Imapro Corp. v. The Queen, 92 DTC 6487, [1992] 2 CTC 298 (FCTD)

McGillis, J.:— The plaintiff Imapro Corporation (Imapro) entered into an obligation in writing on June 10, 1987 to construct a building for its research and development, manufacturing and sales operations. The research and development activities of Imapro constitute scientific research and experimental development (SR&ED) within the meaning of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"), thereby enabling it in certain circumstances to claim a deduction from income for expenditures on SR&ED.

On June 18, 1987, amendments to the Income Tax Act were proposed which provided changes to and transitional relief for the tax treatment of buildings acquired for SR&ED purposes. These amendments were enacted in 1988 and SR&ED expenditures were defined not to include any capital expenditure made in respect of the acquisition of a building. However, the transitional provision continued to permit the deduction of SR&ED expenditures in relation to buildings acquired before 1990 pursuant to an obligation entered into writing before June 18, 1987 or the construction of which was commenced before June 18, 1987.

Imapro constructed its building between September 1987 and February 1988. For the 1987 and 1988 taxation years, Imapro claimed as deductions from income capital and current expenditures on SR&ED. The Department of National Revenue reassessed Imapro for 1987 and issued a notice of assessment for 1988. It disallowed in both taxation years certain expenditures claimed by Imapro. Notices of objection were filed by Imapro. The Minister of National Revenue subsequently confirmed the assessments by notice of confirmation.

Imapro appeals pursuant to subsection 172(2) of the Income Tax Act. The case requires a determination as to whether the transitional provision applies to the circumstances of Imapro. If so, section 37 of the Income Tax Act must be analysed to determine whether Imapro was entitled to claim as deductions from income portions of certain capital and current expenditures incurred for construction or maintenance costs of its building.

Facts

Prior to the commencement of the trial, counsel submitted an agreed statement of facts. This statement was supplemented at trial by the viva voce evidence of witnesses in the areas where counsel were unable to agree on the facts. The following is a summary of the facts as I find them.

Imapro is a Canadian-controlled private corporation, within the meaning of paragraph 125(7)(b) of the Income Tax Act, with its head office and business premises in Ottawa, Ontario. Imapro is involved in the research and development, manufacturing and sales of computer graphics and related equipment. Its research and development activities constitute scientific research and experimental development (SR&ED) within the meaning of subsection 37(7) of the Income Tax Act, thereby enabling it to claim a deduction from income for expenditures on SR&ED in certain prescribed circumstances.

In the spring of 1986, the officers of Imapro decided to move the company to a new location and began to look at various options, including the possibility of constructing a building. Later that year, a decision was made for economic reasons to construct one single level, multi-purpose building which would accommodate its research and development, manufacturing and sales. Imapro began discussions with a developer in early 1987 and, on May 29, 1987, it made an offer to the city of Ottawa to purchase a parcel of land. The developer was formally hired on June 2, 1987 with the payment by Imapro of a $15,000 retainer which represented the first instalment of the development fee. Although the formal contract with the developer was not executed until the project was almost completed, it was specified as being effective on June 2, 1987, the date the retainer was paid. The developer prepared an analysis of the viability of the project and concluded that the total cost of the project would be slightly in excess of three million dollars. Meetings were held at various times with the developer, the architect and the interior designers to discuss the development. Imapro put the financing in place for the project and received confirmation from its bank on June 5, 1987 that it had in excess of three million dollars on deposit. On June 8, 1987, Imapro paid a deposit in the amount of $36,000 to the city for the land. On June 10, 1987, the City signed the agreement of purchase and sale which had been previously executed by Imapro. This agreement contained a term requiring Imapro to commence construction of a building by no later than August 1, 1988 and to complete it substantially within one year. Imapro was therefore obligated in writing on June 10, 1987 to construct a building. On July 31, 1987, Imapro purchased the land for $360,000 and the deed of land from the City to Imapro was registered on title. The deed also contained a condition requiring Imapro to commence construction no later than August 1, 1988 and to complete it substantially within one year.

