ExxonMobil: Tax Court of Canada Finds that Feasibility Study Costs are Deductible

Overview

On March 6, 2026, the Tax Court of Canada (the “Tax Court”) released its decision in ExxonMobil Canada Resources Company v R.^[1] After 22 days of hearings, including nine witnesses, Justice Lafleur allowed the appeal by ExxonMobil Canada Resources Company (the “Taxpayer”) of the Minister’s assessments relating to its 2001 taxation year.

The appeal concerned the deductibility of approximately $36 million of feasibility study costs (the “Feasibility Study Costs”) incurred by the Taxpayer in connection with the Alaskan Gas Pipeline Project Agreement (the “Project Agreement”), including whether the transfer pricing rules in the Income Tax Act (Canada) (the “Act”)^[2] apply to adjust or deny the deduction. The appeal also addressed the Minister’s consequential assessment of Part XIII non-resident withholding tax, whether the Minister had an additional three years to reassess (the application of subparagraph 152(4)(b)(iii)) and a motion for summary judgment and non-suit relief by the Taxpayer.^[3]

In allowing the Taxpayer’s appeal, the Tax Court determined that:

• The Feasibility Study Costs were deductible under section 9 of the Act. Since the Taxpayer had a source of business income relating to the feasibility study, and the Feasibility Study Costs were incurred for the purpose of gaining or producing income from its business, paragraph 18(1)(a) did not apply to limit the deduction.
• The transfer pricing rules under subsection 247(2) did not apply to adjust or deny the deduction of the Feasibility Study Costs.
• The Feasibility Study Costs were not subject to Part XIII non-resident withholding tax as, among other things, there was no benefit conferred by the Taxpayer to its US parent resulting in a deemed dividend.
• The Taxpayer’s request for summary judgment and non-suit relief was denied.
• The Minister’s reassessment issued in 2009 was valid pursuant to subparagraph 152(4)(b)(iii), as it was a consequence of a transaction between the taxpayer and a non-arm’s length non-resident, giving the Minister an additional three years in which to reassess.

Background 

The Taxpayer is indirectly owned by a U.S. resident corporation, ExxonMobil Corporation (“Exxon”). On December 5, 2000, a division of Exxon, ExxonMobil Production Company, entered into the Project Agreement with BP Exploration (Alaska) Inc. and Phillips Alaska, Inc. On June 15, 2001, Exxon assigned 68% of its 1/3 participating interest in the “rights, duties, benefits, obligations, costs, rewards, risks and liabilities arising in connection with the performance of the Project Agreement”^[4] to the Taxpayer under a Partial Assignment and Cost Allocation Agreement effective December 5, 2000 (the “PACA Agreement”), pursuant to which the Taxpayer held 22.67% of the participating interests in the Project Agreement. A feasibility study was conducted to evaluate and take steps to develop a pipeline project from Prudhoe Bay on the North Slope of Alaska through Western Canada and into the United States. The Feasibility Study Costs represented the Taxpayer’s proportionate share of the total feasibility study costs incurred under the Project Agreement, as allocated to the Taxpayer pursuant to the PACA Agreement.

The Taxpayer claimed a deduction of $36,207,810 in respect of the Feasibility Study Costs in computing its income for the 2001 taxation year. The Taxpayer provided a waiver for the 2001 taxation year in respect of the deductibility of the Feasibility Study Costs and the assessment of Part XIII non-resident withholding tax on a deemed payment arising from that non-deductibility. Nevertheless, in its initial reassessment of the Taxpayer’s 2001 taxation year issued on October 2, 2006, the Minister did not make any adjustments regarding the deduction in respect of the Feasibility Study Costs. However, the Minister issued a subsequent reassessment on October 9, 2009 (the “2009 Reassessment”), disallowing the deduction on the basis that the Feasibility Study Costs were not expenditures made or incurred by the Taxpayer for the purpose of gaining or producing income from a business or property pursuant to paragraph 18(1)(a). Alternatively, the Minister took the position that if the Feasibility Study Costs were deductible, the transfer pricing rules under paragraphs 247(2)(a) and (c) would have applied to adjust the deduction to nil, or, in the further alternative, that paragraphs 247(2)(b) and (d) would have applied to recharacterize the transaction and deny the deduction.^[5]

