The effects of a submarine canyon on the propagation of ocean surface waves are examined with a three-dimensional coupled-mode model for wave propagation over steep topography. Whereas the classical geometrical optics approximation predicts an abrupt transition from complete transmission at small incidence angles to no transmission at large angles, the full model predicts a more gradual transition with partial reflection/transmission that is sensitive to the canyon geometry and controlled by evanescent modes for small incidence angles and relatively short waves. Model results for large incidence angles are compared with data from directional wave buoys deployed around the rim and over Scripps Canyon, near San Diego, California, during the Nearshore Canyon Experiment (NCEX). Wave heights are observed to decay across the canyon by about a factor 5 over a distance shorter than a wavelength. However, a spectral refraction model predicts an even larger reduction by about a factor 10, because low-frequency components cannot cross the canyon in the geometrical optics approximation. The coupled-mode model yields accurate results over and behind the canyon. These results show that although most of the wave energy is refractively trapped on the offshore rim of the canyon, a small fraction of the wave energy 'tunnels' across the canyon. Simplifications of the model that reduce it to the standard and modified mild slope equations also yield good results, confirming that evanescent modes and high-order bottom slope effects are of minor importance for the energy transformation of waves propagating across depth contours at large oblique angles.