Executive summary: Key legal and evidentiary issues

• ExxonMobil Canada Resources Company (the Appellant) claimed a $36,207,810 deduction for Feasibility Study Costs related to an Alaskan gas pipeline project, which the Minister of National Revenue disallowed under paragraph 18(1)(a) of the Income Tax Act.

• Whether the Minister could rely on subparagraph 152(4)(b)(iii) to extend the normal reassessment period beyond the statute-barred deadline for the Appellant's 2001 Taxation Year was a key procedural issue.

• At issue was whether the Appellant had a source of business income from which the Feasibility Study Costs could be deducted, or whether the limitation in paragraph 18(1)(a) barred the deduction.

• Transfer pricing provisions under subsection 247(2) were invoked by the Respondent as an alternative basis to deny or adjust the Feasibility Study Costs deduction to zero.

• A Part XIII tax assessment of $1,810,391 was levied on the basis that the Appellant conferred a benefit on its US parent, ExxonMobil Corporation, by paying the Feasibility Study Costs.

• Admissibility of the Original Services Agreement — discovered mid-trial — and the Appellant's motion for summary judgment and non-suit relief were contested preliminary matters.

Background and the ExxonMobil corporate structure

On November 30, 1999, Mobil Oil Corporation became a wholly owned subsidiary of Exxon Corporation, a corporation resident in the USA. Exxon Corporation subsequently changed its name to ExxonMobil Corporation ("EM Corp."), a non-resident of Canada. The Appellant, formerly known as Mobil Resources Ltd. and later ExxonMobil Resources Limited, was a Canadian subsidiary whose parent company in Canada was ExxonMobil Canada Ltd ("EM Canada"), formerly Mobil Oil Canada Ltd. EM Corp. indirectly owned all the shares of the capital of EM Canada and of the Appellant. At all material times, the Appellant was a fully integrated oil and gas producer in Canada, and as of December 1999, it owned an interest in Maritimes & Northeast Pipeline Limited Partnership.

History of the Alaska natural gas pipeline efforts

In 1968, large natural gas reserves associated with oil reserves were discovered in Prudhoe Bay on the Alaska North Slope, representing approximately 10% of the known oil and gas reserves in the USA. Over the following decades, multiple groups pursued the feasibility of constructing a pipeline from the ANS through Canada to the US Lower-48 states. In 1977, US President Carter selected the Alcan Project to become the Alaska Natural Gas Transportation System ("ANGTS"). In 1978, the Northern Pipeline Act in Canada was enacted, establishing the Northern Pipeline Agency to oversee the construction of the Foothills Project, and Certificates of Public Convenience and Necessity were issued to Foothills. Over time, portions of a pipeline from Alberta to the Lower-48 were completed, but none of the Alaska to Alberta portion was ever built. By early 1982, construction of the Alaska portion of the Alcan Project was suspended indefinitely by the FERC.

The project agreement and the feasibility study

On December 5, 2000, ExxonMobil Production Company (EMPC, a division of EM Corp.), BP Exploration (Alaska) Inc., and Phillips Alaska, Inc. entered into the Alaskan Gas Pipeline Project Agreement to evaluate and progress a pipeline project to transport natural gas from the Alaska North Slope into Western Canada and the US market hubs. The Feasibility Study examined both a Southern Route (following the Alaska Highway) and a Northern Route (a subsea pipeline that would pick up natural gas from the Mackenzie Delta deposits). The base case under the Integrated Economic Model estimated the total capital expenditure at 26.2 billion USD. A seven-team Project Team carried out extensive work spanning commercial, environmental, regulatory, and technical domains, producing numerous job books, final reports, and an Integrated Economic Model. In January 2002, all participants in the Project concluded that the Project was not commercially viable, and they decided not to proceed to the next engineering phase.

The PACA agreement and cost allocation to the Appellant

On June 15, 2001 (effective December 5, 2000), EMPC and the Appellant entered into the Partial Assignment and Cost Allocation Agreement ("PACA Agreement"), under which EMPC assigned 68% of its one-third Participating Interest in the Project Agreement to the Appellant. This allocation was derived from an average of the proportion of the Northern Route and Southern Route that would lie within Canada, based on an estimated distance of each route under four scenarios. The feasibility study costs incurred under the Project Agreement approximately totalled 125 million USD. The Appellant's proportionate share amounted to $36,207,810 — the Feasibility Study Costs at issue. Witnesses testified that EMPC wanted the resources, expertise and knowledge of the Appellant in Canada, particularly in dealing with NEB applications, and that the Appellant was a full participant in the Project and was not only a participant used to absorb costs.