The Minister also assessed Part XIII non-resident withholding tax pursuant to a Part XIII assessment issued on January 8, 2010 (the “Part XIII Assessment”) in the amount of $1,810,391, on the basis that the Feasibility Study Costs were a benefit conferred by the Taxpayer to Exxon that was deemed to be a dividend paid by the Taxpayer to Exxon pursuant to paragraphs 246(1)(b) and 214(3)(a), and subject to withholding tax of 5% pursuant to the Canada-United States Income Tax Convention.

Tax Court Decision

Deductibility of the Feasibility Study Costs

The Tax Court first considered whether the Taxpayer had a source of business income under section 3. Recent Federal Court of Appeal decisions have considered whether the pursuit of profit is always required in order to have a source of income and appear to be in conflict with earlier Supreme Court of Canada jurisprudence. Having regard to the lack of clarity on this issue, the Tax Court conducted its analysis under both the test set out by the Supreme Court of Canada in Stewart,^[6] as well as the Stewart test as rephrased and extended^[7] by the Federal Court of Appeal in Brown and Paletta Estate.^[8] Under each analysis, the Tax Court arrived at the same conclusion being that the Taxpayer had a source of business income related to the feasibility study.^[9] This conclusion was based on a variety of factors including, among others:

• the purpose of the Project Agreement was to undertake a feasibility study of a pipeline project, and not to determine whether it would be profitable for producers to bring their natural gas to market, as suggested by the Minister;^[10]
• the nature of the Taxpayer’s business included pipeline development and owning interests in pipelines;^[11]
• feasibility studies are a norm in the pipeline industry,^[12] and the feasibility study was conducted in a commercial manner;^[13] and
• the Taxpayer had the potential to earn a profit from the project by either: (i) earning toll revenue as the owner of a Canadian segment of the pipeline, if a pipeline was built and the ExxonMobil group owned an interest in the pipeline; or alternatively (ii) licensing proprietary information and data gathered from the project, if a pipeline was not built.^[14]

The Tax Court went on to hold that paragraph 18(1)(a) did not apply to deny the deduction of the Feasibility Study Costs. In doing so, the Tax Court clarified that the deductibility of an expense is not to be confused with a source analysis, and the profitability of the activity to which the expense relates does not affect the deductibility of the expense.^[15] The issue is instead whether the expense was made for the purpose of earning income from the business of the taxpayer. The Tax Court concluded that there was a sufficient business connection between the Feasibility Study Costs and the Taxpayer’s business and that the Feasibility Study Costs were incurred for the purpose of gaining or producing income from the Taxpayer’s business, which includes owning various interests in pipelines and pipeline development.^[16]

Application of the Transfer Pricing Rules to the Feasibility Study Costs

Having found that the Feasibility Study Costs were a deductible business expense, the Tax Court then considered whether the transfer pricing rules applied to deny or adjust the deduction. Both the Taxpayer and the Minister called expert witnesses to assist the Tax Court with this determination. The Tax Court relied heavily on the Taxpayer’s expert’s opinion, finding it to be persuasive and reliable. Notably, the Tax Court agreed with the Taxpayer’s expert’s description of the foundational elements of a transfer pricing analysis, which are: (i) a company analysis; (ii) an industry analysis; (iii) a functional analysis of the functions performed, risks assumed, and assets used; and (iv) an economic analysis, which involves selecting a transfer pricing method and a comparable transaction, and then considering adjustments.^[17]

In contrast, the Tax Court gave limited weight to the opinion of the Minister’s expert on the basis that it did not appropriately apply^[18] the OECD Guidelines,^[19] did not take into account the PACA Agreement as drafted by the parties,^[20] and was, at many times, inappropriately speculative and laden with hindsight bias.^[21]

