News of Note

The taxpayer's teenaged daughter and her friends (all without a driving licence) took his Jeep on an unauthorized joyride.  It crashed.

Graham J permitted the taxpayer to deduct a portion of the repair expenses based on the percentage of business use of the vehicle prior to the day of the accident.

Neal Armstrong.  Summaries of Harvey v. The Queen, 2013 TCC 298 under s. 18(1)(a) - income-producing purpose, and s. 163(2).

Since the capital dividend account of a Canadian corporation, which has made a functional currency election, is relevant to its "Canadian tax results" (i.e., whether it is subject to Part III tax), it is required to convert its CDA to the functional currency as at the end of the Canadian currency year preceding its first functional currency year – irrespective of whether it actually paid a capital dividend.

Neal Armstrong.  Summary of 20 September 2013 T.I. 2012-0471261E5 under s. 261(7)(h).

Losses typically are transferred from a parent (Lossco) to a subsidiary (Profitco) in a no-incest jurisdiction through a triangular circling of funds: Lossco makes an interest-bearing loan to Profitco; Profitco subscribes for pref of a Newco subsidiary of Lossco; Newco makes a non-interest-bearing loan to Lossco; and Newco services the dividends on the pref through capital contributions from Lossco.

Here however, Profitco is itself a public corporation which does not want to show additional debt on its balance sheet.  Accordingly, the above triangular transactions will be used to transfer losses to a newly-incorporated special-purpose subsidiary of Lossco ("A Co"), with A Co only being transferred to Profitco and wound-up into it after the loss generation transactions have been unwound.

No representation was given that A Co could borrow even a nickel on its own covenant.  Also, CRA was fine with the accumulated dividends and interest under the triangular arrangement not being funded and serviced until immediately before the triangular arrangement is unwound.

Neal Armstrong.  Summary of 2013 Ruling 2012-0472291R3 under s. 111(1)(a).

A significant number of decisions suggest that the "parol evidence rule" (that "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") does not apply to CRA, as (per Urichuk) "the Minister, not being a party to that agreement, is entitled to rely on any available evidence to support his characterization [thereof]."  However, recent decisions (e.g., General Motors) may suggest a tendency to find that the terms of written agreements, in the absence of a finding of sham, should not be contradicted by extrinsic evidence.  See Contradiction of written contracts or other documents (parol evidence rule).

There also is a U.S. dichotomy.  The U.S. Tax Court has stated that it is "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."  However, the US Court of Appeals for the Third Circuit established the "Danielson rule," that "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."

Neal Armstrong.  Summary of Amir Pichhadze, "Can, and Should, the Parol Evidence Rule Be Invoked by or against the Canadian Tax Authorities in Tax Litigation? Lessons from US Jurisprudence", Bulletin for International Taxation, September 2013, p. 474, under General Concepts – Evidence.