Tax Court of Canada Judgments

Date:20020422

Docket:97-3264-IT-G

BETWEEN:

PETER M. BROWN,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasonsfor Costs

[1]            At the conclusion of my reasons for judgment in the appeals of Peter M. Brown from income tax assessments for the 1993, 1994, 1995 and 1996 taxation years, dated November 15, 2001 and judgment, dated March 13, 2002, I directed counsel for the litigants to make submissions with respect to costs. Counsel have forwarded their written submissions.

[2]            The main issue in these appeals was whether the appellant is entitled to deduct his share of purported business losses from a partnership as well as interest expense on money borrowed to acquire the partnership interest. To a large extent the business loss was the result of the partnership claiming capital cost allowance on a Class 12 property, computer software. At least eight matters had to be considered before determining the main issue in these appeals: a) whether the partnership acquired computer programs and, if so, b) were the assets acquired for the purpose of earning income from a business; c) did the partnership carry on business with a reasonable expectation of profit; d) did the partnership and the vendor of the computer programs deal at arm's length and, if not, e) what was the fair market value of the computer programs; f) whether what I referred to in my reasons as the Acquisition Note was a contingent liability; g) was the appellant deemed to be a limited partner and, if so, what was his "at-risk amount" (para. 96(2.4)(b) of the Income Tax Act); and h) whether the computer programs were "available for use" at the end of 1993 (s.s. 13(25) and (27) of the Act).[1]

[3]            These appeals were heard for a total of 16 days over the course of a year, and in four cities: Vancouver, Winnipeg, Toronto and Ottawa.

[4]            Each party is of the view it was the successful party in the appeals.

[5]            The relevant portions of section 147 of the Tax Court of Canada Rules (General Procedure) ("Rules") relating to the award of costs provide as follows:

(1)      Subject to the provisions of the Act, the Court shall have full discretionary power over payment of the costs of all parties involved in any proceeding, the amount and allocation of those costs and determining the persons by whom they are to be paid.

(2)      Costs may be awarded to or against the Crown.

(3)      In exercising its discretionary power pursuant to subsection (1) the Court may consider,

(a)      the result of the proceeding,

(b)      the amounts in issue,

(c)      the importance of the issues,

(d)       any offer of settlement made in writing,

(e)      the volume of work,

(f)       the complexity of the issues,

(g)      the conduct of any party that tended to shorten or to lengthen unnecessarily the duration of the proceeding,

. . . . .

(j)       any other matter relevant to the question of costs.

. . . . .

(5)      Notwithstanding any other provision in these rules, the Court has the discretionary power,

(a)         to award or refuse costs in respect of a particular issue or part of a proceeding, . . .

. . . . .

[6]            The appellant was successful on issues a), b), c), and h). The respondent was successful on issues d), e), f) and g). There is no doubt in my mind that for practical purposes the respondent was the successful party. The issues in which the respondent was successful trumped those issues in which the appellant was successful.

[7]            The length of the trial was approximately evenly divided between non-expert testimony and expert testimony. The non-expert evidence included, among other matters, whether the partnership carried on a business, and, if so, whether it was carried on with a reasonable expectation of profit ("REOP"), whether the parties were at arm's length and whether certain debt was contingent or not. A substantial portion of the non-expert evidence related to the REOP. The expert evidence related to the valuation of the computer programs as at the end of 1993.

[8]            Appellant's counsel, in his submissions as to costs, states that his client succeeded on all pertinent issues except for valuation and that success on valuation was divided. The issues of contingent liability and "at risk" amount became moot once the Court determined value. Counsel suggests, therefore, that the parties bear their own costs with regard to experts' fees and expenses.

[9]            In her submissions, respondent's counsel advises that the respondent made a written settlement offer on March 25, 1999 on the basis that the cost of the computer programs was US$3.3 million, or $4,389,000 in Canadian funds. This amount, counsel writes, "essentially represented the 40% cash portion for the purchase of the software". This offer of settlement was made before the preparation and filing of expert reports with the Court. Thus, in counsel's view, the need for a trial and "the tremendous expense of expert witnesses would have been obviated".

[10]          The appellant rejected the respondent's offer to settle, appellant's counsel writes, because "there was no mention of any deduction for the interest paid on the Promissory Note and, although the suggested fair market value of the software was marginally higher than that found by the Court, by leaving the income from the partnership in the appellant's income and denying the interest expense, the result of this offer would have been slightly worse than the result decided by this Court".

[11]          The appellant rejected the respondent's offer to settle by June 11, 1999, after the exchange of experts' reports.

[12]          The appellant also made an offer of settlement on January 8, 2000: "that if the Crown permitted a full deduction as claimed in the 1993 and 1994 taxation years, the appellant would include at capital gains rates (then 75%) the sum of US$8,000 per unit in two phases in 2001 and 2003. This result, when coupled with the continued devaluation of the Canadian dollar against the U.S. dollar ... would have resulted in an income inclusion for the Appellant in the 2000 taxation year of more than initially claimed in respect of the promissory note". The differences between the two proposals, according to appellant's counsel, is that interest on the outstanding taxes due from 1993 and 1994, which would be payable under the respondent's settlement offer, would have been avoided under the appellant's offer". Respondent counsel states, among other things, that if the appellant's offer had been accepted, the appellant would have an eight year tax deferral rather than a ten year tax deferral on a portion of the amount involved, "hardly a concession". The respondent rejected the offer to settle.

[13]          By January 8, 2000 I had heard most of the non-expert evidence. Valuation reports, of course, had been prepared and filed and expenses incurred.