Transfer Pricing Rules

Under the transfer pricing rules applicable in respect of the 2001 taxation year, there were two ways in which the transfer pricing rules could modify transactions that are not consistent with the arm’s length principle:

• The terms and conditions may be adjusted to reprice the transaction under paragraphs 247(2)(a) and (c) (the “Repricing Rule”). The Repricing Rule generally applies where the terms and conditions of the parties’ transaction differ from the terms and conditions that would have been agreed to by arm’s length parties.
• If the transaction is not one that arm’s length parties would have entered into at any price, the transaction may be recharacterized to be one that would have been entered between arm’s length parties under paragraphs 247(2)(b) and (d) (the “Recharacterization Rule”). For the Recharacterization Rule to apply, it must be the case that (i) a hypothetical arm’s length person would not have entered the transaction under any terms and conditions;^[22] and (ii) it is reasonable to consider that the transaction was not entered into primarily for bona fide purposes other than to obtain a tax benefit.^[23]

Recharacterization Rule

The Tax Court held that the Recharacterization Rule did not apply to deny the deduction of the Feasibility Study Costs because neither of the two requirements for the Recharacterization Rule to apply were satisfied. The Tax Court considered the second requirement first. The evidence demonstrated that it was reasonable to conclude that the PACA Agreement was entered into primarily for bona fide purposes other than to obtain the tax benefit of deducting the Feasibility Study Costs, such that the second requirement of paragraph 247(2)(b) was not satisfied.

The evidence demonstrated that the primary purposes for entering the PACA Agreement were business and investment purposes, which purposes greatly outweighed any incidental tax purposes.^[24] These purposes included:

• for Exxon to avoid Canadian civil liability exposure;
• for Exxon to avoid the risk of being subject to Canadian tax; and
• for the Taxpayer to “progress its entitlement to the Project”, which included the potential of earning significant revenues as a pipeline owner if a pipeline was built, or having rights to valuable and licensable data generated from the project if a pipeline was not built.^[25]

In concluding that the first requirement of paragraph 247(2)(b) was not satisfied (being a hypothetical arm’s length person would not have entered the transaction under any terms and conditions), the Tax Court found that the evidence demonstrated that the PACA Agreement was a commercially rational transaction.^[26] The Tax Court accepted the Taxpayer’s expert’s opinion that it was commercially reasonable for arm’s length parties to engage in a similar transaction, based on an objective assessment informed by an analysis of the North American pipeline industry, the routine use of joint ventures to diversify risk in that industry, and an economic analysis of the expected benefits to the parties.^[27]

The Tax Court emphasized that the question under the first requirement is whether “any hypothetical arm's length persons would have entered into the transaction under any terms and conditions.”^[28] The Minister’s expert applied a subjective test, rather than an objective one, based on what Exxon and the Taxpayer would have done had they been dealing at arm’s length, instead of what notional arm’s length parties would have done.^[29] The Tax Court also criticized the inappropriate use by the Minister’s expert of hindsight to suggest that arm’s length parties would not have entered the transaction because it was too uncertain.^[30]

With respect to paragraph 247(2)(d), the Tax Court found that, even if the two requirements in paragraph 247(2)(b) were satisfied, the proposed recharacterization of the PACA Agreement as a fee-for-services agreement by the Minister’s expert was inappropriate, on that basis that doing so was purely speculative and unreasonable.^[31] Importantly, the Minister’s expert failed to provide any terms for the proposed fee-for-services agreement, notwithstanding that, as clarified in Cameco, the arm’s length terms and conditions that would have been adopted become the terms and conditions for the relevant participants in applying paragraph 247(2)(d). As noted by the Tax Court, paragraph 247(2)(d) “does not allow for a recharacterization into nothing.”^[32]

Repricing Rule

With respect to the Repricing Rule, the Tax Court found that paragraphs 247(2)(a) and (c) did not apply to adjust the deduction of the Feasibility Study Costs to nil. The Tax Court was again persuaded by the opinion of the Taxpayer’s expert that the terms and conditions of the PACA Agreement did not differ from those that would have been agreed to by arm’s length parties.^[33]

