CRA’s Conduct Slammed For Unnecessarily Prolonging Tax Litigation, Increasing Costs: A Canadian Tax Lawyer Analyzes Canada V. Marine Atlantic

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

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 CRA 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.

For Toronto tax lawyers, taxpayers and government litigants alike, the case serves as an important reminder that the conduct of litigation can be just as important as the legal arguments themselves.

Pro Tax Tip: Do Not Ignore Delays or Unfair Conduct During a Tax Dispute

If the CRA delays making important admissions, changes positions late in the process, or forces unnecessary work during a tax dispute, a taxpayer should carefully document the additional time, expense, and prejudice caused by that conduct. In Canada v. Marine Atlantic, the Court recognized that unnecessary delays and litigation tactics can justify enhanced costs against the government. Taxpayers should not assume that procedural unfairness is simply part of the process. Courts may intervene where one side’s conduct unnecessarily increases legal costs or prolongs litigation.

Our top Canadian tax lawyers can help you by preserving evidence of delays, documenting unnecessary expenses, raising procedural objections early, and seeking enhanced costs where unfair conduct has materially affected the case.

Frequently Asked Questions (FAQs):

What Factors Does the Tax Court Consider When Awarding Costs?

The Tax Court has broad discretion when deciding costs. Under the Tax Court of Canada Rules, the Court may consider several factors, including the result of the case, the amount of money involved, the importance and complexity of the issues, the volume of work required, and whether either party unnecessarily delayed or prolonged the proceedings. The Court may also examine whether a party refused to admit facts that should have been admitted or acted improperly during litigation. In Canada v. Marine Atlantic, the Court placed significant weight on the CRA’s conduct, especially delays and the late filing of evidence that increased the cost and length of the case.

Are Costs Awarded to Fully Compensate a Party for Actual Legal Expenses?

No. The Court confirmed that costs awards are generally not intended to fully reimburse all legal expenses incurred by a successful party. Instead, costs are meant to provide partial compensation and a contribution toward the expenses of litigation. The Court explained that the purpose of costs is usually compensatory rather than punitive. However, enhanced costs may be awarded where one party’s conduct unnecessarily increases the duration or expense of the litigation. In Canada v. Marine Atlantic, the Court upheld an award covering 60% of legal fees because the CRA’s conduct caused additional delay and unnecessary costs.

Do Appellate Courts Use the Same Standard of Review for Costs Appeals as They Do for Judgment Appeals?

Generally, yes; except that cost decisions are highly discretionary, so appellate courts usually give significant deference to the Tax Court’s findings. However, like judgment appeals, Legal questions are reviewed for correctness, and factual findings and discretionary decisions are reviewed using the stricter “palpable and overriding error” standard. This means the appeal court will only interfere if there is a clear and serious mistake affecting the outcome. In Canada v. Marine Atlantic, the Federal Court of Appeal emphasized that it could not simply substitute its own view for the Tax Court’s exercise of discretion unless such a major error was proven.

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.