On June 18, 1987, a notice of ways and means motion was introduced in the House of Commons providing for amendments to the SR&ED provisions of the Income Tax Act. Specifically, references to SR&ED expenditures were not to include capital expenditures in respect of the acquisition of a building. An exception to this was provided in a transitional provision for buildings and leasehold interests acquired before 1990 pursuant to an obligation entered into in writing before June 18, 1987 or the construction of which was commenced before June 18, 1987. Given its commitment to and its involvement in planning for the construction of a building, a portion of which was to be used for SR&ED, the solicitor for Imapro began to make inquiries with officials from the Department of Finance to determine if the transitional provision would apply to Imapro. After an official indicated orally that the circumstances of Imapro were not those intended to be covered by the transitional provision, the solicitor wrote to the General Director of Tax Policy in the Department of Finance who responded in writing that a building would be grandfathered under the transitional provision if it were acquired before 1990 pursuant to an obligation in writing entered into before June 18, 1987. He further stated that, if Imapro was obligated prior to June 18, 1987 to construct the building and if the building were completed before 1990 and otherwise qualified for SR&ED treatment, it would be covered by the transitional provisions.

Imapro began construction of the building in September 1987 and it was completed in early 1988. The building houses the sales, service, manufacturing and administrative sectors of Imapro, as well as its research and development unit. The total area of the building is 2,902 square meters, of which 1,372.5 square meters or 47.3 per cent is used exclusively for research and development purposes. Given the various sectors of Imapro that use the building, there are several common areas centrally located that are used by all employees. For example, there are reception, lunchroom, washroom and ship- ping and receiving areas, as well as electrical, mechanical and garbage rooms. Although the research and development area is largely self-contained, its employees must nevertheless use the hallways to access not only the common areas in the building, but also the research and development library, darkroom, modelroom and its shipping and receiving bay. There is also a general administrative area that services all sectors of Imapro, but is particularly used by research and development for mail, photocopies, fax, personnel matters, accounting, secure storage in the vault and the storage of darkroom materials. If the research and development unit had not been included in the building, the common and administrative areas would have been smaller. Although it is not possible to specify how much smaller these areas would have been, logically they would have been reduced by approximately one-half.

In the 1987 taxation year, Imapro filed an income tax return claiming investment tax credits in the amount of $309,962, of which $61,992 were refundable. For the 1988 taxation year, it claimed investment tax credits in the amount of $743,813, of which $520,635 were refundable.

In early 1989, Imapro filed an amended income tax return for the 1987 taxation year, claiming additional investment tax credits in the amount of $211,022 and an additional investment tax credit refund of $185,494. On October 17, 1989, the Department of National Revenue reassessed Imapro for the 1987 taxation year and also issued a notice of assessment for the 1988 taxation year.

In making its reassessment for the 1987 year, the Department disallowed SR&ED current expenditures on wages, direct materials and other direct charges totalling $5,680 because the expenditures did not reconcile with the ledger accounts. It also disallowed SR&ED capital expenditures for building construction costs of $259,379 on the basis that these expenditures represented a portion of the construction costs for the common and administrative areas which were not used solely for SR&ED purposes.

With respect to the 1988 taxation year, the Department disallowed in its notice of assessment SR&ED capital expenditures for building construction costs of $140,053 as such expenditures were for a portion of the construction costs for the common and administrative areas which were not used solely for SR&ED purposes. It also disallowed SR&ED current expenditures of $9,714 for light, power, water, maintenance, property taxes and telephone costs on the basis that these expenditures related to the maintenance and upkeep of a portion of the common areas not used solely for SR&ED purposes.