Ultimately, the evidence adduced by the Minister’s expert failed to establish that any of the terms were not reflective of arm’s length terms and conditions when measured against the expected benefits under the PACA Agreement.^[34] The Tax Court instead accepted the Taxpayer’s evidence that the share of the Feasibility Study Costs incurred by the Taxpayer was proportionate to the expected benefits it could derive from the project.^[35] In particular, the Tax Court stated that there was no basis upon which to conclude that an arm’s length pipeline investor would “be unwilling to bear a comparable proportion of feasibility costs in exchange for toll revenues and ownership interests of a projected pipeline. Particularly, when the expected benefits would be calculated in proportion to the costs incurred under a regulated environment.”^[36]

Amendments to the Transfer Pricing Rules

On March 26, 2026, Bill C-15, An Act to implement certain provisions of the budget tabled in Parliament on November 4, 2025, received royal assent. Bill C-15 included amendments that substantially overhaul the transfer pricing rules applicable to taxation years and fiscal periods that begin after November 4, 2025. As part of these amendments, the Repricing Rule and Recharacterization Rule have effectively been consolidated into a new test which asks whether the transaction or series includes actual conditions that vary from “arm’s length conditions”, including the possibility that no transaction or series would have taken place.

The Tax Court’s analysis may be of limited utility with respect to certain aspects of the new transfer pricing analysis. For example, the new transfer pricing rules no longer require the primary purpose for the transactions to be to obtain a tax benefit in order for the transactions to be recharacterized, and now apply the “arm’s length conditions” test to the actual parties, rather than hypothetical ones. Additionally, although the Tax Court held that the Minister could not recharacterize the PACA Agreement “into nothing”, the new transfer pricing rules expressly allow the Minister in some cases to recharacterize the transactions as if nothing had happened at all.

One of the shortcomings of the Minister’s expert was that he failed to properly apply the OECD transfer pricing guidelines. Under the old transfer pricing rules, the OECD transfer pricing guidelines are a “widely-accepted” extrinsic aid that inform the transfer pricing analysis.^[37] The new rules elevate the role of the OECD transfer pricing guidelines, and provide that the determination of arm’s length conditions and the amount of the transfer pricing adjustment must be made in a manner that achieves consistency with the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, as adopted by the Committee on Fiscal Affairs on January 7, 2022.^[38]

Thus, the factors that led the Tax Court to give significant weight to the Taxpayer’s expert – and not the Minister’s – are of utmost importance under the new transfer pricing rules. In particular, taxpayers should ensure that their transfer pricing analyses adhere to the “building blocks” of a transfer pricing analysis, including a company analysis, an industry analysis, a functional analysis, and an economic analysis that uses appropriate transfer pricing methods and comparables. Adherence to these fundamental principles is also of increased importance given the references in the new transfer pricing rules to “arm’s length conditions” and “economically relevant characteristics”.

For a summary of the new transfer pricing rules, see our 2025 Canadian Federal Budget Commentary – Tax Initiatives. For a practical, end-to-end framework for navigating Canadian transfer pricing compliance and disputes, please refer to our Practical Guide to Canadian Transfer Pricing 2026.

Part XIII Tax

The Tax Court determined that the Feasibility Study Costs paid by the Taxpayer were not subject to Part XIII non-resident withholding tax. The Minister argued that Part XIII tax applied on the basis that the Feasibility Study Costs were a benefit conferred under subsection 56(2) by the Taxpayer to Exxon that was deemed to be a dividend under paragraph 214(3)(a) and thus subject to withholding tax under subsection 212(2).

