Docket: 2017-4032(IT)G

BETWEEN:

MICHAEL KALLIS,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeal heard on September 17, 2020, at Calgary, Alberta Written submissions on s. 98(3) of the Income Tax Act filed on October 1, 2020 (Appellant’s) and October 8, 2020 (Respondent’s)

Before: The Honourable Justice Susan Wong

Appearances:

 

Counsel for the Appellant:	Matthew Clark
Counsel for the Respondent:	Valerie Meier

ORDER

The Respondent is awarded costs in the amount of $13,639.58, plus reasonable disbursements and applicable taxes.

Signed at Ottawa, Canada, this 25th day of April 2022.

“Susan Wong”

 

Citation: 2022 TCC 47

Date: April 25, 2022

Docket: 2017-4032(IT)G

BETWEEN:

MICHAEL KALLIS,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

 

REASONS FOR ORDER ON COSTS

Wong J.

Introduction/Overview

[1] In my September 1, 2021 judgment dismissing the appeal with costs to the respondent, I gave the parties time to reach an agreement on costs failing which they were directed to file written submissions for my consideration. I also directed that if I did not hear from the parties with respect to costs, costs would be awarded to the respondent in accordance with Tariff B. [1]

[2] The parties did not reach an agreement as to costs so they have provided written submissions. The respondent proposes: (1) tariff costs up to the date on which she served a formal settlement offer, (2) tariff costs after judgment was issued, and (3) substantial indemnity costs [2] from the day after service of a settlement offer to the date that judgment was issued. The appellant disagrees and says that tariff costs are appropriate.

Background and timeline of events

[3] The one-day hearing took place on September 17, 2020 and was a Class C proceeding. The main issue was whether the appellant was in the business of lending money or whether he was an investor from 2010 to 2014, which in turn determined whether his losses were on account of income or capital in those years. There was also a secondary issue of whether legal fees incurred by him to try to recover monies were deductible.

[4] The respondent served a written settlement offer on June 10, 2020. The offer proposed that with respect to the secondary issue, the appellant be allowed a capital loss of $25,000 which was an allowable capital loss of $12,500. Before the respondent served her offer, the parties completed their pre-litigation steps including a written examination of the appellant, the respondent’s request to admit, and the appellant’s responses to the request.

[5] The appellant agrees that the timing requirements under subsection 147(3.3) of the Tax Court of Canada Rules (General Procedure) have been met with respect to the written offer.

Respondent’s claim for costs

[6] The respondent’s claim for Tariff B costs [3] is broken down as follows:

1.(1)(a)	For all services in a proceeding prior to examination for discovery not otherwise listed	$700.00
1.(1)(b)	For a discovery of documents or inspection of property	$200.00
1.(1)(f)	For a notice to admit	$500.00
1.(1)(i)	For all services after judgment	$450.00

[7] The respondent also seeks $700 under heading 1.(1)(c) for the preparation of their cost submissions, as being comparable to a motion. Therefore, the respondent seeks tariff costs totalling $2,550.

[8] With respect to the substantial indemnity portion of the respondent’s claim for costs, the respondent seeks $11,089.58 [4] based on the following:

1. Respondent counsel’s recorded time of 56.73 hours (being 63.68 hours less 6.95 hours for travel) from July 7, 2020 to October 8, 2020; [5]

2. Respondent counsel’s hourly rate of $244.35, based on the Treasury Board of Canada’s published hourly rate for LP-2 level counsel in the 2020-21 fiscal year; [6] and

3. 80 percent of (56.73 hours x $244.35) being $11,089.58. [7]

Legal context

[9] Subsections 147(3.1) and (3.2) are mirror images with respect to substantial indemnity and differ only with respect to which party makes the triggering offer. In the present situation where the respondent made the offer, subsection 3.2 applies. The specific wording is important and reads as follows:

147. (3.2) Unless otherwise ordered by the Court, if a respondent makes an offer of settlement and the appellant obtains a judgment as favourable as or less favourable than the terms of the offer of settlement or fails to obtain judgment, the respondent is entitled to party and party costs to the date of service of the offer and substantial indemnity costs after that date, as determined by the Court, plus reasonable disbursements and applicable taxes.

[10] Therefore, subsection 147(3.2) creates a default entitlement to substantial indemnity while preserving the Court’s discretionary power. The purpose is to encourage settlement at an early stage where possible by virtue of the default entitlement, which removes the usual impediments to (or conditions for) an award of enhanced costs. [8] The default entitlement must be balanced against the Court’s general discretion to fashion a just and appropriate cost award suited for the particular circumstances of an individual case. [9] The discretion to override the default entitlement should be made on a principled basis and the default entitlement should not be taken away lightly. [10]

Discussion

[11] With respect to the income-versus-capital issue, the respondent took issue with the characterization of the outlays but did not dispute that they were incurred. On the other hand, with respect to the secondary issue of legal fees, the reply to the notice of appeal asserted that the appellant had not proven he personally incurred the legal fees but that if he did, they were a capital outlay. [11]

[12] At the hearing, the respondent continued to take issue with respect to whether the legal fees were incurred, noting in cross-examination [12] and closing argument that the appellant’s evidence consisted of a bank draft paid to the trustee in bankruptcy. Although the secondary issue was worth significantly less than the primary issue, it was a live issue for both parties. The respondent’s offer proposed to concede that the legal fees were incurred (and were a capital outlay) while at the hearing, the respondent did not concede that they were incurred. Therefore, the respondent’s offer cannot be viewed as an offer to capitulate, as asserted by the appellant.

[13] I can appreciate how the appellant may view the relative magnitude of the respondent’s offer as being equivalent to an offer to capitulate. However, both parties chose to take an all-or-nothing approach with respect to the primary issue of income versus capital, which was their prerogative. I can find no principled basis to override the respondent’s default entitlement to substantial indemnity in the circumstances.

Conclusion

[14] The respondent is entitled to costs totalling $13,639.58, comprised of tariff costs in the amount of $2,550 and substantial indemnity costs in the amount of $11,089.58, plus reasonable disbursements and applicable taxes.

Signed at Ottawa, Canada, this 25th day of April 2022.

“Susan Wong”

 

CITATION:	2022 TCC 47
COURT FILE NO.:	2017-4032(IT)G
STYLE OF CAUSE:	MICHAEL KALLIS AND THE QUEEN
PLACE OF HEARING:	Calgary, Alberta
DATE OF HEARING:	September 17, 2020 Written submissions on s. 98(3) of the Income Tax Act filed on October 1, 2020 (Appellant’s) and October 8, 2020 (Respondent’s)
REASONS FOR ORDER BY:	The Honourable Justice Susan Wong
DATE OF ORDER:	April 25, 2022

APPEARANCES:

Counsel for the Appellant:	Matthew Clark
Counsel for the Respondent:	Valerie Meier

COUNSEL OF RECORD:

For the Appellant:

Name:	Matthew Clark
Firm:	Matthew Clark Professional Corporation Calgary, Alberta
For the Respondent:	François Daigle Deputy Attorney General of Canada Ottawa, Canada