The taxpayer had a s. 163(2) penalty vacated in the Tax Court on the basis that her involvement in the false amended return filed by her was completely passive. The Tax Court then awarded the taxpayer partial indemnity costs equal to 75% of her actual legal costs and 100% of disbursements.
Pelletier JA found that the Tax Court had erred in indicating that “for consistency purposes …the 50% to 75% range of solicitor-client costs should be used unless there are exceptional circumstances” when no Tax Court authorities were referred to in support of this range.
Regarding Rule 147(3)(d), the Tax Court noted that the taxpayer’s counsel had offered to settle on the basis that the s. 163(2) penalty would be vacated and replaced by a $2500 penalty under s. 162(7)(b). In reversing the Tax Court’s finding that this settlement offer was a factor tending to increase the costs award in the taxpayer’s favour, Pelletier JA found that s. 162(7)(b) should be narrowly construed in light of the noscitur a sociis principle and “would not apply to the case of returns that were filed when required but were negligently prepared” (para. 53). Accordingly, on the basis of the Galway principle, the “settlement proposal was not one which the Minister could have accepted as the lower penalty under paragraph 162(7)(b) was not available” (para. 53).
Regarding a proposal made in the alternative under the settlement offer that the Minister waive the penalty under s. 220(3.1), Pelletier JA stated (at para. 64) that the “principle in Galway rests on the Minister’s view of the facts and the law, not on what the Minister’s view might have been.” Since at the time of the offer, the Crown “remained convinced that she had acted in a grossly negligent way in relation to false statements in her income tax return” (para. 63), the taxpayer’s offer was not one that the Crown could accept. Instead, a waiver of the penalty under s. 220(3.1) “could only be based on the respondent’s personal circumstances” (para. 67).
Since the settlement offer could not have been accepted by the Minister in accordance with Galway, it was irrelevant to the quantum of the costs award.