The Tax Court considered the four pre-conditions for subsection 56(2) to apply, as described by the Supreme Court of Canada in Neuman.^[39]

• The Tax Court found that the first two requirements, being that the payment must be made to a person other than the reassessed taxpayer (Exxon), and that the allocation must be at the direction or with the concurrence of the reassessed taxpayer, were likely satisfied.^[40] In this regard, the Feasibility Study Costs were paid to third-party service providers and at the direction of or concurrence with Exxon.
• With respect to the requirement that the payment must be for the benefit of Exxon or another person whom it wished to benefit, the Tax Court found that the Feasibility Study Costs were not made for the benefit of Exxon, as they were paid for the Taxpayer’s own benefit.^[41] The evidence demonstrated that the Taxpayer had validly incurred the Feasibility Study Costs to obtain benefits from its 22.67% interest in the Project Agreement (being potential ownership of a pipeline and access to data and information from the project).^[42]
• With respect to the requirement that the payment would have been included in Exxon’s income if it had been received by it, the Tax Court found that the Feasibility Study Costs would not have been included in Exxon’s income had Exxon received the Feasibility Study Costs directly.^[43] On this point, the Tax Court rejected the Minister’s argument that the Feasibility Study Costs would have been included in Exxon’s income had it received the payments directly as a benefit under paragraph 246(1)(b), as subsection 246(1) is intended to apply to benefits that are not otherwise included in income under Part I of the Act.^[44] Moreover, using subsection 246(1) in that manner would be inconsistent with the scheme of the Act in respect of Part XIII, since subsection 246(1) provides for its own cross-border consequences without reverting to the use of paragraph 214(3)(a).^[45] Regardless, the Tax Court also concluded that subsection 246(1) did not apply because there was no benefit conferred by the Taxpayer to Exxon, for the same reasons as above.^[46] The confusion in the Minister’s position regarding the interaction between subsection 246(1) and paragraph 214(3)(a) appears to be a result of the Minister failing to plead or initially argue that subsection 56(2) applied.

The Tax Court vacated the Part XIII Assessment on the basis that subsection 56(2) did not apply (such that paragraph 214(3)(a) could not apply to deem the Taxpayer to have paid a dividend to Exxon that would have been subject to Part XIII withholding tax) and subsection 246(1) did not apply as a standalone basis for the Part XIII Assessment.

Procedural Issues

The Tax Court also considered two procedural issues: (i) whether the Taxpayer’s request for summary judgment and non-suit relief should be granted; and (ii) whether the Minister’s reassessment was validly made during the three-year extended period for reassessment under subparagraph 152(4)(b)(iii).

Summary Judgment and Non-Suit Relief

The Tax Court denied the Taxpayer’s request for summary judgment and non-suit relief on the basis that it did not meet its persuasive burden to establish the facts that would demolish the assumptions of facts relied on by the Minister. The Tax Court also clarified that, in this case, the Minister bore neither a persuasive nor evidential burden, but rather only had a “tactical burden” as to whether or not to lead evidence.^[47]

Further, the Tax Court agreed with the recent Tax Court decision in Caroni,^[48] that non-suit motions should rarely, if ever, be entertained. In particular, such motions should not be entertained after the evidence has been presented by all parties, as there is no longer any value brought by the non-suit motion in saving time and the court can simply decide the case on its merits given that it has heard the evidence.^[49]

Extension of the Reassessment Period

Subparagraph 152(4)(b)(iii) of the Act extends the normal reassessment period of a taxpayer for an additional three years for reassessments made as a consequence of transactions involving the taxpayer and a non-arm’s length non-resident person. However, the reassessment may only be issued during the extended period if it may reasonably be regarded as relating to the transaction involving the non-arm’s length non-resident, pursuant to subparagraph 152(4.01)(b)(iii).

In concluding that the Minister was not statute-barred from raising the reassessment, the Tax Court clarified that the scope of the extended reassessment period under subparagraph 152(4)(b)(iii) is not limited to transactions to which section 247 applies.^[50] Rather, because the 2009 Reassessment was made as a consequence of, and reasonably related to, a transaction involving the Taxpayer and a non-arm’s length non-resident person (i.e., the PACA Agreement), the extension was available.

Importantly, the Tax Court considered the PACA Agreement (and not the Project Agreement) as the factual foundation for the Taxpayer’s deduction of the Feasibility Study Costs, notwithstanding that the Feasibility Study Costs represented the Taxpayer’s percentage of the total feasibility study costs to be paid to third party service providers under the Project Agreement itself.^[51] In this respect, the Tax Court found that the relevant transaction to be considered was the PACA Agreement, which was evidently a transaction between the Taxpayer and a non-arm’s length non-resident, and found that the 2009 Reassessment reasonably relates to that transaction.

