The taxpayer purchased a block of seismic data for $1.8 million cash and a $13.2 million note under which recourse was limited to what was realized by the taxpayer on sales of the data and any Canadian oil and gas leases that the taxpayer held at the time the note came due (either seven or ten years later). That block of data, together with another block, had been sold to an intermediary on the previous day for $2 million in cash and 50% of the net licensing revenue derived by the intermediary over a three-year period.
Robertson J.A. found that none of the purchase price qualified as CEE because the taxpayer had not incurred the expense for the purpose of determining the existence of oil and gas reserves but, rather, for the purpose of offering a product which would enable others to engage in oil and gas exploration. Although there was some minimal use of the data on behalf of the taxpayer for exploration work, there was insufficient evidence to demonstrate that a business was being carried on, i.e., that the data was being used in an organized and systematic manner in the search for oil and gas reserves with a view to a reasonable expectation of profit.
Even if the acquisition had qualified as the cost of CEE, the deduction would have been limited to $1.8 million because (applying section 67) the block of data had a value that was no greater than $1.8 million and, furthermore, the $13.2 million note represented a contingent liability.