CRA’s conduct slammed for unnecessarily prolonging tax litigation, increasing costs

Overview: When the CRA’s Conduct Increases the Cost of Tax Litigation

David J Rotfleisch, CPA, JD is the founding tax lawyer of Taxpage.com and Rotfleisch & Samulovitch P.C., a Toronto-based boutique tax law corporate law firm.

In Canada v. Marine Atlantic, the Federal Court of Appeal considered an important issue about court costs, fairness in litigation, and the conduct expected from the Canada Revenue Agency during tax disputes. The decision in Canada v. Marine Atlantic is significant because it confirms that courts may order substantial enhanced costs where one party, such as but not necessarily, the CRA, unnecessarily increases the expense and length of litigation through improper conduct.

Backstory of the Dispute in Canada v. Marine Atlantic

Marine Atlantic is a federal Crown corporation that operates ferry services between Newfoundland and Labrador and Nova Scotia. Some of the services it provided were taxable under the Excise Tax Act, while others were exempt from GST/HST. Because of this mixed system, Marine Atlantic had to create a method for determining how much GST/HST it could recover through input tax credits.

Marine Atlantic developed a measurement-based allocation formula using the physical areas of its vessels. Certain areas, such as passenger cabins and restaurants, were treated as taxable-use areas, while shared spaces were treated as common areas. The CRA disagreed with parts of this approach and argued that some sections of the ferries and certain fuel uses related mainly to exempt activities.

The Tax Court eventually ruled entirely in favour of Marine Atlantic. After winning the main tax appeal, Marine Atlantic sought enhanced legal costs because of the CRA’s conduct during the litigation.

Why the Costs Award Became Controversial in Canada v. Marine Atlantic

Normally, a successful party in litigation receives only partial compensation for legal expenses. Canadian courts generally do not award full reimbursement. However, courts may increase costs where one party behaves improperly or causes unnecessary delay and expense.

The Tax Court awarded Marine Atlantic 60% of its legal fees. The Court based this decision mainly on two forms of conduct by the CRA.

First, the CRA delayed accepting findings from an earlier case called BC Ferries, even though the parties had agreed to be bound by that decision on several common issues. Despite repeated requests from Marine Atlantic, the CRA waited years before conceding those points. This forced Marine Atlantic to spend substantial time and money preparing evidence that later became unnecessary.

Second, the CRA attempted to introduce an affidavit late in the hearing process. The affidavit contained new documents and evidence that had not been disclosed earlier during discovery. The Tax Court described this as a “trial by ambush” because Marine Atlantic had already closed its evidence when the affidavit appeared. The late filing caused delays, additional submissions, and extra hearing days.

The CRA appealed the costs award to the Federal Court of Appeal.

The Federal Court of Appeal’s Decision in Canada v. Marine Atlantic

The Federal Court of Appeal dismissed the CRA’s appeal and upheld the enhanced costs award.

The Court emphasized that decisions about costs are highly discretionary. A court may consider many factors, including whether a party unnecessarily prolonged proceedings or acted improperly during litigation.

The Court rejected the CRA’s argument that the Tax Court improperly punished it for using affidavit evidence. Instead, the Court found that the Tax Court focused specifically on the CRA’s conduct in this case, especially the last-minute attempt to introduce important evidence after the evidentiary stage had effectively closed.

Importantly, the Federal Court of Appeal accepted that deterrence can be a legitimate purpose of a costs award. The Court explained that enhanced costs may discourage parties from repeating litigation conduct that wastes time and increases expenses unnecessarily.

The Court also upheld the finding that the CRA had agreed to be bound by the BC Ferries decision. Because the CRA delayed acknowledging those findings, Marine Atlantic was forced to continue expensive work that ultimately served little purpose.

Finally, the Court rejected the argument that the Tax Court needed to compare the case to many previous costs decisions before awarding 60% of legal fees. The Court stated that while earlier cases can provide guidance, there is no strict rule requiring detailed comparisons in every situation.

Why the Decision in Canada v. Marine Atlantic Matters

This case sends a strong message about fairness and efficiency in litigation. Courts expect parties, especially government parties with significant resources, to conduct litigation responsibly and transparently.

The decision is particularly important because it confirms that procedural conduct matters. A party may lose credibility and face substantial financial consequences where litigation tactics unnecessarily prolong proceedings or create unfair surprise for the opposing side.

The judgment also reinforces the importance of disclosure obligations. Modern litigation depends heavily on fairness during the discovery process. When important evidence is withheld until the last minute, it undermines the orderly administration of justice and increases costs for everyone involved.

Another important aspect of the case is the Court’s discussion of deterrence. The Federal Court of Appeal clarified that enhanced costs are not necessarily punitive simply because they discourage improper conduct. Instead, they can serve the practical purpose of encouraging efficient and fair litigation practices in future cases.

Bottom Line: The Real Cost of Delays and Unfair Litigation Conduct

The Federal Court of Appeal reached a practical and balanced decision in Canada v. Marine Atlantic. The Court carefully protected the broad discretion of trial judges in awarding costs while reinforcing the principle that litigation must be conducted fairly and efficiently.

By upholding the enhanced costs award, the Court recognized that unnecessary delays, late disclosure of evidence, and tactical litigation conduct can impose major financial burdens on opposing parties. The judgment therefore promotes accountability in tax litigation and strengthens confidence in the fairness of the judicial process.

The case serves as an important reminder that the conduct of litigation can be just as important as the legal arguments themselves.

David J Rotfleisch, CPA, JD is the founding tax lawyer of Taxpage.com and Rotfleisch & Samulovitch P.C., a Toronto-based boutique tax law corporate law firm and is a Certified Specialist in Taxation Law who has completed the CICA in-depth tax planning course. He appears regularly in print, radio and TV and blogs extensively.  

With over 30 years of experience as both a lawyer and chartered professional accountant, he has helped start-up businesses, cryptocurrency traders, resident and non-resident business owners and corporations with their tax planning, with will and estate planning, voluntary disclosures and tax dispute resolution including tax audit representation and tax litigation. Visit www.Taxpage.com and email David at david@taxpage.com.

Read the original article in full on Tax Law Canada. Author photo courtesy Rotfleisch & Samulovitch P.C. The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Title image: MV Atlantic Vision, Estonian ferry under charter with Marine Atlantic (Scott Alexander, Wikipedia Commons), available under Creative Commons licence 3.0.