The full purchase price of $100,000 for the acquisition by the taxpayer of seismic data represented Canadian exploration expense to him notwithstanding that $85,000 of the purchase price was satisfied by a promissory note for $85,000 which would be paid down during its term out of a portion of cash proceeds received from any future sales or licensing of the seismic data and of production cash flow generated from his undivided interest in petroleum rights from drilling programs.
With only those repayment terms, the note would have constituted a contingent liability. However, it did not because it provided that should any amount be outstanding at maturity, the holder of the note would have recourse to specified security (in such event a trustee was to be appointed to sell seismic data with the proceeds of sale being allocated as 60% in reduction of the remaining amounts owing under the note). Furthermore, the Minister conceded that the seismic data had a fair market value (para. 28) and, in fact, it was subsequently sold for $17,600 (with 60% thereof applied towards repayment of the note). Thus, the note was analogous to a non-recourse mortgage (which the Minister conceded (per para. 30) would not be a contingent liability) so that here “[t]he only uncertainty, as in the case of a mortgage foreclosure, [was] as to the amount of the proceeds from the sale …. [which] does not make the liability contingent” (para. 35). Rothstein J. stated (at paras. 33, 40):
The Minister seemed to be saying that if there is risk to the value of the collateral security at maturity, liability is contingent because the creditor may not make full recovery of the total liability. If the Minister were correct, all liability would be contingent. …
[U]ncertainty as to the source from which the liability is to be repaid … does not affect the existence of the liability.