A taxpayer who wins an appeal at the Tax Court of Canada is often entitled to costs — a payment from the losing party toward the cost of the litigation. How much is awarded, and on what basis, is governed by the Court's rules and a body of discretion that has shifted noticeably over the past decade. Costs are no longer an afterthought. Used deliberately, and paired with a well-timed settlement offer, they can change the economics of an appeal and the incentives of both sides.
Why costs exist at all
Before turning to the mechanics, it helps to understand what a costs award is for. Costs are not a penalty and they are not damages; they are a partial indemnity, intended to shift some of the burden of litigation from the party who was put to the expense of being right onto the party who put them there. The system serves two purposes at once. It compensates the successful party for part of what the dispute cost them, and it creates an incentive structure — the prospect of paying the other side's costs discourages weak claims and unreasonable defences, and the prospect of recovering costs makes meritorious appeals economically rational to pursue. A taxpayer thinking about whether an assessment is worth fighting is, whether they realize it or not, already inside the costs regime.
The general rule and the Court's discretion
Costs at the Tax Court are discretionary. Under the general procedure rules, the Court has broad authority to decide whether costs are payable, by whom, and how much. The starting point is that costs follow the event — the successful party is presumptively entitled to costs — but the Court can depart from that for a range of reasons set out in its rules, including the result, the amounts in issue, the importance of the issues, the conduct of the parties, and any settlement offers.
The informal procedure works differently. There, costs are limited and the exposure to an adverse award is modest, which is part of what makes the informal procedure attractive for smaller disputes. Most of the costs jurisprudence, and most of the strategic interest, lives in the general procedure, where the amounts justify the fight.
Tariff costs versus a lump sum
Historically, a costs award at the Tax Court meant tariff costs — a fixed schedule of amounts for each step in the litigation (filing, discovery, preparation, hearing days). The tariff was set long ago and bears little relationship to what modern tax litigation actually costs. A successful taxpayer awarded tariff costs would recover a fraction of the legal fees they had paid, often a small fraction.
Over the last decade the Court has increasingly been willing to depart from the tariff and award a lump sum — a percentage of the successful party's actual legal costs, frequently in the range of a quarter to a half of fees actually incurred, and sometimes more where the losing party's conduct warranted it. The lump-sum approach has become the more meaningful remedy in substantial appeals. A taxpayer who succeeds in a hard-fought general-procedure appeal can now recover a real, if partial, contribution toward the fees, rather than the token tariff amount. The Court looks at the same discretionary factors — result, amounts, complexity, conduct, and offers — in deciding whether to go beyond the tariff and how far.
Rule 147 and the settlement-offer engine
The most powerful cost lever is the settlement offer. Rule 147 of the Tax Court of Canada Rules (General Procedure) gives written settlement offers real teeth. The core mechanic is this: where a party makes a written offer to settle, and then obtains a judgment as favourable as or more favourable than the offer, the Court may award that party enhanced — sometimes substantially enhanced — costs from the date of the offer onward.
The numbers are significant. Under the rule's framework, a taxpayer who makes a written settlement offer that the Crown rejects, and who then does as well or better at trial, can be entitled to substantial indemnity costs — a much higher percentage of actual fees — for everything that happened after the offer was made. The logic is to penalize a party who forces a trial that a reasonable settlement would have avoided. The same rule cuts both ways: a taxpayer who rejects a Crown offer and then does worse at trial can be exposed to enhanced costs against them.
What makes a Rule 147 offer effective
Not every piece of correspondence triggers the rule. To carry the enhanced-cost consequences, an offer generally has to be a genuine, written offer to settle that contains an element of compromise — a true attempt to resolve the case, not a demand for total capitulation dressed up as an offer. An offer to settle on the same terms as outright victory is unlikely to attract the rule's benefit, because it offers the other side nothing to accept.
Timing matters too. The cost consequences run from the date the offer was made, so an offer made early — before discovery, before the expensive preparation phase — protects more of the litigation if it is beaten at trial. A well-advised party in a general-procedure appeal thinks about the settlement offer not only as a way to end the case, but as a way to shift the cost risk onto the other side for the remainder of it.
Conduct and special cost awards
The Court also uses costs to respond to how the parties behaved. Unnecessary procedural steps, refusing reasonable requests, prolonging the case, or taking positions that drove up the cost of the litigation can all move a costs award upward against the party responsible. Conversely, a party that conducted the case efficiently and reasonably is better placed to argue for a generous award in its favour. In rare cases of genuinely egregious conduct, the Court can award solicitor-and-client (full-indemnity) costs, though that remains exceptional.
The discretionary factors in detail
When the Court decides whether to award costs and how much, it works through a list of factors set out in its rules. The result of the proceeding is the starting point — who won, and on what. The amounts in issue matter, because a large dispute can justify a larger contribution toward the cost of fighting it. The importance and complexity of the issues are weighed, since a novel or difficult point of law reasonably costs more to litigate. The volume of work, the conduct of each party, any step that was improper or unnecessary, and the presence and terms of any settlement offer all feed into the analysis. No single factor controls; the Court balances them and arrives at an amount it considers just in the circumstances.
Because the factors are open-ended, the costs decision is genuinely discretionary, and the outcomes vary. Two superficially similar appeals can produce quite different costs awards depending on how the cases were run and whether offers were made. That variability is itself a reason to think about costs throughout the litigation rather than only at the end — the conduct that a costs judge will later assess is happening at every stage.
How costs are quantified after judgment
A costs award is usually not a number the trial judge announces with the judgment. The reasons typically address entitlement — who is entitled to costs and on what basis — and then either fix an amount, invite written submissions on quantum, or direct an assessment. Where a lump sum is sought, the successful party puts before the Court a bill of its actual legal fees and disbursements and argues for a percentage of them, pointing to the discretionary factors and any settlement offer. The Court then sets the figure. Disbursements — filing fees, transcript costs, the fees of any properly qualified witness — are generally recoverable on top of the fee component, subject to the Court's view of their reasonableness.
Why this matters before the appeal begins
Costs are not just a post-trial accounting exercise; they shape strategy from the outset. A taxpayer weighing whether to pursue a general-procedure appeal should factor in both the downside — exposure to a Crown cost award if the appeal fails — and the upside — the prospect of a meaningful lump-sum recovery and the leverage of a Rule 147 offer if it succeeds. A credible, early, written settlement offer is one of the few tools that can simultaneously open the door to resolution and improve the cost outcome if the case goes the distance.
The takeaway
Costs at the Tax Court of Canada have evolved from a token tariff into a genuine strategic dimension of the appeal. The shift toward lump-sum awards has made winning worth more, and Rule 147 has made the written settlement offer a lever that reallocates cost risk. A taxpayer running a general-procedure appeal — described in general terms on the Tax Court appeal process page — should treat costs and settlement offers as part of the case plan, not an afterthought. For the firm's Tax Court work, see the Tax Court of Canada service page.