Executive Summary: Key Legal and Evidentiary Issues

• Tax Court of Canada determined costs allocation following a five-day trial where success was divided between the parties across three consolidated appeals.

• Corporate assessments against Afdon Contracting Ltd. were vacated as derivative, while the primary personal assessments against Mr. Tajbakhsh were largely upheld.

• Settlement offers exchanged between the parties were analyzed under Rules 147(3.1) or (3.2), with the Crown's pre-trial withdrawal offer deemed to lack an element of compromise.

• Gross negligence penalties were adjusted but maintained against Mr. Tajbakhsh, alongside adjustments to rental income, capital gains, and disallowed management fees.

• Evidentiary gap existed in linking Bahamas airport revenues to the corporations, contributing to the failure of the corporate appeals.

• Lump sum costs of $25,000 awarded to the Respondent in Mr. Tajbakhsh's appeal; no costs granted in the two corporate matters.

Background and facts of the case
The matter before the Tax Court of Canada involved three related appeals heard together over five days in September and October 2025 before Justice Michael U. Ezri. The appellants were Afdon Contracting Ltd., which filed both an income tax appeal (Docket 2022-1038(IT)G) and a GST appeal (Docket 2022-1036(GST)G), and Afshin Tajbakhsh individually (Docket 2022-1037(IT)G). The primary assessments arose from the audit of Mr. Tajbakhsh, and the corporate assessments against Afdon Contracting Ltd. were derivative in nature. Certain elements of the assessment, such as capital gains, rental income, and shareholder benefit, were unrelated to and formed no part of the corporate assessments. The federal tax and penalty approached $1 million for the years in issue, which was significant especially for an individual taxpayer, and the significance of the tax amounts as compared to Mr. Tajbakhsh's income was reflected in the decision to maintain the penalties.

Outcome of the underlying appeals
The outcome of the proceeding favoured the Crown. The corporate assessments against Afdon Contracting Ltd. were vacated in full, both for income tax and GST, and those appeals foundered on the lack of any evidence connecting the Bahamas airport revenues with the corporations. The Crown was significantly successful in defending Mr. Tajbakhsh's assessments. Adjustments were made in that the rental income and capital gain were reduced and $94,000 in management fees were disallowed, albeit because they were statute barred rather than incorrect. The net worth was maintained almost in its entirety except for an $80,000 revenue adjustment. Gross negligence penalties were adjusted but not vacated.

Settlement offers
The parties were unable to agree on costs and made brief submissions on the quantum of costs. The only offer made at least 90 days prior to trial that might engage rules 147(3.1) or (3.2) was a Crown offer for a withdrawal of the appeals without costs, which the Court found did not have much of an element of compromise, and in any event the respondent did not do better than that opening offer. The appellant made a settlement offer on July 11, 2025 but did not disclose its nature in its submissions. Counter offers followed, ending on August 28 with the Crown's final offer being rejected. The trial commenced but did not conclude, and the parties again exchanged offers, with the appellant rejecting the final offer on October 22, the day before the trial resumed. The respondent's August 28 offer proposed to reduce income, and the final offer on October 22 would have also vacated all penalties. Comparing the Crown's final offer to the actual result, for the three tax years Mr. Tajbakhsh did approximately $50,000 better than the offers on the tax side, but that was more than offset by the penalties which were defended by the Respondent. The Court found that the Crown offers arrived too late to support enhanced costs but somewhat supported costs above tariff for the last two days of trial. The Court disagreed with the appellant's assertion that more realistic pre-October offers might have led to settlement, noting the respondent's August 28th offer came within $50,000 in income of the final decision, and it was the individual appellant who miscalculated.

Other factors and work performed
The respondent emphasized the amount of work involved in the case, a point the Court considered fair, though it took issue with the hours billed on the corporate appeals. The details attached to the responding submissions showed almost $100,000 on the individual appeal plus an additional $75,000 on the corporate appeal. The corporate appeal had no unique or separate issues from the individual appeal, no evidence was led that related only to the corporate appeals, and those appeals foundered on the lack of evidence linking the Bahamas airport revenues with the corporations. The Court gave no credit for the 236 hours ostensibly spent by the appellant on the corporate appeals after pleadings closed. The Court noted that both parties conducted themselves very well and expressed appreciation for their efforts.

Ruling and disposition on costs
The respondent's costs on a tariff basis were just about $21,000 for the three replies to the notices of appeal, including $700 for each of the three notices of appeal, but the Court held that no costs should be awarded for the replies in the two corporate appeals, treating tariff costs as coming in at $19,600 give or take. Given the views on settlement offers and other factors, the Court concluded that based on the respondent's settlement offer a trial was avoidable but the steps leading up to trial were not, and was prepared to allow a small premium over the tariff costs. In the final disposition signed on March 12, 2026, no costs of the appeal were awarded to either party in the two Afdon Contracting Ltd. corporate matters, while lump sum costs of $25,000 were awarded to the Respondent for Mr. Tajbakhsh's appeal.