Canada vs ExxonMobil Canada Resources Company, March 2026, Tax Court of Canada, Case No 2017-5069(IT)G
Table of Contents
Case Information
Court: Tax Court of Canada
Case number: 2017-5069(IT)G
Citation: 2026 TCC 42
Applicant: ExxonMobil Canada Resources Company
Respondent: His Majesty the King
Jurisdiction: Canada
Judgment date: March 6, 2026
Judgment Summary
The appeal concerned the Appellant's 2001 taxation year ended November 30, 2001. Three issues were raised in the Notice of Appeal: the deductibility of Alaskan Gas Pipeline Study Costs, the deductibility of Canadian Merger Costs, and whether Hibernia Offshore Loading System Revenue should be reclassified as Non-Resource Revenue [1].
At the commencement of trial, the parties filed a Consent to Judgment dated January 9, 2025, resolving the Canadian Merger Costs Issue and the OLS Issue without costs [2]. The hearing therefore focused exclusively on the Alaskan Gas Pipeline Study Costs Issue [3].
The court heard evidence over 22 days, with nine witnesses including four expert witnesses [10]. The Respondent called only one witness, qualified as an expert in transfer pricing [10].
The court allowed the appeal in full. It held that the Minister was permitted to raise the 2009 Reassessment under subparagraph 152(4)(b)(iii), that the Feasibility Study Costs were deductible under sections 3 and 9 of the Act and were not restricted by paragraph 18(1)(a), that subsection 247(2) did not apply to limit or deny the deduction, and that the Part XIII tax assessment of $1,810,391 was to be vacated [17].
Background
ExxonMobil Canada Resources Company (the Appellant) was formerly known as Mobil Resources Ltd. and ExxonMobil Resources Limited. It is a Canadian corporation indirectly owned by ExxonMobil Corporation (EM Corp.), a non-resident of the United States of America [20, 21, 22, 25, 26].
On December 5, 2000, ExxonMobil Production Company (EMPC), a division of EM Corp., BP Exploration (Alaska) Inc. (BP Alaska), and Phillips Alaska, Inc. entered into the Alaskan Gas Pipeline Project Agreement (the Project Agreement). The purpose was to evaluate and progress a pipeline project to transport natural gas from the Alaska North Slope (ANS) through Western Canada to market hubs in the Lower-48 states [50, 51].
On June 15, 2001, with an effective date of December 5, 2000, EMPC and the Appellant entered into the Partial Assignment and Cost Allocation Agreement (the PACA Agreement). Under it, EMPC assigned 68% of its one-third Participating Interest in the Project Agreement to the Appellant, and the Appellant agreed to pay its proportionate share of feasibility study costs [63, 65].
The feasibility study costs incurred under the Project Agreement totalled approximately 125 million USD. The Appellant's proportionate share, being 22.67% of total costs, amounted to $36,207,810 (the Feasibility Study Costs) [5].
In computing its income for the 2001 Taxation Year, the Appellant deducted the Feasibility Study Costs. The Minister initially assessed the Appellant for the 2001 Taxation Year on October 11, 2002 [242]. On October 9, 2009, the Minister reassessed to disallow the deduction (the 2009 Reassessment), relying on paragraph 18(1)(a) and alternatively on the transfer pricing provisions [242]. On January 8, 2010, the Minister raised an additional assessment for Part XIII tax in the amount of $1,810,391 computed with reference to the disallowed deduction [242]. The Final Reassessment was issued on October 5, 2017 [242].
Core Dispute
Four issues required determination [15, 16].
First, whether the Minister was entitled to rely on subparagraph 152(4)(b)(iii) to extend the normal reassessment period so as to raise the 2009 Reassessment, or whether the reassessment was statute-barred.
Second, whether the Feasibility Study Costs of $36,207,810 were deductible in computing the Appellant's business income under sections 3 and 9 of the Act and were not restricted by paragraph 18(1)(a). The Minister's position was that the Appellant had no source of income from which to deduct the Feasibility Study Costs because the activities carried out under the Feasibility Study were in pursuit of the producers' profits (EM Corp., BP Alaska and Phillips Alaska) and not in pursuit of the Appellant's profit [312, 313, 314].
Third, if the Feasibility Study Costs were deductible, whether paragraphs 247(2)(b) and 247(2)(d) applied to deny the deduction, or alternatively whether paragraphs 247(2)(a) and 247(2)(c) applied to adjust it to zero. The Respondent's primary position was that the PACA Agreement would not have been entered into between arm's length persons under any terms and conditions, and that it was entered into solely to obtain a tax benefit; accordingly it should be recharacterised as a fee-for-services agreement producing no deduction [608, 609, 610].
Fourth, whether the Minister erred in assessing Part XIII tax of $1,810,391 on the basis that the Feasibility Study Costs were a benefit conferred by the Appellant on EM Corp. [9, 998, 999].