The Minister's reassessment and the issues at trial

The Minister disallowed the deduction under paragraph 18(1)(a) of the Income Tax Act, on the basis that the Feasibility Study Costs were not expenditures made or incurred by the Appellant for the purpose of gaining or producing income from a business or property. In the alternative, the Minister invoked subsection 247(2) transfer pricing rules to deny or adjust the deduction, and separately assessed $1,810,391 under Part XIII of the Act on the basis that the Feasibility Study Costs were a benefit that the Appellant conferred on its ultimate US parent, EM Corp. The hearing took place over 22 days, where nine witnesses, including four expert witnesses, testified. The Respondent called only one witness to testify, who was qualified as an expert witness in transfer pricing.

The statute-barred issue

The Court found that the Minister was allowed to raise the 2009 Reassessment under subparagraph 152(4)(b)(iii) for the Appellant's 2001 Taxation Year. Justice Lafleur rejected the Appellant's argument that the provision applied only to transfer pricing adjustments, holding that on a plain reading, there is no requirement in either the amended or applicable version of subparagraph 152(4)(b)(iii) providing that section 247 must be applicable to a transaction for the extended reassessment period to apply.

The deductibility analysis under sections 3, 9, and paragraph 18(1)(a)

The Court found that the Appellant had a source of business income relating to the Feasibility Study, and that the Feasibility Study Costs were made or incurred by the Appellant for the purpose of gaining or producing income from the Appellant's business, which business includes various pipelines interests and pipeline development. The Court rejected the Respondent's attempt to conflate the source test with the paragraph 18(1)(a) analysis, noting that under the Supreme Court's decision in Stewart, deductibility of an expense is not to be confused with a source analysis. The Appellant's business was 100% in the oil and gas industry, and its income tax return for the 2001 Taxation Year showed a net income of $462 million and net income after taxes and extraordinary items per financial statements of $612 million. The Feasibility Study Costs were incurred pursuant to the Appellant's legal obligation under the PACA Agreement, and the Respondent did not argue that the transaction was a sham. The Court also noted that the Appellant licensed data from the Feasibility Study to the Mackenzie Gas Project participants in 2003, and the Appellant reported licensing income in the amount of $1,031,022 in its taxation year ended November 30, 2004.

The transfer pricing analysis under subsection 247(2)

The Court gave significant weight to the expert opinions of Ernst & Young (EY) and Mr. Carruthers over the Respondent's sole expert, Dr. Horst, whose report was found to contain shortcomings. In the Horst Expert Report, Dr. Horst did not provide an industry analysis, a company analysis and a functional analysis as instructed by the OECD Guidelines, but only provided a partial economic analysis. The Court also found the Horst Expert Report was factually flawed due to its reliance on the Integrated Economic Model, which reflected hindsight bias since it was not completed until February 2002 whereas the PACA Agreement was entered into in June 2001 (effective December 5, 2000). The Court found that the primary purposes of the PACA Agreement were of a business and investment nature — being to avoid subjecting EM Corp. to Canadian tax and civil jurisdiction, consistent with its corporate policy to limit liability exposure, and to allow the Appellant to advance its entitlement to the Project (including entitlement to data and information from the Project) — outweighing the tax purpose for entering into the PACA Agreement. Accordingly, the requirement of subparagraph 247(2)(b)(ii) was not met, and paragraphs 247(2)(b) and 247(2)(d) did not apply. Similarly, subsection 247(2) as a whole was found not to apply to limit or deny the deduction of the Feasibility Study Costs.

The ruling and outcome

Justice Dominique Lafleur of the Tax Court of Canada allowed the appeal in favour of ExxonMobil Canada Resources Company. The deduction in the amount of $36,207,810 that the Appellant claimed in respect of the Feasibility Study was found to be expenditures made or incurred by the Appellant for the purpose of gaining or producing income from a business and are deductible in computing the Appellant's business income under the Act, as the Appellant had a source of business income relating to the Feasibility Study and the limitation in paragraph 18(1)(a) does not apply to limit the deduction. Subsection 247(2) of the Act was found not to apply to limit or deny the deduction of the Feasibility Study Costs. The Part XIII tax assessment in the amount of $1,810,391 was allowed and vacated. The Appellant's request for summary judgment and non-suit relief was denied, as the Court found that both parties had led sufficient evidence to allow the pleaded issues to be considered and that non-suit motions should rarely, if ever, be entertained in the Tax Court of Canada. The parties were given 30 days from the date of the Judgment to agree on costs, failing which one set of costs shall be awarded to the Appellant in accordance with Tariff B. The Judgment was signed on the 6th day of March 2026.