25 January 1990 Internal T.I. 58949 F - SR&ED Non-Qualifying Expenditures - Building Acquired Before 1990

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Dear Sirs:

Re:  Technical Interpretation of Building Acquired before 1990

We are writing in reply to your letter of October 24, 1989, concerning the application of the transitional provisions for subparagraph 37(7)(f)(i) of the Income Tax Act (the "Act").  In your letter you have outlined the following hypothetical fact situation:

a)     A taxpayer, A Co., is a company resident in Canada which carries on scientific research and experimental development ("SR&ED") in Canada related to its business.

b)     In July 1986, it made an internal decision and announced in a press release that it would undertake a major expansion of its SR&ED facilities.

c)     Engineering studies were conducted in 1986 and early 1987 pursuant to a written agreement between A Co. and engineering company.

d)     In May 1987 A Co. entered into a written agreement with an engineering and architectural company for the preparation of a programming/space planning study for construction of a building to be used exclusively for SR&ED related to A Co.'s business.

e)     Throughout the period 1986 to date, A Co.'s in-house engineering staff have been and continue to be heavily engaged in undertaking engineering and design work as well as project supervision relative to the SR&ED expansion project.

f)     Site preparation work was carried out in 1988.

g)     Excavation for the project commenced in 1989, and the project is expected to be completed sometime after 1989.

You have requested our opinions related to the following questions:

1)     Would the building be considered to be "acquired" on a gradual basis as construction progresses, in a manner similar to the gradual acquisition of a building under construction described in Interpretation Bulletin IT-50R in the context of capital cost allowance deductions?

2)     If the answer to question "I" is affirmative, would the building, or any part of it, be a building acquired before 1990 pursuant to an obligation entered into in writing before June 18, 1987 within the meaning of the transitional rule for paragraph 37(7)(f) of the Act?

3)     If the answers to questions "1" and "2" are affirmative, would the construction costs incurred by A Co. or progress billings received by A Co., as the case may be, before 1990, qualify as expenditures on SR&ED within the meaning of paragraph 37(1)(b) of the Act?

4)     Would such expenditures mentioned in question "3" be "qualified expenditures" within the meaning of that term as  defined in subsection 127(9) of the Act for purposes of determining A Co.'s investment tax credit?

Our Comments

The situation outlined in your letter appears to involve an actual situation involving a specific taxpayer and should be directed to a district taxation office together with all the available documentation.  However, we are prepared to offer the following general comments:

1)     We confirm that provided that the conditions in the transitional rules are met, a building would be considered to be "acquired" on a gradual basis as construction progressed.

2)     Whether a specific building and written contracts related to it will meet the criteria to be considered when determining if the transitional rules will apply is a question of fact which can only be answered when all of the pertinent facts are known.  However, the above situation would not appear to meet the requirements of the transitional rules.  The construction of the building did not start until after June 18, 1987 and no written agreement appears to have existed prior to June 18, 1987 that caused the taxpayer to have an obligation to a developer or other third party which required the building to be constructed.  In order to qualify for the grandfathering provisions, the company must have entered into a contract for the construction of the building.  The contracts for architectural and engineering work described in the situation above are distinguishable from contracts for the construction of a building.

3)     We confirm that where the transitional rules apply, construction costs incurred related to construction of a building completed prior to January 1, 1990, would, assuming all other provisions of the Act were met, qualify as expenditures on SR&ED within the meaning of paragraph 37(1)(b) of the Act.

4)     We confirm that expenditures made to construct a SR&ED building and which meet the requirements of the transitional provisions would generally, be "qualified expenditures" within the meaning of subsection 127(9) of the Act for purposes of determining the company's investment tax credit.

We trust that our comments will be of assistance.

for DirectorBusiness and General DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch