What you need to know about the costs of appealing a tax decision
If you disagree with the way the taxman has assessed your return, you have the right to formally object to your assessment and, ultimately, if it remains unresolved through communication with the Canada Revenue Agency, you have the right to your proverbial day in court. But, as you are no doubt aware, going to court can be expensive, the cost often dependent on the complexity of your case and the route taken in court.
Depending on the dollar amounts involved when appealing to the Tax Court of Canada, there are two options: the “general procedure” or the “informal procedure.” Under the first, formal court procedures are followed and a lawyer must represent you. The latter, on the other hand, is beneficial when it’s not cost-effective to hire a lawyer based on the amounts involved.
Taxpayers often represent themselves under informal procedure hearings or are sometimes assisted by their accountant. The informal procedure, however, 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).
But the costs can quickly add up no matter which route you take. There are the out-of-pocket costs of hiring legal counsel or, the cost of your own time if you decide to represent yourself. If you’re ultimately successful in court, you can be awarded costs, the amount being often significantly less than what you’ve spent on a lawyer or the perceived value of your time.
The court has wide discretion when determining the amount of costs and will consider a range of factors, including the end result of the case, the amount in issue, the importance and complexity of the issues raised, the volume of work and even any conduct by either party that tended to shorten or unnecessarily lengthen the duration of the legal proceedings.
Take the recent case of an Ontario taxpayer who was victorious in Tax Court in March 2019 and yet awarded costs of just $1,000. Tax Court rules state that if you are unhappy with amount of costs you were awarded, you can apply to the court within 30 days and request that it reconsider. That’s exactly what the taxpayer did. Last month, the taxpayer made written submissions, saying the $1,000 he was awarded was “wholly inadequate given the court’s finding that he had gone through ‘a long and frustrating battle’ with the CRA.”
The taxpayer’s troubles began in 2006, when he made an RRSP contribution of $43,000, which was significantly more than his RRSP deduction limit of about $2,700. This resulted in a significant RRSP overcontribution, which began to attract an overcontribution penalty tax of one per cent per month.
The taxpayer “made some very bad investment decisions” and the entire $43,000 was invested in securities that quickly became worthless. The result was that the taxpayer was unable to withdraw the excess overcontribution from his RRSP, which continued to attract the penalty tax for nearly a decade. During this time, the taxpayer was required to file annual T1-OVP information returns with the CRA to report the overcontribution tax. His failure to file these annual returns led to both significant arrears interest and failure-to-file penalties.
The taxpayer applied to the CRA under the taxpayer relief provisions to have his overcontribution tax, interest and penalties, totalling some $38,000, forgiven. In June 2015, the CRA accepted his application and waived the taxes, interest and penalties.
With the matter resolved, why did the taxpayer end up in court?
It turns out that the taxpayer proceeded to deduct these overcontributions from his income over the next decade as new RRSP contribution room opened up. The CRA argued that it would be “unfair” for the court to allow the taxpayer to reduce his taxable income over these years having never had to pay tax on the excess contributions.
But the court in March 2019 ruled in the taxpayer’s favour and allowed his RRSP deductions. The court also awarded costs of $1,000 against the CRA, finding that “it had not articulated a proper legal position and that, more importantly, it had failed to provide an accurate accounting of the (taxpayer’s) RRSP contributions over time, despite the court’s request.”
In April 2019, the taxpayer applied to the court seeking “an increase (in costs) to reflect the inordinate amount of time spent trying to resolve the various issues relating to his RRSP account.” The taxpayer was “extremely critical of the way that CRA has handled this matter and feels that as a result of their alleged incompetence, he has spent in excess of 200 hours ‘since 2013’ when the matter was first raised by CRA. At an assumed rate of $250 per hour which he might have otherwise paid to a junior lawyer, according to his argument, he calculates that his lost time can be quantified at about $50,000.”
The taxpayer’s case was heard under the informal procedure, where the well-established rule is not to award costs or to do so only in exceptional circumstances. Even if costs are awarded, they are limited to $810 under Tax Court rules: $185 for the preparation of a notice of appeal, $250 for preparing for a hearing and $375 for each half day spent at trial. In addition, costs are generally only awarded where legal counsel represents a litigant.
As a result, the judge concluded that the award of $1,000 “was exceptional in the context of an appeal under the Informal Procedure.” The judge found that the taxpayer “is no different from any other taxpayer who seeks to have his day in court, without legal representation. Win or lose, that taxpayer must necessarily spend large amounts of time to be able to explain the underlying facts and articulate the legal position relied upon.”