The case concerned the deductibility of feasibility study costs of CAD 36,207,810 claimed by ExxonMobil Canada Resources Company (the Appellant), a Canadian subsidiary of ExxonMobil Corporation (EM Corp.), in respect of its 2001 taxation year. The Appellant had been assigned a 68% share of EMPC’s one-third participating interest in a major pipeline feasibility study — the Alaskan Gas Pipeline Project — under a Partial Assignment and Cost Allocation Agreement (PACA Agreement). The project aimed to evaluate and progress a natural gas pipeline from Prudhoe Bay on the Alaska North Slope through Western Canada into the lower 48 United States. Total feasibility costs under the project approximated USD 125 million.
The Minister of National Revenue disallowed the deduction of the Feasibility Study Costs on two alternative grounds: (i) that the costs were not incurred for the purpose of gaining or producing income from a business or property under paragraph 18(1)(a) of the Income Tax Act, and (ii) that the transfer pricing provisions of subsection 247(2) of the Act applied to limit or deny the deduction on the basis that the PACA Agreement between the Appellant and EMPC — related non-arm’s length parties — resulted in terms that differed from arm’s length terms and that the transaction lacked commercial rationality. In addition, the Minister assessed Part XIII withholding tax of CAD 1,810,391 on the basis that the Feasibility Study Costs represented a benefit conferred by the Appellant on EM Corp. The Respondent also raised a statute-barred issue, arguing the Minister was entitled to reassess outside the normal reassessment period under subparagraph 152(4)(b)(iii), as the reassessment arose from a transaction between the Appellant and a non-resident non-arm’s length person.
The Appellant argued that the Feasibility Study Costs were genuine business expenditures incurred for the purpose of earning income from the Canadian portion of a prospective pipeline business, that the Appellant was a full participant in the project with legitimate commercial reasons for its involvement, and that the subsection 247(2) transfer pricing adjustment was inapplicable. The Appellant further contended that the Part XIII assessment was without basis as no benefit was conferred on EM Corp.
Judgment of the Court
The Tax Court of Canada allowed the appeal. The court found that the Minister was entitled to reassess outside the normal reassessment period under subparagraph 152(4)(b)(iii), as the reassessment was made as a consequence of the PACA Agreement between the Appellant and EM Corp., a non-resident non-arm’s length person. On the merits, the court held that the Feasibility Study Costs were expenditures made or incurred by the Appellant for the purpose of gaining or producing income from a business and were deductible under sections 3 and 9 of the Act, with the limitation in paragraph 18(1)(a) not applying. The court further held that subsection 247(2) did not apply to limit or deny the deduction of the Feasibility Study Costs. The Part XIII tax assessment of CAD 1,810,391 was vacated. The Appellant’s motion for summary judgment and non-suit relief was denied, with the court finding that non-suit motions should rarely, if ever, be entertained in the Tax Court of Canada. The Canadian Merger Costs issue and the Hibernia Offshore Loading System Revenue reclassification issue had been resolved by consent at the outset of the trial.