The court also considered the Appellant's motion for summary judgment and non-suit relief [16].
Court Findings
On the statute-barred issue, the court held that the 2009 Reassessment was validly made under subparagraph 152(4)(b)(iii). The PACA Agreement was the factual foundation for the deduction of the Feasibility Study Costs and constituted a transaction involving the Appellant and EM Corp., a non-resident person with whom the Appellant did not deal at arm's length. The 2009 Reassessment reasonably related to that transaction. The court rejected the Appellant's argument that subparagraph 152(4)(b)(iii) is limited to transactions to which section 247 applies [249, 250, 253]. The original assessment for the 2001 Taxation Year was mailed on October 11, 2002, making the normal reassessment period end on October 11, 2006; the 2009 Reassessment was mailed on October 9, 2009, four days before the expiry of the extended period [252, 253].
On deductibility, the court held that the Feasibility Study was a feasibility study for a pipeline project, not a producers' study to evaluate commercialisation of natural gas resources [384, 385]. The Appellant's business included various pipeline interests and pipeline development, and the Appellant owned interests in the Maritimes and Northeast Pipeline Limited Partnership, EMCP Partnership, and EMCE Partnership, and was involved in the oil and gas industry [352, 359, 361, 362]. The court found the Feasibility Study to be a clearly commercial activity with no personal or hobby element and that the Appellant had a source of business income related to it under the Stewart test [346, 349, 350, 351]. Applying also the extended test from Paletta Estate and Brown, the court found that the Appellant was pursuing profit in undertaking the Feasibility Study, including through the expectation of pipeline ownership in the Canadian segment with NEB-regulated toll revenues and through the right to licence proprietary data [454, 455, 456, 459, 460]. The court accepted Mr. Carruthers' calculation that, assuming a $4.5 billion investment in pipeline construction, a 30% equity, and a 12% NEB-approved rate of return on equity, the annual equity return for the Appellant would be $162 million, giving a lifetime return of $6.5 billion over 40 years [531]. The court found sufficient business connection between the Feasibility Study Costs and the Appellant's business and that the limitation in paragraph 18(1)(a) did not apply [544, 572].
On the non-suit motion, the court denied relief. It held that the Respondent bore only a tactical burden, not an evidential or persuasive burden, and that the correct approach on a non-suit motion is not to weigh evidence but to assess whether any evidence has been adduced on the relevant issues. The court found that the Respondent had adduced sufficient evidence through the Partial Agreed Statement of Facts, the Joint Book of Documents, expert reports, and cross-examination of the Appellant's witnesses [217, 227, 233, 234, 235, 236].
On transfer pricing under paragraphs 247(2)(b) and 247(2)(d), the court held that the PACA Agreement was a commercially rational transaction and that no arm's length persons would have been precluded from entering into it [730]. The court found that the primary purposes of the PACA Agreement were to avoid subjecting EM Corp. to Canadian tax and civil jurisdiction and to allow the Appellant to advance its entitlement to the Project, and that these business and investment purposes outweighed the tax purpose of the deduction [689, 690, 713]. The requirement of subparagraph 247(2)(b)(ii) was therefore not met [671, 714]. The court also found the requirements of subparagraph 247(2)(b)(i) were not met: the evidence showed the transaction was commercially rational, and the proposed recharacterisation as a fee-for-services agreement was speculative, applied a subjective rather than objective test, and would amount to replacing the transaction with nothing contrary to Cameco FCA [730, 731, 735, 736, 838, 853, 856].
On transfer pricing under paragraphs 247(2)(a) and 247(2)(c), the court held that the terms and conditions of the PACA Agreement, including paragraphs 2, 4, and 6, did not differ from those that would have been made between arm's length persons [866, 969]. The court gave substantial weight to EY's transfer pricing expert opinion and to Mr. Carruthers' expert opinion on pipeline project development, and gave very limited weight to the Respondent's expert Dr. Horst's opinion on the grounds that it was based on hindsight bias from the Integrated Economic Model which was not completed until February 2002, applied a subjective rather than objective test, lacked comparable transactions, and reflected a lack of expertise in feasibility studies for pipeline megaprojects [621, 622, 636, 642, 643, 648, 651]. The court found that the cost allocation of 68% of EMPC's one-third Participating Interest based on estimated distances of the Northern and Southern Routes in Canada versus the United States was objective and reasonable and in line with industry standards [756, 757, 758].
On the Part XIII tax assessment, the court vacated it. The court held that the Appellant paid the Feasibility Study Costs for its own benefit and not for the benefit of EM Corp., so subsection 56(2) did not apply and paragraph 214(3)(a) did not deem a dividend to have been paid to EM Corp. [1016, 1017, 1049]. The court also held that subsection 246(1) could not be used to satisfy the fourth pre-condition of subsection 56(2) because subsection 246(1) is designed to capture benefits not otherwise included in income under Part I and applying it to meet a Part I condition would be contrary to both its wording and the scheme of the Act [1041, 1042, 1043, 1044, 1046]. Independently, no benefit was conferred by the Appellant on EM Corp. under subsection 246(1) [1050, 1051, 1052].