For both the 1987 and 1988 years, the Department allowed SR&ED capital expenditures claimed by Imapro for the portion of costs incurred in the construction of the research and development areas of the building. It also allowed the claim by Imapro for all current expenditures for the research and development area. In claiming its SR&ED expenditures in the 1987 and 1988 taxation years, Imapro assessed these costs as being 47.3 per cent of the total construction and current expenditures, on the theory that the research and development area occupied 47.3 per cent of the building. Interpretation Bulletin IT-151R3 indicates that, where a building is built partly for SR&ED and partly for other purposes, a reasonable portion of the total cost of the building can qualify as a capital expenditure on SR&ED. In allowing the SR&ED expenditures, the Department permitted Imapro to claim a deduction by apportioning its expenditures based on the percentage of the building occupied by research and development. It also proceeded on the basis that the circumstances of Imapro were covered by the transitional provision, thereby permitting Imapro to claim the deduction. Imapro filed notices of objection to the 1987 notice of reassessment and the 1988 notice of assessment. On September 12, 1990, the Minister of National Revenue issued a notification of confirmation in relation to the 1987 and 1988 assessments. Imapro now appeals pursuant to subsection 172(2) of the Income Tax Act.

Issues

(i) whether the transitional provision enacted in the Income Tax Act in 1988 permits Imapro to deduct from income scientific research and experimental development (SR&ED) capital expenditures for the construction of its building;

(ii) whether the current expenditures claimed by Imapro for the 1988 taxation year for a portion of the maintenance and upkeep expenses of the common areas of the building qualify as SR&ED expenditures under paragraph 37(1)(a) of the Income Tax Act; and,

(iii) whether the capital expenditures claimed by Imapro in the 1987 and 1988 taxation years for a portion of the construction expenses of the common and administrative areas of the building qualify as SR&ED expenditures within the meaning of paragraph 37(1)(b) of the Income Tax Act.

Statutory scheme

For many years, the Income Tax Act has permitted the deduction from income of expenditures for research and development. In 1983 to 1984, these provisions were significantly amended in order to stimulate research and development activities in Canada. There have been several amendments of the provisions since that time. To assist in appreciating the statutory and regulatory framework applicable to the issues in this case, the relevant provisions, as well as certain predecessor sections, are outlined in this section of the judgment.

Paragraphs 37(1)(a) and (b) of the Income Tax Act (the Act) respectively permit a taxpayer carrying on business in Canada to deduct current and capital expenditures on scientific research and experimental development (SR&ED) activities in certain prescribed circumstances. Although subsection 37(1) of the Act was amended in 1988, the changes in the wording applicable to the 1987 and 1988 taxation years are not material for the purposes of this appeal. However, for ease of reference, the complete texts of subsection 37(1) of the Act for the taxation years 1987 and 1988 are reproduced in schedule A of this judgment.

Subparagraph 37(7)(c)(ii) of the Act defines, in the same terms for both 1987 and 1988, expenditures. Clause 37(7)(c)(ii)(A) provides that expenditures include only expenditures each of which was incurred for and all or substantially all of which was attributable to the prosecution or the provision of premises, facilities or equipment for the prosecution of SR&ED. There is no distinction made in that clause of the Act between current and capital expenditures. Current expenditures are further defined in clause 37(7)(c)(ii)(B) as being only expenditures that were directly attributable, as determined by regulation, to the prosecution, or to the provision of premises, facilities or equipment for the prosecution of SR&ED. The predecessor to clauses 37(7)(c)(ii)(A) and (B) provided, until its amendment in 1986, that references to expenditures included only expenditures incurred for and wholly attributable to the prosecution, or the provision of facilities for the prosecution of scientific research. Subparagraph 37(7)(c)(ii) of the Act and its predecessor, which was also numbered subparagraph 37(7)(c)(ii), are reproduced in schedule B of this judgment.

The meaning of "directly attributable", as that phrase is used in relation to current expenditures, is found in subsection 2900(3) of the Income Tax Regulations ("the Regulations”). According to subsection 2900(3) of the Regulations, current expenditures which are directly attributable are the cost of maintenance and upkeep of the provision of premises, facilities or equipment for the prosecution of SR&ED and other expenditures which are directly related to such provision and which would not have been incurred if such premises, facilities or equipment had not existed. Subsection 2900(3) of the Regulations is reproduced in schedule C of this judgment.

In 1988, subsection 37(7) of the Act was amended by the introduction of paragraph 37(7)(f) which excluded from expenditures on SR&ED any capital expenditure in respect of the acquisition of a building other than a prescribed special-purpose building. To alleviate situations of hardship, a transitional or grandfather provision was enacted which exempted from the operation of that paragraph building or leasehold interests acquired before 1990 pursuant to an obligation in writing entered into before June 18, 1987 or the construction of which was commenced before June 18, 1987. Paragraph 37(7)(f) and the transitional provision are reproduced in schedule D of this judgment.

