A number of commentators, including Justice John Owen, have expressed unease with the reasoning of the Federal Court of Appeal in R v Paletta (Estate), 2022 FCA 86, and Brown v R, 2022 FCA 200. They might say “I told you so” after the Crown, in ExxonMobil Canada Resources Company v R, 2026 TCC 42, argued ExxonMobil was not entitled to deduct the costs of a pipeline feasibility study because there was no source of income.
Given the court’s view regarding the “present state of the case law,” Justice Lafleur opted to apply both tests—namely, the source-of-income test, as set out originally in Stewart; and the “extended” test articulated by the FCA in Paletta and Brown. After an extensive analysis, the TCC concluded that under both tests, the appellant had a source of business income.
In Chad v R, 2026 FCA 84, the Court revisited straddle trading losses. It rejected the taxpayer’s argument to the effect that Paletta was wrongly decided and reaffirmed the need for an intention to pursue profit. Regarding the latter, it found that a reasonable expectation of profit might be a factor indicative of such an intention. The authors, after contrasting the Court’s approach in Paletta, Brown and Chad with the Supreme Court decisions in Stewart and Walls, conclude that “Chad risks reviving the REOP test in substance, if not in name.”
Philip Friedlan and Adam Friedlan “Revisiting Stewart and Walls: Source of Income in the Post-Paletta World—The ExxonMobil and Chad Decisions” Tax for the Owner-Manager 26:3 (July 2026)
