The 2020 tax filing season is coming to an end on June 15 (the filing deadline for self-employed taxpayers and their spouse or partner), so most of us have, by now, received our Notice of Assessment. If you disagree with your assessment, you can file a formal objection with the Canada Revenue Agency, and if your issue remains unresolved after that, you can appeal to the Tax Court of Canada.
You have two options, depending on the dollar amounts involved, when appealing to the court: the “general procedure” or the “informal procedure.” Under the first, formal court procedures are followed and, as a result, many taxpayers will hire a lawyer with tax litigation experience to represent them. The informal procedure, meanwhile, is beneficial when it’s not cost-effective to hire a lawyer based on the amounts involved, although you are certainly entitled to have one represent you.
Indeed, taxpayers often represent themselves under informal procedure hearings, but they are sometimes assisted by an accountant or lawyer. The informal procedure is limited to cases where the amount of federal tax and penalties in dispute for each taxation year, excluding interest, is $25,000 or less (or $50,000 for a loss).
Of course, the costs of going to court can quickly add up under either option. Although you can be awarded costs if you’re ultimately successful, the amount you get may be significantly less than what you’ve spent, especially if you go the informal route.
Take the recent case of an Ontario couple who, after being mostly successful in their 2019 tax appeal, asked the Tax Court to award them $30,000 in legal costs, which represented only 65 per cent of their total legal bill, plus disbursements of $2,265. The Crown took the position that the costs to be awarded should be limited to $1,185 “in accordance with the tariff.”
Under the Tax Court rules governing the informal procedure, the “tariff” provides a flat rate of $185 to prepare a notice of appeal, $250 to prepare for a hearing, and $375 for each half-day spent at trial. In this case, the trial lasted a full day, so the Crown offered $1,185 in costs.
Before reviewing the recent decision on costs, let’s go back to the original case, which was heard in a London, Ont., courtroom in January 2019, and began with an award-winning chili recipe.
In 2007, an Ontario woman entered her husband into a national chili recipe contest without his knowledge. The top 10 recipes were selected and the top three received a trip to Toronto to participate in a live competition. The husband won the contest, leading the couple to discuss how they could create a side business that would ultimately be profitable when they retired.
Rather than open a restaurant or food truck, they launched a plan to build up a brand that would eventually derive income from a variety of sources, including: being a media celebrity host, brand ambassador, event coordinator consultant and/or celebrity chef, as well as book deals, product endorsements, having a product line and catering special events.
From 2008 through 2014, the couple racked up business losses totalling $345,000 in pursuing their venture. The issue in the tax case was whether the couple was entitled to claim these business losses against their full-time employment income. The CRA denied the business losses on the basis that the activities carried out by the taxpayers did not actually constitute a business.
The Tax Court, however, found that although there was, indeed, a personal element to the taxpayers’ activities, the evidence clearly showed that by 2012 they were carrying on a business.
The court ruled that the taxpayers couldn’t be reassessed for the 2008 through 2011 tax years as the years were “statute-barred.” The taxpayers were partially reassessed for the 2012 to 2014 taxation years, with the net effect being a reduction of the business’ losses in those years by around 30 per cent.
The judge rendered his decision in February 2020, saying that “if the parties are unable to agree on costs … they may make submissions in writing to the court.” And that’s exactly what they did.
In their submissions, the couple attempted to argue that the judge should “not (be) bound by the tariff and … should follow a number of decisions relating to the general procedure … (which) indicate that the court has a significant degree of leeway in fixing costs.” The couple felt that they “should not be left to bear so much of the costs of litigation where they have been successful to the degree that they have.”
The couple also tried to argue that if the judge felt bound by the tariff limits, given that there were seven taxation years involved in the appeal and two taxpayers, he could perhaps award the full tariff amounts 14 times. “That is not the way the tariff works,” the judge wrote. But he was willing to increase the amount awarded somewhat.
In the judge’s ruling released in May, he noted that since there were two taxpayers, two Notices of Appeal had to be filed, which amounted to two times $185 or $370. The actual hearing in court under the tariff amounted to $750 for the day and $250 for the preparation of it, for a total of $1,000. The judge allowed an additional $1,000 each to recognize the taxpayers’ written arguments and submissions regarding costs, which was “the equivalent of hearings on two more sitting days,” for a total of $2,000 for all the written submissions.
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Add in the disbursements of $2,265 (which were never in dispute), the total fees and disbursements amounted to $5,635. The judge rounded up to $6,000, and awarded the husband and wife each a $3,000 lump sum amount covering both fees and disbursements — a far cry from the $30,000 (plus disbursements) they were claiming.
The judge explained that the scheme of the informal procedure is quite different from the general procedure and he cannot “simply ignore the tariff of costs set out in (the informal procedure rules.) … (I)n many circumstances, successful appellants may be left having to pay a lot of costs. However … the role of the courts is to apply the law and not to make it.”
Jamie Golombek, CPA, CA, CFP, CLU, TEP is the managing director, Tax & Estate Planning with CIBC Private Wealth Management in Toronto.