Position of plaintiff Imapro

Counsel for Imapro submits that the expenditures in issue in relation to the 1987 and 1988 taxation years are SR&ED expenditures in that they were incurred pursuant to a written obligation entered into prior to June 18, 1987 and the construction of the building was completed prior to January 1, 1990. As a result, the transitional provision applies to the circumstances of Imapro, thereby enabling it to claim SR&ED deductions.

With respect to both current and capital expenditures for the common and administrative areas, the real issue is whether the provisions of the Income Tax Act permit the apportionment of these expenditures between the SR&ED and other areas of the building. Apportionment is permitted by the statute in relation to both of these classes of expenditures. Similarly, the portion of current expenditures claimed for the 1988 taxation year is directly attributable to the prosecution of SR&ED in Canada. Therefore, the assessments should be varied to allow the claims in question. The portions of capital expenditures claimed for 1987 and 1988 for the research and development area were incurred for and were all or substantially all attributable to the prosecution of SR&ED in Canada.

Position of defendant Her Majesty The Queen

Counsel for the Attorney General of Canada submits that the General Director of Tax Policy for the Department of Finance erred in confirming in writing to the solicitor for Imapro that the transitional provision would grandfather Imapro from the legislative amendments to the SR&ED provisions of the Income Tax Act. Furthermore, governmental officials erred in issuing Interpretation Bulletin IT-151R3 which indicates that, where a building is built partly for SR&ED and partly for other purposes, a reasonable portion of the total cost of the building can qualify as a capital expenditure on SR&ED. Officials, including the Minister of National Revenue, further erred in allowing Imapro to claim SR&ED expenditures in 1987 and 1988 for construction and other costs for the portion of the building which is used for the SR&ED activities. There is no provision in the Income Tax Act to allow the apportionment of expenditures. Accordingly, expenditures must be allowed in their totality or disallowed.

With respect to the SR&ED expenditures claimed by Imapro in the 1987 and 1988 taxation years in relation to the common and administrative areas, these expenditures cannot qualify as SR&ED expenditures because the circumstances of Imapro are not covered by the transitional provision. Alternatively, with respect to the current expenditures for the common areas, these expenditures cannot be said to be directly related to the provision of premises for the prosecution of SR&ED and therefore cannot be claimed. Similarly, the capital expenditures were not all or substantially all attributable to SR&ED activities as required by the Income Tax Act and therefore cannot be claimed.

Interpretation of tax legislation

In a line of authorities beginning with Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536, [1984] C.T.C. 294, 84 D.T.C. 6305, the strict rule of interpretation previously applicable in the construction of tax legislation has been abandoned in favour of a plain meaning approach. The words in a tax provision must be given their ordinary meaning in the context of the statutory scheme and its object. [See Vaillancourt v. M.N.R., [1991] 2 C.T.C. 42, 91 D.T.C. 5408 (F.C.A.) and Lor-Wes Contracting Ltd. v. The Queen, [1986] 1 F.C. 346, [1985] 2 C.T.C. 79, 85 D.T.C. 5310 (F.C.A.).]

Given the facts of this case, it is also relevant to consider the effect, if any, of interpretations made by officials of the Department of National Revenue either in Interpretation Bulletins or written opinions. In this regard, recent authorities have confirmed that such opinions, while not binding, may nevertheless provide important guidance in interpreting ambiguous statutory provisions. [See Vaillancourt v. M.N.R., supra, and First Fund Genesis Corp. v. M.N.R., [1991] 2 C.T.C. 14, 91 D.T.C. 5361 (F.C.T.D.).]

Analysis

i. transitional provision

In the 1988 amendments, paragraph 37(7)(f) of the Income Tax Act was added for the purpose of excluding from scientific research and experimental development (SR&ED) expenditures any capital expenditure made in the acquisition of a building. The companion transitional provision exempted or grandfathered from the operation of this new paragraph of the Act a building or leasehold interest acquired before 1990 pursuant to an obligation entered into in writing before June 18, 1987 or the construction of which was commenced before June 18, 1987 by or on behalf of the taxpayer.

