> I'm wondering how to set the base URI's static context 
> relative to that of the file being transformed.

Eh? The static context includes a base URI. The base URI does not have a
static context. Is this just a typo, or are you seriously confused about
concepts?
> 
> I've currently got my xsl located at 
> http://site1.ca/styles/myxsl.xsl, and am transforming a 
> document located at http://site2.ca/documents/mydocument.xml

And where is the file whose existence you are trying to test? 
> 
> My xsl builds the location of the relative file, and attempts 
> to test for it's existence as below:

There's no such thing as a "relative file", I'm not sure what you mean. And
I can't see how the names used in this code relate to your site1.ca and
site2.ca given above.
> 
> <xsl:variable name="regpit" select="concat('../06_Regulations 
> Point in Time/',concat(translate(/reg/regnum, '/', '_'), 
> '_pit.xml'))"/> <xsl:if 
> test="unparsed-text-available(resolve-uri($regpit))">

resolve-uri() with one argument resolves against the static base URI (that
is, the location of the stylesheet). Which is exactly what
unparsed-text-available() would do anyway. So this can't be right. If you
want to resolve against the location of the source document, use
resolve-uri($regpit, base-uri(/)).

Regards,

Michael Kay
http://www.saxonica.com/
http://twitter.com/michaelhkay