Tax judge fixed costs at 60 percent of legal fees mainly due to Crown’s conduct
The Federal Court of Appeal dismissed the Crown’s appeal upon finding no grounds to interfere with the Tax Court’s award of enhanced costs of 60 percent of a ferry service provider’s legal fees, primarily based on the Crown’s conduct.
The respondent in Canada v. Marine Atlantic, 2026 FCA 96, claimed input tax credits for fuel it had consumed or used on ferries.
In July 2023, the Tax Court of Canada addressed the merits of two tax appeals in these proceedings and ruled in the respondent’s favour. Last April, the Tax Court awarded the respondent enhanced costs, mainly due to the Crown’s conduct in two instances.
First, the Tax Court determined that the respondent unnecessarily spent time and money preparing for the appeals because the Crown failed to promptly fulfill its 2013 agreement with the respondent to be bound by the findings in British Columbia Ferry Services Inc. v. The Queen, 2014 TCC 305 (BC Ferries), in connection with three common issues.
Second, the Tax Court decided that the Crown blatantly attempted a trial by ambush – which lost trial days, entailed additional submissions and hearing days, and ultimately lengthened the trial – through filing an affidavit, sworn by a Canada Revenue Agency tax appeals case specialist, at the last minute.
Cost order upheld
The Federal Court of Appeal dismissed the Crown’s appeal of the cost order.
The appeal court acknowledged the unusual circumstances in the resolution of the tax appeals. The appeal court noted that the presiding judge, upon the parties’ agreement, based the merits decision on transcripts, documentary evidence, and written submissions filed before another hearing judge, who retired from the Tax Court shortly after the hearing’s conclusion.
First, regarding the Crown’s conduct in relation to the last-minute affidavit, the appeal court found no legal errors or palpable and overriding errors by the Tax Court that would justify its intervention.
The appeal court rejected the appellant’s arguments that the Tax Court pursued punitive goals when awarding enhanced costs or relied on factors extraneous to the respondent’s litigation.
The appeal court explained that the Tax Court awarded enhanced costs to compensate the respondent for the additional costs arising from the Crown’s conduct and to discourage similar future conduct.
The appeal court accepted that the Tax Court generally expressed concern regarding the propriety of using affidavits instead of witnesses to establish contentious facts, and opined that the Crown often attempted to enter evidence via affidavits.
“Judges may occasionally be tempted to share general views on perceived trends in litigation practices or even to signal reservations about conduct they have witnessed in other proceedings,” wrote Justice Gerald Heckman for the appeal court.
“In my view, they should refrain from doing so in reasons for judgment, which should reflect the Court’s findings of fact based on the evidence before it, the legal principles that apply to the issues in dispute and the Court’s disposition of these issues by applying the law to the facts,” Heckman added.
Second, regarding the Crown’s delayed acknowledgement of the BC Ferries findings, the appeal court saw no reason to interfere with the Tax Court’s conclusion that the Crown’s conduct merited an enhanced cost award.
The appeal court explained that the Tax Court based its interpretation of the 2013 agreement between the Crown and the respondent on the letters exchanged by counsel and its assessment of the surrounding circumstances.
Third, regarding the Tax Court’s reasoning for the quantum of costs, the appeal court found no reviewable error in the Tax Court’s refusal to examine comparable cases to support its cost award of 60 percent of the respondent’s legal fees.
The appeal court noted that the Tax Court observed that a comparative analysis would offer “useful guidance” and would serve as “a means” to exercise its broad discretion in awarding costs.
Lastly, the appeal court awarded the respondent all-inclusive costs of $3,020, as agreed by the parties.
