The Financial Post recently ran an article discussing the fascinating complexities that are involved in assessing the Fair Market Value of the donation of 21 bottles of wine to an Ottawa charity.[i] Without rehashing Jamie Gombec’s excellent article, I think there is merit in discussing some of the context of the case, and providing perspective to the litigation process and the costs involved in it. Spoiler: The overarching message of this Tax-IFY is that SOME CASES ARE NOT WORTH TAKING TO TRIAL.
It is first interesting to note that in the case[ii], counsel for the Appellant was from Gowling WLG (Canada) LLP – the Canadian office of a large multinational firm. Partners from larger firms generally bill out at north of $600 per hour, and their associates, who do the bulk of the work on the case, generally bill out north of $350 per hour. As a result, it might not be earth shattering news that trials are pricey. In fact, the national average estimated cost of a two-day trial in 2015 was $31,300 [iii], and costs have only risen since then.
Moreover, given that court resources are limited, the tax litigation process heavily emphasizes amicable resolution through discovery and settlement conferences before trial. The thinking behind this is if both parties show their hands and take time to actually talk before trial, the majority of claims should and do in fact get resolved before ever seeing a court room. People can then move on with their lives and not go through the time and stress involved. Also not surprisingly, the overall concept of what judges refer to as “judicial economy”, i.e. not wasting scarce court resources, runs counter to the traditional law firm business model of the “billable hour” which incentives spending as much time as one can on a case. All this needs to be taken into consideration when looking at this case.
The Taxpayer in their 2005 and 2006 returns claimed that the wine was worth $23,600, as per the charities’ appraisal but the CRA reassessed the taxpayer using a value of $4,700. The difference between the two valuations being $18,900. Referencing the fact that the national average cost of a two-day trial ($31k+), and taking into account that this case was heard for 4 days (= +/-$60k?) , regardless of the other indirect costs (including time missed from work, stress from trial, judicial economy, etc.), it does not make financial sense for this to have went to trial. This could have easily been settled before trial, saving the cost of trial and likely increasing the net “take-home” amounts for both parties.
What should also be noted is the fact that experts were brought into this trial on a dispute that was over a difference in valuation of $18,900. Expert witnesses at trial are articulated by the courts as to be necessary when there “must likely be outside the experience and knowledge of a judge or jury and must be assessed in light of its potential to distort the fact‑finding process”[iv]. That is to say the expert lends their knowledge to the court in assessing the facts. Their services generally do not come for free though. While the article did not mention the specifics costs for the wine and fine art experts in this trial, expert witnesses are notoriously expensive.
Take for example the costs to have a Physician provide expert evidence. A general practitioner alone may command $612 for an hour of travel, preparation, and court time.[v] Given that the cost for an expert being as high as it is, expert testimony should only be used for disputes with much larger dollar values. This further brings into the question the rationality of the parties to bring this issue to trial. The experts in this case undoubtedly have commanded substantial fees for their research and appearance. That is on top of the fact that expert testimony for valuation of goods are an art form rather than a science – there is not much in the way of certainty in them and carry an element of subjectivity in their assessments. Specifically the taxpayer’s expert was not found to be as credible as the Crown’s expert, indeed the court found the taxpayer’s expert witness’ testimony with regard to certain issues amounted to “the folly of the novice up against the experienced.”[vi]. The expert therefore effectively discredited herself in the eyes of the judge.
So the moral of the story is, given the cost of trial (=/-$60k+? on legal bills +/- $10k+? on expert testimony?) it does not make much sense financially for this $18k case to have went all the way to trial. Maybe the taxpayer felt a principled compulsion to have their day in court regardless of the costs involved. Maybe the felt that the Canadian tax world truly needed to know how one should value 21 bottles of wine for taxes purposes and financially took one for the team. Maybe Gowlings and the expert did this whole thing pro bono? In any event, the taxpayer lost, and now has to carry all of those expenses, whatever they were, plus the tax and interest, plus the legal bill of the Crown, including disbursements such as the cost of their expert witness.
All in all, a very expensive couple of cases of wine.
Just as an FYI, we usually operate on a different basis for tax court litigation (our staged flat fee model) that does not rely on the billable hour. We find that our model better aligns the interests of the taxpayer in resolving matters efficiently, with the interests of the court in judicial economy, and with the economic interests of tax counsel.
[ii] McCuaig Balkwill v The Queen, 2018 TCC 99 (CanLII).
[iv] R v Mohan,  2 SCR 9.
[vi] Supra Note ii at footnote 1.