Federal Court of Appeal Decisions

Date: 20131206

Docket:

A-486-12

 

Citation: 2013 FCA 285

CORAM:      

BLAIS C.J.

DAWSON J.A.

O’REILLY J.A. (ex officio)

BETWEEN:
TRANSALTA CORPORATION
Appellant
and
HER MAJESTY THE QUEEN
Respondent

 

Heard at Calgary, Alberta, on October 3, 2013.

Judgment delivered at Ottawa, Ontario, on December 6, 2013.

REASONS FOR JUDGMENT BY:                                                                               BLAIS C.J.

CONCURRED IN BY:                                                                                           

DAWSON J.A.

                                                                                                               

O’REILLY J.A. (ex officio)

                                                                                                                                                           

 

 

Date: 20131206

Docket:

A-486-12

 

Citation: 2013 FCA 285

CORAM:      

BLAIS C.J.

DAWSON J.A.

O’REILLY (ex officio)

BETWEEN:
TRANSALTA CORPORATION
Appellant
and
HER MAJESTY THE QUEEN
Respondent

 

REASONS FOR JUDGMENT

BLAIS C.J.

[1]               This is an appeal from the order of Justice Margeson (Judge) of the Tax Court of Canada (Tax Court), dated October 23, 2012, in which the Appellant’s motion for substantial indemnity costs was dismissed (Transalta Corporation v. The Queen, 2012 TCC 375).

 

 

 

FACTUAL BACKGROUND

[2]               The Minister of National Revenue (the Minister) assessed the Appellant for the 2001, 2002, 2003 and 2004 taxation years, denying its deductions of share and cash bonuses.

 

[3]               The Appellant challenged this decision before the Tax Court (Transalta Corporation v. The Queen, 2012 TCC 86) and the appeal was allowed. The Judge sent the matter back to the Minister and costs were awarded to the Appellant.

 

[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.

 

[8]               Before the Tax Court, the Rules (Tax Court of Canada Rules (General Procedure),
SOR/90-688a) that refer to costs are 147 to 153. Rule 147 reads as follows:

 

[9]               There are also two Practice Notes concerning proposed Rules and Amendments with respect to, among other things, settlement offers. They are not yet in effect but the parties are nevertheless aware of the Court’s intentions regarding settlement offers.

 

[10]           Practice Note 17, as amended by Practice Note 18, reads as follows with respect to enhanced costs:

 

[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.

 

[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.

 

[14]           Indeed, awarding costs is a highly discretionary power which is necessarily subject to deference.

 

[15]           In another case, Canada v. Landry, 2010 FCA 135, at paragraph 22, our Court stated that highly discretionary powers imply that an appellate court may not substitute its view for the trial judge’s unless said trial judge did not exercise his discretion on a principled basis.

 

[16]           The legal disability concept was discussed in CIBC World Markets Inc. v. Canada,

2012 FCA 3 (CIBC World Markets) where the Appellant was seeking increased costs in light of its successful appeal, following the Respondent’s rejection of an ultimately favorable settlement offer.

 

[17]           Interpreting Rule 147(3)(d) of the Tax Court Rules, Justice Stratas wrote, at paragraph 14, that it is:

[a]imed at encouraging parties to make offers of settlement and to treat them seriously. An unaccepted offer can trigger adverse costs consequences if, in light of the Court’s decision, it turns out that the offer should have been accepted.

 

[18]           Justice Stratas then specified, at paragraph 15, that this principle was nevertheless subject to an important pre-requisite:

… only offers that, as a matter of law, could have been accepted can trigger costs consequences. If, due to some legal disability, a party could not have accepted an offer, adverse costs consequences should not be visited upon that party.

 

[19]           Both in CIBC World Markets and in the case at bar, the issue before the Tax Court was a question of statutory interpretation that has to be answered either by “yes or no”. In CIBC World Markets, at paragraph 17, it was said that:

… the Minister’s assessment denying CIBC World Markets input tax credits would have been confirmed in its entirety or rejected in its entirety.

 

[20]           Stratas J.A. continued, at paragraph 18:

… If the answer were affirmative [in allowing multiple claims for input tax credits], then the Minister’s reassessment would have been quashed and CIBC World Markets would receive 100% of the input tax credits it claimed. If the answer were negative, then the Minister’s reassessment would have been confirmed and CIBC World Markets would receive none of the input tax credits it claimed.

 

[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.

