It is well-known that the Canada Revenue Agency (the CRA) has broad audit and information gathering powers under the Income Tax Act (Canada). Subject to the existence of solicitor-client privilege, it is not uncommon for taxpayers to be required at the audit stage to disclose all corporate transaction books and records, including internal and external correspondence in respect of that transaction. In light of a potential CRA auditor reviewing such materials, it is essential that diligence and attention be exercised when describing the purpose of a transaction, even in respect of seemingly inconsequential internal communications. The recent Tax Court of Canada decision of ExxonMobil Canada Resources Company v. The King, 2026 TCC 42 provides an example of the CRA misinterpreting innocent and innocuous language contained in the taxpayer's books and records (see our full blog post on this decision here and Judgment here).
In ExxonMobil, the US parent corporation (EM Corp) assigned to its Canadian subsidiary (EM Canada) 68% of its 1/3 participating interest in an agreement entered into with unrelated parties to evaluate and progress a pipeline project to transport natural gas. The assignment was effected by way of an assignment agreement (the Assignment Agreement) entered into by EM Corp and EM Canada. Related to this was a funding request approved by EM Corp senior management (the Approval). The documented Approval, along with select other internal communications, contained the same specific language in respect of the cost sharing structure under the Assignment Agreement. Specifically, such communications described the entering into of the Assignment Agreement and the assignment of costs under the funding approval request as being made "to capture the beneficial tax treatment associated with the Canadian portion of the [pipeline]" (see Judgment at para 665).
The Minister relied upon this singular statement as one of the primary bases for its ill-conceived reassessing positions asserting, among other things, that this statement demonstrated that EM Corp and EM Canada entered into the Assignment Agreement for the benefit of EM Corp and not for its own business and that EM Corp and EM Canada entered into the Assignment Agreement to achieve a tax benefit. However, the facts of this case and the evidence of four lay witnesses demolished this assumption of fact, confirming that this was not so. Rather, the parties entered into the Assignment Agreement for a number of valid commercial reasons and the strong evidence in this respect was accepted by the Court (see Judgment at para 695).
The ExxonMobil case demonstrates that in reviewing a taxpayer's books and records in respect of a transaction, CRA Audit (or CRA Appeals) will be looking closely for any evidence of the taxpayer's intention in respect of that transaction, and in so doing may misinterpret that intent and go on to assume that intent as a fact in ultimately reassessing the taxpayer. In light of the fact that taxpayers may be faced with the need to demolish inaccurate assumptions of fact before the Tax Court of Canada arising out of the Minister's interpretation of statements made in internal correspondence, taxpayers are reminded to be deliberate, thoughtful and live to the language used in documents entered into and communications made at the time of the transaction. This will in turn mitigate risk during a CRA audit when key facts and assumptions are being formulated by the CRA.
