On December 31, 1993, the taxpayer and other parties to a joint venture acquired rights to exploit seismic data in consideration for $975,000 cash and a $5,525,000 promissory note (payable only out of 50% of net licensing revenues and 20% of any production cash flow generated out of any petroleum rights acquired by the joint venture) - which the Minister conceded was not a contingent liability.
All of the interest on his share of the note incurred by the taxpayer in his 1994 and 1995 taxation years was paid out of licensing revenues, and Favreau J found that the taxpayer was entitled to capitalize those expenses as Canadian exploration expenses. In 1998 and 1998, while licensing revenues of $53,800 were generated, interest of $242,600 and $262,500 was incurred. Total licensing revenues generated in 1997 to 2006 were close to $1 million. After reciting these facts, Favreau J stated (para. 71):
This shows that the Joint Venture, despite the fact that it had ceased its exploration activities in 1996, continued to earn licensing revenues from the Seismic Data until 2006. This justifies the deduction of the interest payable on the appellant's Promissory Note in the 1998 and 1999 taxation years.