October 07, 2011

Global Communications Limited (Appellant) v. Her Majesty the Queen (Respondent)

97 DTC 1293
Tax Court of Canada
May 27, 1997

(Court File Nos. 96-718(IT)G and 96-1598(IT)G.)

Deductions — Canadian exploration expense (“CEE”) and cumulative Canadian exploration expense (“CCEE”) — Whether amounts expended in acquiring certain seismic data deductible as CCEE — Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1, as amended, ss. 66.1(3) and 66.1(6) — Bills of Exchange Act, R.S.C. 1985, c. B-4, ss. 176(1) — Alberta Sale of Goods Act, R.S.A. 1980, c. S-2, ss. 1(g), 8(1), 15(a), (b), (c), and 24(1).

The corporate taxpayer alleged that it had acquired from Technical Data Holdings Ltd. (TDHL) (in two agreements dated August 29, 1991) certain seismic data for $15,066,316, comprising cash of $1,807,958, and a “limited recourse promissory note” for $13,258,358. In computing its income for 1991 and 1992 the taxpayer added the said $15,066,316 to its CCEE, deducting CCEE of $5,246,062 (for 1991) and $9,518,454 (for 1992). On reassessment, the Minister disallowed both of the said deductions, and, in addition, added certain relatively small amounts to the taxpayer’s income as “recovery of CEE” (for 1991 and 1992) and as “business income” (for 1992) from licensing the said seismic data. The taxpayer appealed to the Tax Court of Canada.

Held: The taxpayer’s appeal was allowed in part. On the evidence, TDHL did not have title to the goods (i.e., the seismic data) which it had purported to sell. In addition, the taxpayer had not paid anything to TDHL, prior to the taxpayer’s 1991 taxation year ending on August 31, 1991. The documents and purported agreements of August 29, 1991 were, therefore, a nullity (including the said so-called “limited recourse promissory note” ). The Minister’s reassessment for 1991 was affirmed accordingly. As for the taxpayer’s 1992 taxation year, the said $1,807,958 was paid by the taxpayer on September 23, 1991 to P Ltd., and P Ltd. transferred the seismic data in question to TDHL as trustee for the taxpayer on October 2, 1991. On the evidence, moreover, the taxpayer had purchased geophysical data when purchasing the said seismic data. Hence the taxpayer had, during its 1992 taxation year, incurred an expense “for the purpose of determining the existence, location, extent or quality of an accumulation of petroleum or natural gas in Canada”, within the meaning of paragraph 66.1(6)(a) of the Act. The Minister, therefore, was ordered to reassess the taxpayer for 1992: (a) to permit a CCEE deduction of $1,807,958, (b) to revise the amount to be included in its income by way of “recovery of CEE”, and (c) to include in its income from licensing the said seismic data the same $158,039 as before.