Executive Summary: Key Legal and Evidentiary Issues

• Chevron sought to retain paragraphs in its Notice of Appeal referencing CRA audit and appeals staff views on deductibility of feasibility and representation expenses.

• The Crown moved to strike these paragraphs, arguing they concerned internal CRA processes irrelevant to determining correctness of the reassessments.

• The Court applied the "plain and obvious" test and found the impugned paragraphs disclosed no reasonable grounds for appeal.

• Established case law holds that only the final assessment matters; interim CRA communications and mental processes are legally irrelevant.

• Chevron argued the CRA material met the “train of inquiry” test for discovery, but the Court found this standard inapplicable to pleadings.

• The Court granted the motion, struck paragraphs 51 to 54 of the Notice of Appeal, and awarded $7,500 plus disbursements in costs to the Crown.

Background and procedural context

Chevron Canada Limited filed tax returns for its 2013 and 2014 taxation years under the Income Tax Act, reporting “feasibility expenses” incurred in assessing whether to proceed with the Kitimat LNG Project. These were initially reported as capital expenses, and the Minister assessed the returns as filed without an audit. Subsequently, the Minister reassessed those years—on October 25, 2021 (for 2013) and July 10, 2019 (for 2014)—but not on the classification of feasibility expenses.

Chevron then filed Notices of Objection to the reassessments, reversing its original filing position and asserting that the feasibility expenses should have been classified as current, deductible expenses. Pursuant to subsection 165(3) of the Act, the CRA began a reconsideration of these objections, but before that process concluded, Chevron filed a Notice of Appeal under paragraph 169(1)(b), more than 90 days after serving the objections. This Notice of Appeal included four paragraphs—51 to 54—summarizing CRA internal actions and conclusions during the objection process.

The paragraphs referred to a referral from CRA Appeals to CRA Audit, the latter’s findings that the expenses were deductible on income account, its recommendation that the objections be allowed in full, and CRA Appeals’ subsequent failure to accept those recommendations.

Motion to strike and Court’s ruling

The Crown brought a motion under Rule 53(1) of the Tax Court of Canada Rules (General Procedure) to strike paragraphs 51 to 54. It argued that these paragraphs concerned internal CRA conduct and mental processes, which are irrelevant to determining the correctness of the assessments. The Crown relied on Rule 53(1)(a) through (d), arguing the paragraphs could prejudice or delay the hearing, were frivolous or vexatious, were an abuse of process, and disclosed no reasonable grounds for appeal.

Chevron argued that there was no authority for excluding the Minister’s determinations as irrelevant and that relevance and weight should be left to the trial judge. It also claimed the paragraphs met the “train of enquiry” threshold used in discovery and that excluding them would improperly limit its discovery rights.

Justice Russell found that it was “plain and obvious” that the impugned paragraphs related solely to internal CRA deliberations during the unresolved objection process and were irrelevant to determining whether the reassessments were correct. The Court reviewed appellate jurisprudence including Hawkes v. R., Riendeau, Zhou, and others, confirming that the Minister’s internal thought process, prior statements, and earlier assessments cannot affect the correctness or validity of a subsequent assessment. What matters is the final assessment and the proper application of the law to proven facts.

The Court rejected Chevron’s invocation of discovery-related principles, such as the “train of enquiry” test, noting these standards apply to discovery motions—not to motions to strike pleadings. It also held that the fact CRA had shared documents with Chevron during the objection process did not make the related pleadings legally relevant to the appeal.

Outcome

The Court granted the Crown’s motion, struck paragraphs 51 to 54 from the Notice of Appeal pursuant to Rule 53(1)(d), and awarded costs of $7,500 plus disbursements to the Crown. The Court also granted the Crown 45 days from the date of the Order (March 24, 2025) to file and serve its Reply. Justice Russell emphasized that the ruling did not restrict discovery on matters properly before the Court, namely, the correctness of the appealed reassessments.