In the circumstances of this case, where an obligation was entered into in writing before June 18, 1987 but construction had not begun by that date, a plain reading of the transitional provision would appear to exclude Imapro from its operation. However, in determining the proper interpretation to be given to this section, it is important to recognize that transitional provisions are enacted, out of a sense of fairness, to alleviate the hardship which may be caused by the imposition of retroactive legislation. In this case, the transitional section interpreted only according to its plain meaning would discriminate against a person who had entered into an obligation in writing before June 18, 1987 to construct a building but who had not actually begun the construction by that date. It is difficult, if not impossible, to conceive of any legitimate tax policy reason for creating a distinction between persons who purchase an existing building or begin construction of a building before June 18, 1987 and persons who enter into an obligation in writing before June 18, 1987 to construct a building.

I therefore conclude that it would be more consistent with the object and spirit of the transitional provision to interpret it as including buildings acquired or constructed before 1990 pursuant to an obligation entered into in writing before June 18, 1987. Furthermore, I am of the opinion that my conclusion is supported by the fact that a senior official in the Department of National Revenue, when asked to provide an opinion on the specific circumstances of Imapro, concluded that the transitional provision would operate so as to accord its protection to Imapro. It is also relevant to note that the Department proceeded with its assessment and reassessment on the basis that the transitional provision applied and that the Minister adopted this approach in his notification of confirmation.

ii. Current expenditures

In the 1988 taxation year, Imapro claimed as SR&ED expenditures under paragraph 37(1)(a) of the Act current expenditures in the amount of $9,714 for the maintenance and upkeep of the common areas of the building. These expenditures were for light, power, water, maintenance, property taxes and telephone costs. The Minister disallowed these expenditures on the basis that they related to the maintenance and upkeep of a portion of the common areas of the building not used solely for SR&ED purposes.

In considering whether a portion of current expenditures incurred for the building as a whole may be claimed as SR&ED expenditures, it is necessary to review the statutory framework. The definition of expenditures in subparagraph 37(7)(c)(ii) of the Act was amended in 1986. Following its amendment, clause 37(7)(c)(ii)(A) defined expenditures, not specified as being either capital or current in nature, as being expenditures each of which was incurred for and all or substantially all of which was attributable to the prosecution or provision of premises for SR&ED. Clause (B) of that section further provided for current expenditures that were directly attributable, as determined by regulation, to the prosecution or provision of premises for SR&ED. Prior to its amendment in 1986, the wording in paragraph 37(7)(c) of the Act required expenditures to be wholly attributable to the prosecution or provision of facilities for the prosecution of scientific research. In subsection 2900(3) of the Regulations, current expenditures directly attributable to the provision of premises for the prosecution of SR&ED were defined to be the cost of maintenance and upkeep of such premises, facilities or equipment and other expenditures directly related to such provision that would not have been incurred if such premises, facilities or equipment had not existed.

On a plain reading of subparagraph 37(7)(c)(ii) of the Act, the definition of expenditures in clause (A) of that section includes both current and capital expenditures. This interpretation is supported by the Department of National Revenue Interpretation Bulletin IT-151R3 (See paragraph 10, page 7-88). It is further supported by the fact that, elsewhere in the provisions of the Act dealing with SR&ED, expenditures are qualified as being either current or capital. Accordingly, when considered in this context, the use of the sole word "expenditures" in the clause (A) definition section means that both current and capital expenditures are included. Given this interpretation, it follows that current expenditures are defined in both clauses (A) and (B) as being those expenditures incurred for and all or substantially all of which were attributable or directly attributable to the prosecution or the provision of premises, facilities or equipment for the prosecution of SR&ED.

