Definition of parol evidence rule (p. 474)
In Canada, a widely cited description of the [parol evidence] rule is that by Lambert J.A. of the British Columbia Court of Appeal, According to Lambert J.A.: [fn 5:…Gallen v. Nunweiler (1984), 53 B.C.L.R. 38, para. 34…..]
[s]ubject to certain exceptions, when the parties to an agreement have apparently set down all its terms in a document, extrinsic evidence is not admissible to add to, subtract from, vary or contradict those terms.
Is there a stranger-to-the-contract rule? (p. 475)
…Does the parol evidence rule apply only to bar the admission of extrinsic evidence by or against the taxpayer and/or Y, i.e. the parties to the contract, or does it also bar the admission of extrinsic evidence by or against the tax authorities? In at least some jurisdictions, this question may be unsettled and/or underdeveloped, as exemplified by the law in Canada.
Is there a stranger-to-the-contract rule in Canada? (p. 476)
The leading authority in Canada's tax jurisprudence appears to be the decision of the Federal Court of Appeal (FCA) in Urichuk v. R. (1993), where…the FCA held that the parol evidence rule cannot be invoked by or against the Minister. The FCA's comments have been applied by the judges of the Tax Court of Canada (TCC) in Harris v. The Queen (1998) [fn 25:...[1998] 1 C.T.C. 2605, para. 17.] and Husky Oil Limited v. The Queen (2009). [fn 26: … 2009 TCC 118. para. 47.]
More recently, however, in On-Line Finance & Leasing Corp. v. R. (2011), Justice Diane Campbell…argued that the FCA was merely making an exception for "situations involving spousal support payments." [fn 28: 2010 TCC 475, at para. 23.]
Stranger-to-the-contract rule in the U.S. Tax Court (p. 477)
…the "stranger to the contract rule" is treated as an additional exception to the parol evidence rule, [fn 30: US: CA. 2002, Deckard v. General Motors Corp., 307 F.3d.556 (2002), p. 565] has been described by the US Tax Court as follows: [fn 31: US: TC, 1969, Brown v. Commissioner of Internal Revenue, 52 T.C. 50 (1969), p. 60.]
The rule in this Court is well settled that the parol evidence rule has no application in Federal tax cases where the Government is not a party or privy to a party to the instrument. What we said in Haverty Realty & Investment Co., 3 T.C. 161, 167 (1944), still pertains today:
The Supreme Court of the United States, almost all the Circuit Courts of Appeals, and this Court have held that the parol evidence rule cannot be invoked by a third party, not a party to the written instrument involved. (T)he United States is a stranger to the contract. It asserts a tax liability, not a claim derived from either party to the contract.
Academic criticism of U.S. Tax Court approach (pp. 478-479)
The traditional estoppel-based stranger to the contract justification, which focuses only on the rights and duties of the parties to the contract and ignores possible legal interests that strangers may have in a fully integrated contract, has attracted significant criticism from some of the most prominent legal scholars in the United States….
Professor Williston who cautioned as follows in Williston on Contracts (2012): [fn 42: Williston on Contracts. 4th ed., para. 33:10 (ThomsonReuters 2012), cited in US: SCH, 1968 Akamine and Sons, Ltd. v. American Sec. Bank, 50 Haw. 304, pp. 309-310: Martin v. Setter (1931), supra n. 40, at p. 463; and Habets v. Swanson (2000), 303 Mont. 410, p. 419.]
It must be remembered that the written contract represents the truth and the whole truth of the contractual obligations of A and B no matter what the nature of the inquiry or who the inquiring party may be. To admit parol evidence, otherwise inadmissible as between the parties themselves, is to permit facts to be shown which have no relevance to the issue of what the contract between A and B is. (Emphasis added)
...The critiques of Professors Corbin, Wigmore and Williston share common connecting threads that are critically important to emphasize.
First, they are reminders that once the rights or duties of the parties have been completely integrated in writing, the parol evidence rule should serve the function of protecting those rights and duties from being varied or contradicted by extrinsic evidence, irrespective of who is offering the extrinsic evidence. ...
Second, the parol evidence rule should protect all those whose legal rights and interests depend on the contract, even if they were not parties to the contract...
Danielson rule (p 480)
[T]he US Tax Court's view is that any extrinsic evidence could be admitted by either the taxpayer or the Commissioner to establish the true substance of a transaction. This view was based on the understanding that tax disputes are focused on the substance rather than form of transactions. This approach was changed, however, by the decision of the US Court of Appeals for the Third Circuit in C.I.R. v. Danielson (1967). [fn 56: ... 378 F.2d 771 (1967).] In this case, the Court established the Danielson rule, which was described as follows: [fn 57: ... C.I.R. v. Danielson, 378 F.2d 771 (1967), at p. 775]
a party can challenge the tax consequences of his agreement as construed by the Commissioner only by adducing proof which in an action between the parties to the agreement would be admissible to alter that construction or to show its unenforceability because of mistake, undue influence, fraud, duress, etc.
Canadian Tax Court should reject the stranger-to-the-contract rule (p. 484)
Are the TCC and FCA justified in granting the Minister an exception from the parol evidence rule? As can be seen from US jurisprudence…, this "stranger to the contract rule" has been subject to criticisms by the leading academics as well as by numerous courts at federal and state levels. In the author's view, the criticisms are compelling and they support the rejection of the "stranger to the contract rule" in the circumstances identified in the numerous cases cited in this article. That is, once the terms of a contract have been completely integrated, the parol evidence rule should serve the function of protecting the terms from being varied by parol evidence, irrespective of whether such evidence is presented by the parties or by a stranger to the contract. In addition, rather than confining the parol evidence rule to only protecting the rights and interests of the parties to the contract, the rule should also protect the legal interests that others, i.e. strangers, may have in the terms of the contract. ...
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