Mogan,
T.C.J.:
—In
1982,
the
appellant
became
a
limited
partner
in
Janicek
Associates,
a
limited
partnership
established
for
the
purpose
of
conducting
basic
and
applied
scientific
research
in
orbital
mechanics
and
related
fields
of
science
and
technology.
In
the
years
1982,1983
and
1984,
the
appellant
made
capital
contributions
to
the
partnership
in
the
following
respective
amounts
$10,000,
$3,300
and
$29,500.
In
computing
her
income
for
those
three
years,
the
appellant
deducted
$8,000,
$3,481
and
$21,735
respectively
with
respect
to
her
above
capital
contributions
to
the
partnership.
The
respondent
disallowed
such
deductions
on
the
ground
that
they
were
capital
outlays.
The
appellant
acknowledges
that
the
amounts
in
question
are
capital
outlays
but
she
claims
that
they
are
deductible
under
section
37
of
the
Income
Tax
Act
as
expenditures
in
respect
of
scientific
research.
The
only
issue
which
was
argued
in
this
appeal
was
the
interpretation
of
paragraph
37(1)(b)
of
the
Income
Tax
Act.
There
were
ten
partners
in
the
limited
partnership
Janicek
Associates
which
was
formed
in
1981
under
the
laws
of
Ontario.
The
respondent
conducted
a
field
audit
of
the
partnership
and
the
parties
appear
to
be
in
agreement
that
(a)
the
partnership
was
bona
fide
throughout
the
years
1982,
1983
and
1984,
although
no
partnership
agreement
was
signed
until
1986;
(b)
the
partnership
was
engaged
in
scientific
research
within
the
meaning
of
section
37
of
the
Income
Tax
Act;
and
(c)
the
appellant
made
capital
contributions
to
the
partnership
in
the
amounts
claimed.
Because
the
only
issue
involves
the
interpretation
of
paragraph
37(1)(b)
of
the
Act,
it
should
be
set
out
in
full:
Sec.
37
(1)
There
may
be
deducted
in
computing
the
income
for
a
taxation
year
of
a
taxpayer
who
carried
on
a
business
in
Canada
and
made
expenditures
in
respect
of
scientific
research
in
the
year
the
amount
by
which
the
aggregate
of
(a)
.
.
.
(b)
such
amount
as
may
be
claimed
by
the
taxpayer
not
exceeding
the
lesser
of
(i)
the
expenditures
of
a
capital
nature
made
in
Canada
(by
acquiring
property
other
than
land)
in
the
year
and
any
previous
year
ending
after
1958
on
scientific
research
relating
to
the
business
and
directly
undertaken
by
or
on
behalf
of
the
taxpayer,
and
(ii)
the
undepreciated
capital
cost
to
the
taxpayer
of
the
property
so
acquired
as
of
the
end
of
the
taxation
year
(before
making
any
deduction
under
this
paragraph
in
computing
the
income
of
the
taxpayer
for
the
taxation
year),
The
appellant
submits
specifically
that
the
amounts
in
question
are
deductible
under
subparagraph
37(1)(b)(1):
—
as
expenditures
of
a
capital
nature
made
in
Canada
by
acquiring
property
(i.e.
the
appellant's
partnership
interest)
;
—
as
expenditures
on
scientific
research
relating
to
the
business
carried
on
by
all
members
of
the
partnership
through
the
partnership
itself;
and
—
as
expenditures
on
scientific
research
directly
undertaken
by
or
on
behalf
of
the
appellant
through
the
partnership.
The
appellant's
representative
cited
the
decision
of
the
Federal
Court-
Trial
Division
in
International
Nickel
Co.
of
Can.
Ltd.
v.
M.N.R.,
[1971]
F.C.
213;
[1971]
C.T.C.
604;
71
D.T.C.
5332
at
page
5349
for
the
proposition
that
an
expenditure
on
scientific
research
was
a
capital
expenditure.
That
proposition
is
well
founded,
The
appellant
also
relies
on
the
decision
of
this
Court
in
Topolewski
v.
M.N.R.,
[1986]
2
C.T.C.
2405;
86
D.T.C.
1824
to
demonstrate,
by
analogy,
that
section
37
applies
at
the
partner
level
and
not
at
the
partnership
level.
In
my
view,
the
Topolewski
case
which
was
concerned
with
the
restricted
farm
loss
under
section
31
does
not
apply
to
the
appeal
herein
concerning
expenditures
on
scientific
research.
The
respondent
submits
that
the
appellant
did
not,
within
the
meaning
of
subparagraph
37(1)(b)(i),
have
any
"expenditures
of
a
capital
nature
made
in
Canada
on
scientific
research
.
.
.”
because
only
the
partnership
made
such
expenditures.
The
respondent
also
makes
two
arguments
with
respect
to
the
interpretation
of
"property"
in
paragraph
37(1)(b).
Firstly,
the
respondent
submits
that
the
word
"property"
in
subparagraphs
(i)
and
(ii)
must
have
the
same
meaning
because
subparagraph
(ii)
refers
to
"the
property
so
acquired”.