[14]          Subsection 147(1) of the Rules give me discretion over payment of the costs of all parties in an appeal. In exercising this discretion I may consider any offer of settlement made in writing: s.s. 147(3). Both parties made written offers of settlement. The appellant's offer depended on events taking place at least several years after the years under appeal; the respondent's rejection of the offer was not surprising. Similarly, the appellant's rejection of the respondent's offer to settle was not unreasonable since it left out a vital component in issue, that of interest. I agree with appellant's counsel that a reason for enumerating a written settlement offer as a factor to consider in an award of costs is to discourage unreasonable rejection of a settlement offer. I do not give any weight to the fact that the offers to settle were rejected.

[15]          In my reasons for judgment I did not fix a value for the computer programs as at December 31, 1993 since, at the date of my reasons for judgment, I thought it may not be necessary to do so in view of my other findings. In my review and conclusion of the expert evidence, I set out certain guidelines to serve as a basis for a future valuation. I stated that if the parties required a valuation the guidelines set out in my reasons would serve as the basis of any valuation.

[16]          The parties required a valuation. I directed the respondent's valuator, Mr. Rosen, to prepare the valuation based on my reasons. Mr. Rosen required some clarification and I issued directions on how the valuation would proceed. Applying the guidelines and additional information gathered during conference calls with counsel and me, Mr. Rosen fixed the value of the computer program as at December 31, 1993 to be $4,129,000 and, after review by counsel, judgment was issued accordingly. Respondent is entitled to Mr. Rosen's costs (and expenses) incurred to perform these services.

[17]          Valuation reports should serve to assist a trial judge to determine the proper valuation. A valuator should not advance his client's position. Once the author of a valuation report is effectively examined and cross-examined the strengths and weaknesses of the report are highlighted; the puffery and hyperbole hopefully disappear and the judge can appreciate the quality of the valuation and give the valuation its due weight. At the end of the day I did not give more weight to the report prepared by Messrs. Wise and Michelin or to the report prepared by Mr. Rosen. There were serious flaws in each report yet, taken together, the reports - and the testimony of their authors, and their examinations in chief and cross-examinations - did help me to develop guidelines to serve as the basis of the valuation.

[18]          In the case at bar I adopted and rejected principles and conclusions of Messrs. Wise, Michelin and Rosen. Unfortunately, Mr. Rosen's valuation relied in great part on a technical report prepared by Mr. Lam. Much of Mr. Lam's report was of value to me. However, he erred in assuming the computer software was written in C language rather than in assembler and this error distorted the development costs of the computer programs, adversely affecting Mr. Rosen's original valuation. Mr. Rosen also valued individual games, rather than a pool of games. Therefore, I am of the view that the appellant should not have to pay costs of Mr. Rosen's and Mr. Lam's reports prepared for the trial in these appeals.

[19]          Costs shall be in favor of the respondent. Each party asked for two counsel fees; I agree that these appeals warranted two counsel. The respondent, as the successful party, is entitled to costs for two counsel. The respondent is also entitled to Mr. Rosen's costs after November 15, 2001, the date of my reasons for judgment.

[20]          After receipt of submissions by the Court, one of the appellant's counsel advised the Court that, according to his information, several other appeals "which relate to an investment in a Class 12 partnership known as Basic Software are being held in abeyance" along with other objections with respect to the same matter. He estimated the number of appeals and objections may exceed 3,000. He submitted that since the appeals at bar are the first appeals to be heard by a Court dealing with Class 12 partnership issues, these appeals should be considered a "test" case and the Crown absorb all costs. I cannot agree. This was not a test case. Simply because a provision of the Act is considered by a Court for the first time and may affect other taxpayers does not colour that appeal with the character of a test case. The normal income tax appeal - which this appeal was - is not a matter of public policy (as in Lachine General Hospital Corp. v. A.G. of Quebec)[2] or touch on constitutional principles and in the public interest (as in Singh v. The Queen)[3]. It is simply a dispute between a taxpayer and the Crown as to whether the taxpayer was properly assessed tax. The principle purpose of these appeals was to settle a dispute between the parties, not necessarily to settle a point of law.[4] That the decision of a Court in a tax appeal may help settle other assessments and reduce the Crown's expenses are not reasons for the Crown to absorb costs of the appeal.

Signed at Vancouver, British Columbia, this 22nd day of April 2002.

"Gerald J. Rip"

J.T.C.C.

97-3264(IT)G

BETWEEN:

PETER M. BROWN,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appearances

Counsel for the appellant:           Craig C. Sturrock

                                                          David R. Davies

Counsel for the respondent:                 D. Graham Reynolds

Lisa Macdonell

ORDER (AS TO COSTS)

Whereas reasons for judgment and judgment in the appellant's appeals from income by assessments for the 1993, 1994, 1995 and 1996 taxation years were issued by this Court on November 15, 2001 and March 13, 2002, respectively;

And whereas costs of these appeals were to be determined upon submissions from the parties;

And having considered the submissions of the parties;

          It is ordered that costs in these appeals shall be awarded to the respondent provided, however, that:

a)       the costs awarded to the respondent shall not include the costs of Messrs. Rosen and Lam for services provided to the respondent in the appeals prior to date of reasons for judgment;

b)      the respondent is entitled to costs of Mr. Rosen for his services after date of reasons for judgment; and

c)      the costs awarded to the respondent include costs for two counsel.

Signed at Vancouver, British Columbia, this 22nd day of April 2002.

J.T.C.C.

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