 

[22]           As for the possibility of a compromise, Justice Stratas stated at paragraph 19 of CIBC World Markets that:

Due to the precise circumstances of this case, I agree with the Minister that under no factual or legal scenario could CIBC World Markets have been granted 90% of the input tax credits it claimed. The situation might have been different if, for example, the quantum of input tax credits were in issue and, theoretically, the Minister could defend the 90% figure on the facts and the law. But here, the issue was an all-or-nothing question of statutory interpretation.

 

[23]           Later on, at paragraphs 22 and 23, he wrote:

[22]   This Court is bound by its decision in Galway v. Minister of National Revenue, [1974] 1 F.C. 600 (C.A.) [(Galway)]. In that decision, Jackett C.J., writing for the unanimous Court, stated (at page 602) that “the Minister has a statutory duty to assess the amount of tax payable on the [facts] as he finds them in accordance with the law as he understands it.” In his view, “it follows that he cannot assess for some amount designed to implement a compromise settlement.” The Minister is obligated to assess “on the facts in accordance with the law and not to implement a compromise settlement.” See also Cohen v. The Queen, [1980] C.T.C. 318 (F.C.A.) [(Cohen)].

[23]   More recently, this Court reaffirmed Galway in Harris v. Canada, [2000] 4 F.C. 37 (C.A.). Sexton J.A., writing for a unanimous Court, stated (at paragraph 37) that “the Minister of National Revenue is limited to making decisions based solely on considerations arising from the Act itself” and cannot make “deals” divorced from those considerations. To similar effect, see Longley v. Minister of National Revenue (1992), 66 B.C.L.R. (2d) 238 (C.A.) at page 455.

 

[24]           In oral argument, the Appellant alleged that the legal disability exception, as explained in Galway and Cohen, had been narrowed by CIBC World Markets. For the reasons that follow, I do not read CIBC World Markets as departing in any way from this jurisprudence.

 

[25]           As a matter of fact, in CIBC World Markets, the Court explicitly considered itself bound by the decision in Galway. At paragraph 25, the Court noted that no legislative provision has repealed the principle articulated in Galway. This language is inconsistent with the Court narrowing the principle articulated therein.

 

[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).

 

[27]           Another argument raised by the Appellant at the hearing is that the Judge misapplied the test for the legal disability exception since he only considered whether the Crown could concede the share bonus issue. According to the Appellant, the Judge was required to apply the test to the whole offer, which means applying it to both the cash and share bonuses.

 

[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 (see
IT-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).

 

[30]           For the aforementioned reasons and on the basis of the prior jurisprudence of this Court, I cannot conclude that the Judge made a reviewable error in concluding that the Minister was justified in rejecting the settlement offer as it was put forward by the Appellant.

 

[31]           Further, since Practice Note 18 is not yet in force, it cannot affect the discretion of the Court to allow further costs when it is justified or to deny them when it is not. Even if the Practice Notes were in force, proposed Rule 147(3.1) recognizes that judges of the Tax Court retain discretion to not award enhanced costs. Were this not the case, the proposed rule would interfere with the ability of Tax Court judges to fashion just and appropriate cost awards, suitable to the particular circumstances of individual cases.

 

[32]           Both parties submitted substantial written briefs and made representations during conference calls regarding costs. Rule 147(3) lists a wide range of factors a judge may consider when awarding costs and the Appellant failed to demonstrate that those factors were not considered by the Judge.

 

[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.

 

[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.

 

“Pierre Blais”

“I agree

          Eleanor R. Dawson J.A.”

“I agree

          James W. O’Reilly J.A. (ex officio)

 

FEDERAL COURT OF APPEAL

NAMES OF COUNSEL AND SOLICITORS OF RECORD

 

DOCKET:	A-486-12
STYLE OF CAUSE:	TRANSALTA CORPORATION v. HER MAJESTY THE QUEEN

 

PLACE OF HEARING:

                                                                                                CALGARY, ALBERTA

DATE OF HEARING:

                                                                                                OCTOBER 3, 2013

REASONS FOR JUDGMENT BY:

                                                                                                BLAIS C.J.

CONCURRED IN BY:                                                       

DAWSON J.A.

                                                                                               

O’REILLY J.A. (ex officio)

 

DATED:

                                                                                                December 6, 2013

APPEARANCES:

Robert D. McCue Todd Marr	For The appellant
Carla L. Lamash Mary Softley	For The Respondent

 

SOLICITORS OF RECORD:

Bennett Jones LLP Calgary, Alberta	For The AppELLANT
William F. Pentney Deputy Attorney General of Canada	For The Respondent