In Mariano et al v. Her Majesty the Queen (2016 TCC 161) ("Mariano"), the Tax Court of Canada ("TCC") continued signalling its disdain for so-called "buy-low donate-high" arrangements, by holding the non-party promoter of a charitable donations scheme ("Program"), Global Learning Gift Initiative Inc. ("Promoter"), liable for costs in a lead case on behalf of Program participants. The TCC determined that the Promoter's integral role in funding and supporting the litigation warranted holding it liable for costs. This appears to be the first time the TCC has awarded costs against a non-party. The ruling has ramifications for interpreting Rule 147(1) of the Tax Court of Canada Rules (General Procedure) ("Rules") and for payment of costs by non-parties in the future.
At trial, Pizzitelli J held that Juanita Mariano and Douglas Moshurchak ("Appellants") lacked the required donative intent for their donations to qualify for a credit under subsection 118(1) of the Income Tax Act (Canada). Rather than intending to impoverish themselves through their donations, they intended to enrich themselves, thus vitiating their donative intent and disqualifying them from receiving tax credits.
The Crown was entirely successful after a 25 day trial and submitted a Bill of Costs seeking Tariff B fees of $41,075 and disbursements in the total amount of $491,136. Fortunately for the Appellants, the Crown claimed only Tariff costs. Pizzitelli J said he would have awarded costs higher than the Tariff costs based on the factors in Rules 147(3)(a) to (i.l), had the Crown sought them. The TCC also held that the five individuals who agreed to be bound by the decision ("Bound Appellants") were also liable for costs and ruled against allocating the costs instead amongst the thousands of other Program participants who were similarly assessed.
The TCC's expansive interpretation of Rule 147(1) was the most striking development. Rule 147(1) grants the TCC jurisdiction to determine the amount of costs in any proceeding and "the persons required to pay them." The TCC interpreted the "plain wording" of Rule 147(1) as granting the Court discretion to make an award against non-parties. The TCC relied on 155569 Canada Ltd. v. 248524 Alberta Ltd. (43 Alta LR (3d) 189) and Richards v. Minister of National Revenue (2005 FC 24), two cases recognizing a court's jurisdiction to award costs against a person funding an action.
The TCC found that the Promoter not only funded the appeals, but conducted them from the sidelines "if not directly from on-field." The Promoter's extensive involvement in the appeals included creating a defense fund in anticipation of a challenge by the CRA, promoting the test case, hiring the expert witnesses called on behalf of the Appellants at the hearing, paying all the legal fees of the solicitors engaged to conduct the test case and paying the costs assessed against the Appellants at the case management stage. In short, the TCC determined that the Promoter controlled all aspects of the Program and "had far more participation and influence in the action than did the Appellants themselves."
The TCC did not absolve the Appellants. Instead, Pizzitelli J held that they turned a blind eye to the nature of the Program and could not lay blame on others for the consequences that followed from participating in a sham perpetrated on the Canadian public. Based on the principle that costs awards should be compensatory and contributory, not punitive or extravagant, the TCC also noted the wide divergence among the Appellants and Bound Appellants regarding the respective amounts donated and number of years in issue. Since the charitable receipts were calculated on differing bases, allocating costs to all the parties on the same basis would be punitive to some and inadequately contributory to others. Consequently, Pizzitelli J capped the liability of the Appellants and the Bound Appellants for costs, limiting their costs on a proportionate basis, based on the ratio of their respective credits from the Program for years under appeal to the total credits claimed by all of them combined with respect to the Program for the years under appeal. Conversely, the Court put no limit on the Promoter's costs, making it jointly and severally liable for the entire cost award.
Offering a measure of comfort to taxpayers at the notice of objection stage while a lead case is pending, the TCC held that there is no basis in law for allocating costs to taxpayers simply because their dispute is at that stage, or to taxpayers at the appeals stage who did not agree to be bound by a decision. The TCC based its holding on the principle that persons who have no ability to influence the conduct of an appeal should not be liable for costs. This is a corollary to the TCC's inherent jurisdiction to hold non-parties who fund, maintain or conduct the legal action from the sidelines liable for costs. The Bound Appellants were engaged in the group appeal and were able to influence their counsel or the proceedings if they so chose, hence their exposure to an adverse cost award. Query whether the exposure to cost awards may have a chilling effect on the willingness of other tax scheme participants to come forward and be lead case appellants in the TCC.
The general rule is that cost awards can only be made against parties to the proceeding. In special circumstances, however, the court has power to award costs against a non-party, especially one who is proven to be the "real litigant". The interpretation of Rule 147(1) in this case provides a basis for the TCC to allocate costs to non-parties in an appeal. In recent years, the TCC's docket has been inundated by appeals involving aggressive or entirely untenable tax schemes, often involving thousands of taxpayers. It is reasonable for the TCC to exercise its jurisdiction to make cost awards against non-party promoters in an effort to manage its docket and put at least some of the cost of litigation back on those promoters responsible for such failed schemes. It remains to be seen whether the Promoter in this case will pay the cost award, or leave the Appellants and the Bound Appellants "holding the bag". As of August, 2016, it is unknown whether the Promoter will appeal this decision and the home page on the Promoter's website reads: "Canadians Helping Canadians" and "Happy New Year & Thank You for Your Generous Donations in 2014!"
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