Because
property
in
subparagraph
(ii)
must
be
depreciable
property,
then
the
property
in
subparagraph
(i)
must
also
be
depreciable
property.
The
appellant
acquired
only
a
partnership
interest
with
her
expenditures
in
question
and,
since
a
partnership
interest
cannot
be
depreciable
property,
the
appellant's
expenditures
cannot
come
within
paragraph
37(1)(b).
And
secondly,
the
respondent
submits
that
paragraph
37(1)(b)
permits
the
deduction
of
the
lesser
of
the
amounts
in
subparagraphs
(i)
and
(ii);
and
for
the
appellant,
the
amount
in
subparagraph
(ii)
is
nil.
In
my
opinion,
the
interpretation
of
section
37
put
forward
on
behalf
of
the
respondent
is
the
more
reasonable
interpretation.
There
is
no
doubt
that
paragraph
37(1)(b)
permits
a
taxpayer
to
deduct
in
computing
income
a
capital
outlay
which
would
otherwise
be
prohibited
by
paragraph
18(1)(b).
This
exception
to
the
general
rule
in
paragraph
18(1)(b)
is
restricted
to
expenditures
of
a
capital
nature
on
scientific
research.
When
the
appellant
made
the
capital
expenditures
in
question,
she
acquired
only
an
interest
in
the
partnership.
Although
the
partnership
may
have
been
engaged
only
in
scientific
research,
a
capital
outlay
by
a
partner
to
acquire
an
interest
in
the
partnership
is
different
from
a
capital
outlay
by
the
partnership
on
scientific
research.
Leaving
aside
the
wording
of
subparagraph
37(1)(b)(ii),
I
cannot
construe
the
word
"property"
in
subparagraph
37(1)(b)(i)
as
including
a
partnership
interest
because
"the
expenditure
of
a
capital
nature"
in
subparagraph
37(1)(b)(i)
must
be
"on
scientific
research"
and
a
capital
outlay
to
acquire
a
partnership
interest
is
clearly
not
an
expenditure
of
a
capital
nature
on
scientific
research.
Referring
now
to
the
wording
of
subparagraph
37(1)(b)(ii),
I
am
reinforced
in
my
conclusion
that
the
word
"property"
in
subparagraph
37(1)(b)(i)
cannot
include
a
partnership
interest
because
subparagraph
37(1)(b)(ii)
uses
the
words
"the
undepreciated
capital
cost
.
.
.
of
the
property
so
acquired”.
To
me,
these
words
indicate
that
the
expenditure
of
a
capital
nature
on
scientific
research
in
subparagraph
37(1)(b)(i)
must
be
made
to
acquire
depreciable
property;
and
the
amount
deductible
under
paragraph
37(1)(b)
cannot
exceed
the
undepreciated
capital
cost
of
such
property
at
year
end
before
claiming
any
deduction
under
paragraph
37(1)(b).
Regulation
1102(1)(d)
excludes
from
depreciable
property
any
property
that
was
acquired
by
an
expenditure
in
respect
of
which
the
taxpayer
was
allowed
a
deduction
under
section
37.
Subparagraph
37(1)(b)(ii)
is
carefully
worded,
however,
to
describe
the
undepreciated
capital
cost
of
property
at
year
end
before
making
any
deduction
under
paragraph
37(1)(b).
In
other
words,
the
property
acquired
under
subparagraph
37(1)(b)(i)
must
be
depreciable
property
at
the
time
of
acquisition
even
though
it
may
fall
out
of
that
class
after
year
end
according
to
Regulations
1102(1
)(d)
if
the
taxpayer
claims
a
deduction
under
section
37(1)(b)
when
computing
his
income
at
year
end.
The
effect
of
Regulation
1102(1)(d)
appears
to
be
that
no
capital
cost
allowance
is
permitted
in
respect
of
scientific
research
property
if
the
cost
of
that
property
is
deducted
under
section
37
as
it
is
incurred.
Section
96
requires
a
partnership
to
be
regarded
as
if
it
were
a
separate
person
resident
in
Canada.
A
partnership
adopts
its
own
fiscal
period
and
computes
its
own
income.
In
my
view,
a
deduction
under
section
37
must
be
made
at
the
partnership
level
and
not
at
the
partner
level
unless
expressly
excluded
as
a
partnership
deduction.
For
example,
a
deduction
with
respect
to
exploration
and
development
is
expressly
excluded
by
paragraph
96(1)(d)
but
I
do
not
find
any
similar
exclusion
for
scientific
research
expenditures
under
section
37.
The
extraordinary
aspect
of
subsection
96(1)
is
the
allocation
of
profit
and
loss
among
the
partners
under
paragraphs
96(1
)(f)
and
(g)
but,
as
already
stated,
such
profit
or
loss
will
be
allocated
after
any
relevant
deduction
under
section
37
is
made
by
the
partnership.
For
the
above
reasons,
the
appeal
herein
is
dismissed.
Appeal
dismissed.