Outcome
The appeal of the reassessment for the 2001 Taxation Year, notice dated October 5, 2017, was allowed. The matter was referred back to the Minister for reconsideration and reassessment on the basis that the Feasibility Study Costs of $36,207,810 are deductible in computing the Appellant's business income and that subsection 247(2) does not apply to limit or deny the deduction [17(iii)]. The Part XIII tax assessment of $1,810,391 was vacated [17(iv)]. The appeal relating to the Canadian Merger Costs Issue and the OLS Issue was allowed without costs by consent [Judgment p.1-2]. The Appellant's request for summary judgment and non-suit relief was denied [17(i)]. The parties were given 30 days from the date of judgment to agree on costs; failing agreement, written submissions of not more than 10 pages were to be filed on or before April 10, 2026, with costs otherwise to be awarded to the Appellant in accordance with Tariff B [17, 18].
TP Method Highlighted
The parties agreed that the PACA Agreement was the transaction to be reviewed under section 247 [614]. The Appellant's transfer pricing experts from Ernst and Young LLP (Mr. Greg Noble and Mr. Caton Walker) selected the comparable uncontrolled price or transaction method (CUP or CUT method), using the Project Agreement itself as an internal comparable to the PACA Agreement [901]. EY examined five comparability factors: characteristics of property and services, functions performed by participants, contractual terms, economic circumstances, and business strategies [902]. EY applied a proportionality standard derived from the OECD Guidelines, concluding that costs should be allocated in proportion to expected benefits and that the 68% allocation to the Appellant of EMPC's one-third share of feasibility study costs aligned with the proportion of the projected pipeline lying in Canada versus the United States [925, 927, 930, 939]. The court accepted EY's approach and gave it substantial weight [896, 931, 932, 969]. The Respondent's expert Dr. Thomas Horst did not select a formal transfer pricing method or provide comparable transactions; instead he conducted a partial economic analysis addressing three specific paragraphs of the PACA Agreement and proposed recharacterisation as a fee-for-services agreement [638, 640, 628]. The court gave Dr. Horst's opinion very limited weight [621].
Major Issues / Areas of Contention
- Whether the Minister was entitled to rely on subparagraph 152(4)(b)(iii) to reassess outside the normal reassessment period on the basis of the PACA Agreement as a transaction involving the Appellant and a non-resident non-arm's length person, EM Corp.
- Whether subparagraph 152(4)(b)(iii) is limited to transactions to which section 247 applies, or applies more broadly to any transaction involving a non-resident non-arm's length person.
- Whether the Appellant had a source of business income related to the Feasibility Study under sections 3 and 9 of the Act, given that the Appellant owned no natural gas resources on the ANS and the feasibility study was conducted by a Project Team staffed principally by employees of EMPC, BP Alaska and Phillips Alaska.
- Whether the Feasibility Study was a feasibility study for a pipeline project or a producers' study directed at evaluating ways to commercialise the ANS natural gas resources of EM Corp., BP Alaska and Phillips Alaska.
- Whether the limitation in paragraph 18(1)(a) of the Act applied to restrict deductibility of the Feasibility Study Costs on the ground that they were not made or incurred for the purpose of gaining or producing income from the Appellant's business.
- Whether the PACA Agreement would not have been entered into between arm's length persons under any terms and conditions for the purposes of subparagraph 247(2)(b)(i).
- Whether the PACA Agreement can reasonably be considered not to have been entered into primarily for bona fide purposes other than to obtain a tax benefit for the purposes of subparagraph 247(2)(b)(ii).
- Whether the PACA Agreement should be recharacterised as a fee-for-services agreement under paragraph 247(2)(d), reducing the Feasibility Study Costs to nil.
- Whether the terms and conditions of the PACA Agreement, in particular the 68% proportionate assignment of interest (paragraph 2), the cost allocation methodology (paragraph 4), and the governance and voting arrangements (paragraph 6), differed from those that would have been made between arm's length persons under paragraph 247(2)(a).
- Whether the payment of the Feasibility Study Costs by the Appellant constituted a benefit conferred on EM Corp. for the purposes of subsection 246(1) and subsection 56(2), triggering a deemed dividend under paragraph 214(3)(a) and Part XIII tax of $1,810,391 under subsection 212(2).
- Whether subsection 246(1) can be used to satisfy the fourth pre-condition of subsection 56(2) for the purposes of paragraph 214(3)(a).
- Whether the Appellant's motion for summary judgment and non-suit relief, brought after the close of the Respondent's evidence, should be granted.
- Whether the Original Services Agreement between IOL and Mobil Canada, discovered during trial, was admissible in evidence notwithstanding the obligations under subsection 98(1) of the Tax Court of Canada Rules (General Procedure).