Exxonmobil: Resource Allowance, SR & ED

Exxonmobil Canada Ltd v. The Queen (2019 TCC 108) considered the application of the now-repealed resource allowance regime to income derived from an offshore oilfield, taking a somewhat narrow view of the meaning of the word "derived." The TCC also addressed whether the drilling of a failed oil well constituted a scientific research and experimental development (SR & ED) expenditure, concluding that an expenditure does not become SR & ED merely because it incidentally provides data that either agrees or disagrees with a model's predictions.

The appellant, ExxonMobil Canada Ltd. (EMC), is an owner and operator of oil and gas projects in Atlantic Canada. EMC indirectly owns ExxonMobil Canada Hibernia Company Ltd. (EMCHC). EMC and EMCHC each have an interest in a limited partnership, ExxonMobil Canada Properties (EMCP). EMCHC and EMCP are parties to a joint venture relating to the development and operation of the Hibernia oilfields.

Hibernia, located in Newfoundland, consists of a complex system of offshore production facilities. A drilling and production platform ("the platform") transfers crude oil to shuttle tankers at a loading base using a network of transport lines (the lines and loading base are collectively referred to as "the offshore loading system"). To mitigate environmental and safety concerns, the offshore loading system is located two kilometres from the platform. Tankers pick up the crude oil from the offshore loading system for transport to market or storage facilities.

The minister reassessed and reclassified portions of income reported by EMC and EMCHC for the 1999 and 2005 taxation years, respectively, on the grounds that income derived from activities other than extraction—such as the offshore loading system's transport of oil to the tankers—must be removed from the calculation of "gross resource profits" for the purpose of calculating a resource allowance pursuant to sections 1204(1) and 1204(3)(a) of the regulations. Section 1204(3)(a) excludes amounts from the calculation of "gross resource profits" to the extent that the income or loss is derived from transporting or transmitting petroleum from a natural accumulation of petroleum.

The minister argued that the word "derived" does not require a taxpayer to have received income from the transportation or transmission of the petroleum. The TCC took a narrower approach and allowed the appeal. The TCC stated that the income or loss was not derived from transporting or transmitting petroleum because the offshore loading system did not itself generate income or loss. The offshore loading system "had no impact one way or the other on the amount of income realized by the joint venture owners." The only income or loss realized by EMC or EMCHC from Hibernia was from the actual sale of the oil.

The second issue in the appeal was the CRA's denial of the SR & ED claim for EMCHC's share of the expenditures incurred in 2005. EMCHC's position was that the drilling activity qualified as SR & ED because it provided experimental validation of predictions made using improved reservoir connectivity analysis (RCA) methodology. The TCC denied the claim, holding that the primary purpose of drilling the well was not to validate the RCA methodology, but rather to obtain data regarding the location of oil at Hibernia (paragraph 69):

The drilling of a conventional well, based on the predicted location of oil, to establish whether and to what extent oil is present may be distinguished from the construction of a pilot plant to test a new or improved process or technology. The latter contributes to the resolution of technological uncertainty associated with the construction of a full scale plant while the former incidentally provides data that either agrees with or disagrees with the outcome predicted by the model.
Bharbara Parken
Blake Cassels & Graydon LLP, Calgary

Canadian Tax Focus
Volume 9, Number 3, August 2019
©2019, Canadian Tax Foundation