practice Notes and proposed Amendments and Rules dealing with, among other things, settlement offers. While none of these are yet in effect, the parties and the court were aware of them.
[11] While the Judge agreed that the issues raised on the appeal were important and deserved careful attention, the Judge accepted the Respondent’s submission that the Minister was prevented from accepting the Appellant’s settlement offer and that he did not have to provide reasons for this refusal. This was because the Minister could not accept the offer because of the application of the concept of legal disability.
[12] The Judge also accepted the Respondent’s submission that, notwithstanding the Practice Notes, he retained full discretion to allow or deny enhanced costs.
The court cited the standard of review for a costs order:
[13] Regarding the standard of review to be applied to the Judge’s decision as to costs, Justice Dawson wrote, in
Guibord et al v. Canada, 2011 FCA 346 at paragraph 10, that:
An appellate court must thus defer to a Tax Court judge’s exercise of discretion in determining costs and should only intervene if the judge considered irrelevant factors, failed to consider relevant factors, or reached an unreasonable conclusion.
The court accepted the Crown’s position that it could not have accepted the taxpayer’s offer because of the doctrine of legal disability:
[21] The situation in CIBC World Markets is substantially similar to this one. In the present case, the issue was whether all of the share bonuses were deductible or whether none of them were. There was no principled basis on which the Minister could have accepted that the cash bonuses were non-deductible in exchange for treating the share bonuses as deductible. The Minister’s position was, in fact, the opposite – that the cash bonuses were deductible and the share bonuses were not.
It was up to Parliament, not the courts, to change the legal disability doctrine:
[26] In so concluding, I am mindful of the policy arguments raised by Transalta. However, as noted in CIBC World Markets, there are policy arguments both for and against repeal of the principle articulated in Galway and Cohen. Moreover, it is for Parliament to determine tax policy through amendment of the Act to give the Minister express authority to settle cases on a compromise basis (see, for example, section 109 of the Corporation Tax Act, R.S.O. 1990, c. C-40 and sections 7121 and 7122 of the Internal Revenue Code of 1986).
The appellant unsuccessfully argued that the Tax Court judge erred in only considering the share bonus aspect of the offer, not the offer as a whole:
[28] To this submission, I must answer that, even assuming the Judge did err, such error could not be considered material. Indeed, the Judge correctly ruled that the Crown could not concede the share bonus issue and this fact alone is sufficient to conclude that the Crown could not accept the settlement offer.
[29] Finally, the Appellant suggested that the Judge misapprehended the facts when he stated that the Crown had conceded the deductibility of the cash bonuses. This argument also cannot stand for the same reason discussed at paragraph 28. Even assuming the Appellant’s allegation was true, the Judge correctly concluded the Crown could not compromise with respect to the share bonuses because the assessing policy of the Canada Revenue Agency was that any issuance of shares to employees of a corporation under a salary bonus or stock bonus plan constituted an agreement falling within the ambit of section 7 of the Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1. As such, an employer could not deduct laid out costs incurred in respect of such an agreement (seeIT-113R4). Being of this view of the law, the Minister was obliged to assess in accordance with the law as he understood it (See Cohen at page 319).
Nor had the Crown been under any obligation to make a counter-offer:
[33] No obligation or duty required the Respondent to provide reasons or propose settlement alternatives (
Campbell v. The Queen, 2010 TCC 323 (Campbell)).
[34] In Campbell, the judge wrote, at paragraph 10 that:
Although this Court encourages settlement negotiations between parties wherever possible, the Respondent was under no obligation to provide a counter-offer, as the Appellant implies, and was free to promptly reject the offer made.
As a result the court dismissed the appeal with costs:
[35] In light of the above, I have not been persuaded that the Judge erred in law, failed to consider relevant factors, considered irrelevant factors or reached an unreasonable conclusion. I have concluded that the Judge exercised his discretion appropriately and that this Court should not intervene.
[36] I would dismiss the appeal with costs in favour of the Respondent.
[1] 2013 FCA 285.