Exxonmobil Canada – Tax Court of Canada declines to impute notional income to an essential income-generating activity

A participant in the Hibernia joint venture treated its share of the costs of the initial well in one of the oil reservoirs as SR&ED on the grounds that the well provided experimental validation of the predictions made using an improved systematic and logical methodology (the “reservoir connectivity analysis,” or “RCA”) for evaluating how a reservoir is connected. In rejecting this claim, Owen J stated:

[C]ommon sense and commercial reality dictate that the primary purpose of any such well (even the first one) is not to validate the RCA methodology but rather to obtain data regarding oil in the southern extension.

His conclusion was reinforced by a specific exclusion in the SR&ED definition for drilling for petroleum.

Crude pumped from an undersea oil reservoir up to the “Hibernia Platform” above the ocean surface was, for safety and environmental reasons, not pumped directly from the platform to oil tankers but was instead pumped from the platform through underwater flow lines to an “offshore loading system” (“OLS”) two kilometers away, which was used to load the crude onto the tankers for sale and shipment to refineries.

Reg. 1204(3)(a) excluded “income … derived from transporting … petroleum” from production profits for resource allowance purposes. CRA reassessed to reduce the amount of a participant's production profits for such purposes by the expenses of the OLS (effectively treating those expenses as equalling income from transporting the crude, and then deducting the same amounts as an expense applicable to such transporting income).

In rejecting this adjustment, Owen J stated:

[T]he word “derived” means that the income or loss must exist not because the transporting/transmitting of the petroleum from a natural accumulation of petroleum was necessary in order to sell the petroleum but because the transporting/transmitting of the petroleum in and of itself generated income or a loss. …

[T]he income realized by the joint venture owners from the sale of the crude was derived solely from the market value of the crude. The OLS had no impact one way or the other on the amount of income realized by the joint venture owners from the sale of the Hibernia crude and did not in and of itself generate any income or loss for the joint venture owners.

Although the resource allowance is kaput, the word “derived” is still with us, and it is noteworthy that Owen J adopted a somewhat narrow view of the concept of “deriving” income (cf. Westar – “the authority has established that 'derived from' is a term of wide import"). The unsuccessful CRA approach of imputing income to a portion of a business is vaguely reminiscent of Cudd Pressure (rejecting imputed rent).

Neal Armstrong. Summaries of Exxonmobil Canada Ltd. v. The Queen, 2019 TCC 108 under s. 248(1) - SR&ED and Reg. 1204(3)(a).