Case information

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Taxation - Income tax - Assessment - Deductions - Exploration and development expenses - Minister disallowing certain deductions claimed by taxpayer - Whether Federal Court of Appeal erred in concluding that the Respondent’s liability under a promissory note was not a contingent liability within the meaning of paragraph 66.1(6)(a) of the Income Tax Act - Whether Federal Court of Appeal erred in equating the obligation to surrender security in the event amounts were still outstanding at the due date, with a legal obligation to pay the face amount of the promissory note - Whether the purchaser and vendor were factually at arm’s length pursuant to ss. 69(1)(a) and 251(1)(b) of the Act.

McLarty invested $100,000 in proprietary seismic data as part of a joint venture. On the purchase transaction, the vendor of the data also acted as agent for the joint venture participants. McLarty’s purchase price was comprised of $15,000 in cash and a limited recourse promissory note in the amount of $85,000. On his income tax return, McLarty added $100,000 to his Cumulative Canadian Exploration Expenses pool. Subsequently, he claimed Canadian Exploration Expenses of $81,655 for taxation year 1992 and $14,854 for the 1994 taxation year. The Minister reassessed McLarty and found that the purchase price of the seismic data was in excess of fair market value. The Minister attributed a lower value to the data, thereby reducing the amount of the expenses that McLarty could claim. McLarty appealed the Minister’s notices of assessment. The Tax Court allowed the appeal and the deductions were permitted as claimed by the taxpayer. On appeal, the Court of Appeal allowed the appeal on the basis that the purchaser and vendor were not at arm’s length; the matter was remitted to the Tax Court to determine whether the Respondent can prove a higher fair market value for the data than that determined by the Minister.