Executive Summary: Key Legal and Evidentiary Issues

• The appeal turned on whether the Tax Court properly awarded Marine Atlantic enhanced costs of 60% of its legal fees following its win on two tax appeals.
• Central to the dispute was the Crown's last-minute filing of the Shimizu affidavit, which the Tax Court characterized as "a blatant attempt at trial by ambush."
• Also contested was whether the Crown had, in a 2013 agreement, agreed to be bound by the Tax Court's findings in BC Ferries, and whether its delay in acknowledging them justified enhanced costs.
• Quantum was challenged on the ground that the Tax Court failed to compare like cases before fixing costs at 60%.
• Appellate standards of review governed: the scope of the costs factors was assessed for correctness, and their application to the facts for palpable and overriding error.
• Deterrence of litigation conduct that lengthens proceedings was confirmed as a legitimate purpose of a costs award, distinct from impermissible punishment.

Facts of the case

Marine Atlantic Inc., a federal Crown corporation, operates a constitutionally mandated passenger and commercial ferry service between Newfoundland and Labrador and Nova Scotia. It sought to claim input tax credits for the GST/HST it paid on goods and services used in that business. Some of what it provided — passenger cabins, sleeper dorms and reserved seating (together, the "upgraded accommodations"), along with the sale of goods, food and beverage — were taxable supplies, while the ferry service itself was an exempt supply under the Excise Tax Act for which no input credits could be claimed. Because it made both taxable and exempt supplies, Marine Atlantic had to develop a method to allocate its costs between the two.

It calculated the allocation using the total vessel area devoted exclusively to taxable supplies, divided by the combined area used exclusively for taxable supplies and exclusively for exempt supplies, so that common areas did not have to be measured. The Crown accepted this measurement-based method as fair and reasonable for property and services other than fuel, but argued that Marine Atlantic had not applied it consistently — contending, for instance, that the ferry terminals and exterior deck area should be treated as areas used substantially for exempt supplies rather than as common areas, and that fuel used to propel the ferries related to exempt supplies. The Tax Court rejected these arguments, found the terminal facilities and exterior deck area were properly treated as common areas, held that the same allocation method could apply to fuel because propulsion fuel could not be separately measured from fuel used for electricity, heat and hot water, and — because Marine Atlantic succeeded on every issue — allowed the two tax appeals (the Merits Decision, 2023 TCC 95). It then awarded Marine Atlantic enhanced costs of 60% of its legal fees (the Costs Decision, 2024 TCC 51). The Crown appealed that costs order to the Federal Court of Appeal.

The agreement and the statutory costs framework at issue

Two sources of obligation framed the dispute. The first was a 2013 agreement between the Crown and Marine Atlantic to be bound by the Tax Court's forthcoming decision in British Columbia Ferry Services Inc. v. The Queen, 2014 TCC 305 (BC Ferries) on three common issues: whether the upgraded accommodations were used exclusively in taxable or exclusively in exempt activities; whether the vessels' infrastructure — engine rooms, crew and officers' quarters, and navigational bridge decks — formed part of the common areas or was used exclusively in exempt activity; and whether fuel used to propel the vessels was used in both activities or exclusively in exempt activity. BC Ferries, released October 14, 2014, concluded that the upgraded accommodations were used exclusively in taxable activities and that the infrastructure was part of the common areas.

The second was the Tax Court's costs discretion under the Tax Court of Canada Rules (General Procedure). Subsection 147(1) allows the Court to determine the amount and allocation of costs, while subsection 147(3) lists factors it may consider, including the result of the proceeding, the amounts in issue, the volume and complexity of the work, and — most significant here — the conduct of a party that tended to lengthen the proceeding unnecessarily. The governing jurisprudence holds that no single factor is determinative and that costs aim at compensation and contribution, not punishment.

The court's reasoning and analysis

The appeal raised three issues, all reviewed on appellate standards: defining the scope of the subsection 147(3) factors is a question of law reviewed for correctness, whereas applying those factors to the facts is a question of mixed fact and law reviewed only for palpable and overriding error.

On the Shimizu affidavit, the Crown conceded that its last-minute filing — an affidavit sworn by a CRA tax appeals case specialist, attaching ninety pages of documents not disclosed in pleadings or discovery, tendered just after Marine Atlantic had closed its evidence — had prolonged the trial, and it conceded that deterring such conduct is a legitimate purpose of a costs award. It argued, however, that the Tax Court had gone further and penalized its use of affidavits generally, pointing to the Tax Court's remarks about a "troubling trend." The Court of Appeal accepted that relying on factors extraneous to the appeal would be a reviewable legal error, but found that, on a fair reading, the award rested on the Crown's conduct in this case — the late filing the Tax Court called a "blatant attempt at trial by ambush" — and served both to compensate Marine Atlantic and to deter repetition. It cautioned that judges should refrain from airing general views on litigation trends in their reasons, but treated the Tax Court's broader observations as obiter, distinct from and not the foundation of the costs award, and rejected the claim that the award was punitive or based on extraneous factors.

On the BC Ferries delay, the Crown argued it had never actually agreed to be bound, relying on letters exchanged by counsel. The Court disagreed, drawing on the Tax Court's earlier Fuel ITCs Motion Decision (2016 TCC 46), which had interpreted the same 2013 agreement — considering not only the letters but the surrounding circumstances — and found the parties intended to be bound on all three common issues. The Crown had not appealed that decision. Given that finding, it was not a palpable and overriding error for the Tax Court to conclude that the Crown had agreed to be bound on the first two common issues, or that the Crown's maintenance of its contrary position until roughly ten months before the oral hearing, and its formal admissions only in September 2021, had forced Marine Atlantic to spend needlessly on measuring common areas that its upheld method did not require. The Crown's argument, the Court held, was really an invitation to reweigh the evidence, which an appellate court cannot do absent such an error.

On quantum, the Crown relied on Bowker for the proposition that the Tax Court had to compare like cases to justify a 60% award. The Court read Bowker as requiring only that a costs award be grounded in the Court's past practice and jurisprudence, describing reference to comparable cases as "useful guidance" rather than a mandatory step; the error in Bowker had been the fettering of discretion by adopting a contested range not specific to the Tax Court. Here the Tax Court had properly weighed the subsection 147(3) factors, and the Crown conceded that departures from the tariff have historically ranged between 10% and 60% of solicitor-client costs. Absent an extricable legal error, the quantum was reviewable only for palpable and overriding error, and the Court found nothing unprincipled in the 60% award.

Ruling and overall outcome

The Federal Court of Appeal dismissed the Crown's appeal, leaving intact the Tax Court's award of enhanced costs of 60% of Marine Atlantic's legal fees. Marine Atlantic, the respondent, was the successful party. On the appeal itself, the Court ordered costs in Marine Atlantic's favour in the all-inclusive amount of $3,020, as the parties had agreed. The underlying appeals had concerned amounts the Tax Court estimated at between $19.7 million and $21.8 million, though this decision does not state the dollar value of the 60% costs award.