Key Takeaways

The ExxonMobil decision is an important precedent for the deductibility of feasibility study costs in the context of the North American pipeline industry, with the Tax Court recognizing that feasibility studies are an integral part of the multi-staged megaprojects that are commonly undertaken. This decision is also an important reminder of the importance of expert witnesses in transfer pricing disputes (both under the old transfer pricing rules and the new rules), particularly with respect to establishing the commercial rationality of transactions and the arm’s length nature of the relevant terms and conditions. As emphasized repeatedly by the Tax Court, persuasive expert evidence in a transfer pricing dispute should be rooted in the foundational elements that must be considered in a transfer pricing analysis. Expert reports that are speculative, that benefit from hindsight, or that do not properly consider the relevant economic considerations, will be given little to no weight.

^[1]      2026 TCC 42 (“ExxonMobil”). The full text of the decision is available online.

^[2]      All statutory references herein are to the Act.

^[3]      Given the length of the written decision and for the sake of brevity, only the material issues in dispute and the material conclusions made by the Tax Court will be discussed in this blog.

^[4]      ExxonMobil at para 53.

^[5]      At the hearing, the Minister argued that paragraphs 247(2)(b) and (d) applied as the primary position, and paragraphs 247(2)(a) and (c) applied in the alternative.

^[6]      Stewart v R, 2002 SCC 46.

^[7]      ExxonMobil at paras 341 and 343.

^[8]      Brown v Canada, 2022 FCA 200; Canada v Paletta Estate, 2022 FCA 86.

^[9]      ExxonMobil at paras 453 and 454.

^[10]    ExxonMobil at paras 383 and 385.

^[11]    ExxonMobil at para 347.

^[12]    ExxonMobil at para 348.

^[13]    ExxonMobil at para 350.

^[14]    ExxonMobil at para 460.

^[15]    ExxonMobil at para 546.

^[16]    ExxonMobil at para 572.

^[17]    ExxonMobil at paras 898 and 899.

^[18]    ExxonMobil at para 638.

^[19]    The OECD Guidelines referred to in this decision mean the “Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations” (OECD, July 1995).

^[20]    ExxonMobil at paras 630, 631, and 636.

^[21]    ExxonMobil at paras 736, 777, 819, and 993.

^[22]    Subparagraph 247(2)(b)(i).

^[23]    Subparagraph 247(2)(b)(ii).

^[24]    ExxonMobil at para 689.

^[25]    ExxonMobil at paras 690, 692, and 693.

^[26]    ExxonMobil at para 730.

^[27]    ExxonMobil at paras 825 to 830.

^[28]    ExxonMobil at para 588.

^[29]    ExxonMobil at para 735.

^[30]    ExxonMobil at paras 818 to 819.

^[31]    ExxonMobil at paras 840 and 853.

^[32]    ExxonMobil at para 853.

^[33]    ExxonMobil at para 867.

^[34]    ExxonMobil at para 869.

^[35]    ExxonMobil at paras 939 and 940.

^[36]    ExxonMobil at para 991.

^[37]    ExxonMobil at para 636.

^[38]    Subsection 247(2.03).

^[39]    Neuman v MNR, [1998] 1 SCR 770.

^[40]    ExxonMobil at para 1031.

^[41]    ExxonMobil at paras 1032 and 1036.

^[42]    ExxonMobil at paras 1037 to 1038.

^[43]    ExxonMobil at para 1040.

^[44]    ExxonMobil at paras 1042 and 1043.

^[45]    ExxonMobil at paras 1046 to 1048.

^[46]    ExxonMobil at para 1052.

^[47]    ExxonMobil at para 227.

^[48]    Caroni v R, 2025 TCC 101.

^[49]    ExxonMobil at para 236.

^[50]    ExxonMobil at para 250.

^[51]    ExxonMobil at para 269.