Tax Court judges have great discretion in awarding costs but the award must relate to costs of the actual Tax Court proceeding. In rare cases, costs for the audit and objection stages could be allowed, says the Court of Appeal, if those stages unduly prolonged the Tax Court proceeding. That was not the case here.
“[13] Awards of costs lie at the heart of a trial judge’s discretion. Discretionary costs awards should only be set aside if the judge made an error in principle, or if the award is plainly wrong: …
“[18] It is well-settled law that in exceptional circumstances conduct that occurs prior to a proceeding may be taken into account if that conduct unduly and unnecessarily prolongs the proceeding. See, for example: Merchant v. Canada, 2001 FCA 19 (CanLII), 267 N.R. 186, at paragraph 7; Canada v. Landry, 2010 FCA 135 (CanLII), 404 N.R. 255, at paragraph [24].
“[19] Thus, in Merchant conduct at the audit and objection stages was relevant to the assessment of costs in the Tax Court because it impacted on the manner in which the trial proceeded. In the trial Judge’s view, a trial that should have lasted no more than one day took seven days: Merchant v. Canada,[1998] T.C.J No. 278, 98 DTC 1734, at paragraph 59.
“[21] Rule 147 is set out in the appendix to these reasons. Briefly, Rule 147 allows the Tax Court to determine the amount of the costs of all parties to a“proceeding” (Rule 147(1)). “Proceeding” is a defined term. In Rule 2 it is defined to mean “an appeal or reference”.
“[22] Read in the context of the definition of “proceeding”, the Judge erred in principle in allowing an amount incurred in respect of costs unrelated to the appeal which were incurred at the objection stage. Those expenses, by definition, were not incurred as part of the appeal “proceeding”. The error is made manifest when one considers that it resulted in an award of more than twice as much as Mrs. Martin’s actual counsel fees for preparing, filing and pursuing her notice of appeal through to judgment in the Tax Court …