Usually these cost awards are much less than the successful party's actual legal costs. (The courts don't want to make the awards so large that people are unfairly discouraged from pursuing or defending a claim.) To help the goal of encouraging settlements, though, courts will give extra costs to a party who makes an offer to settle that the other side refuses, if, at the end of trial, the losing party would have been better off accepting the offer. The enhanced award is a penalty for refusing a good offer.
Despite these general principles, tax cases are a little different. In tax cases,
“'the Minister has a statutory duty to assess the amount of tax payable on the [facts] as he finds them in accordance with the law as he understands it.' ... 'it follows that he cannot assess for some amount designed to implement a compromise settlement.'” (Para. 23.)
In this case, "the issue was whether all of the share bonuses were deductible or whether none of them were. There was no principled basis on which the Minister could have accepted that the cash bonuses were non-deductible in exchange for treating the share bonuses as deductible." (Para. 21.) So, the CRA couldn't accept the taxpayer's offer and so the judge concluded it would be unfair to make the CRA pay extra costs in this case, despite the CRA's having refused an offer that turned out, in the end, to be better than the Tax Court judge ordered. The FCA agreed with the TCC judge's view.
One interesting point is that the FCA reconsidered its rule that CRA cannot make settlement offers and, again, the FCA said it could not. Parliament must change the laws to allow this. In saying so, the FCA noted that Ontario had just such a compromise rule in s. 109 of its old Corporations Tax Act. (There seems to be no similar rule, though, under the new Taxation Act, 2007.)
Another interesting feature of this case is the FCA's affirmation of a trial judge's discretion over costs, even if there is an offer to settle. "Indeed, awarding costs is a highly discretionary power which is necessarily subject to deference." (Para. 14.) "'An appellate court must thus defer to a Tax Court judge’s exercise of discretion in determining costs and should only intervene if the judge considered irrelevant factors, failed to consider relevant factors, or reached an unreasonable conclusion.'" (Para. 13.) The reason seems to be this: Judges see the parties in action; they see the amount of preparation and the attitude of counsel -- whether cooperative or belligerent. They can measure work done to the complexity and novelty of the case. Leaving judges discretion over cost awards allows "judges to fashion just and appropriate cost awards, suitable to the particular circumstances of individual cases." (Para. 31.)
See Transalta Corporation v. Canada, (2013 FCA Blais CJ)