The plain meaning of the words “all or substantially all attributable” and "directly attributable” used in relation to current expenditures in clauses 37(7)(c)(ii)(A) and (B) of the Act contemplates that these expenditures may be apportioned between SR&ED and other uses in a building. Significantly, the Department of National Revenue in Interpretation Bulletin IT-151R3 appears to have adopted this interpretation as the basis for its position on the meaning to be accorded to these phrases. As well, the Department proceeded with its assessment of Imapro on this understanding and the Minister confirmed it in his notification of confirmation. Furthermore, the change in wording in the Act in 1986 from “wholly attributable” to the new wording of “all or substantially all” and "directly attributable” supports the proposition that expenditures may be apportioned, at least to some degree, between SR&ED and other uses in a building.

Having determined that the expenditures may be apportioned, at least to some extent, between SR&ED and other uses, it must now be considered whether the 47.3 per cent portion of current expenditures claimed by Imapro in 1988 for expenses pertaining to the maintenance and upkeep of common areas of the building are substantially all attributable or directly attributable to the prosecution or provision of premises, facilities or equipment for SR&ED.

With respect to the expression “ substantially all”, these words, as used in another section of the Act, were interpreted in Wardean Drilling v. M.N.R.,

[1974] C.T.C. 190, 74 D.T.C. 6164 (F.C.T.D.); [1978] C.T.C. 270, 78 D.T.C. 6202 (F.C.A.) to mean a substantial portion. In Interpretation Bulletin IT-151, the Department of National Revenue has expressed the view that “ all or substantially all” in the context of subparagraph 37(7)(c)(ii) of the Act means at least 90 per cent. In Wood v. M.N.R., [1987] 1 C.T.C. 2391, 87 D.T.C. 312 (T.C.C.), the interpretation by the Department of "all or substantially all” in another section of the Act to mean at least 90 per cent was described as being merely a useful and functional departmental assessing policy for a term which does not lend itself to any mathematical formula. Even assuming that some leeway is permitted from the 90 per cent rule adopted by the Department in its Interpretation Bulletin dealing with subparagraph 37(7)(c)(ii) of the Act, I am of the opinion that a 47.3 per cent portion of expenditures incurred in relation to SR&ED would not fall within the meaning of the words "all or substantially all”.

Furthermore, I am unable to conclude that the 47.3 per cent portion of expenditures for the maintenance and upkeep of the common areas is directly attributable to SR&ED. The words "directly attributable” must be read in their context, bearing in mind that the previous words in the section were "wholly attributable”. The evidence that SR&ED employees use the common areas and that these areas would have been smaller if the building did not have an SR&ED sector does not convince me that the current expenditures in relation to the maintenance and upkeep of the common areas are directly attributable to SR&ED.

iii. capital expenditures

At issue are capital expenditures from 1987 and 1988 in the amounts of $259,379 and $140,053 respectively which represent a portion of the construction costs for common and administrative areas not used solely for SR&ED purposes.

The question of apportionment is also relevant in considering the capital expenditures issue. In this regard, my analysis in the preceding section is generally applicable to the issue of apportionment by Imapro of capital expenditures. However, it should also be noted that the Department of National Revenue in paragraph 22 of Interpretation Bulletin IT-151R3 has stated that a portion of construction costs can be claimed as capital expenditures on SR&ED. Specifically, the Department has taken the position that, where a building is built partly for SR&ED use and partly for other purposes and a specific area in the building is used only for SR&ED, a reasonable portion of the total cost of the building can qualify as a capital expenditure on SR&ED. The position taken by the Department in the Interpretation Bulletin is reasonable and is consistent with the meaning of the words in the Act when taken in context. I therefore conclude that the reasonable apportionment of construction costs for the purpose of claiming a capital expenditure on SR&ED is permissible. The only question now remaining to be determined is whether the 47.3 per cent construction costs claimed by Imapro as a capital expenditure for SR&ED in relation to the common and administrative areas are reasonable in the circumstances.

The facts as I have found them based on the evidence at trial indicate that Imapro chose to build a single story multiple-use building for economic reasons. Its research and development sector uses exclusively 47.3 per cent of the total area of the building. The centrally located common areas, which include reception, lunchroom, washroom and shipping and receiving areas, as well as electrical, mechanical and garbage rooms, are used by the research and development employees on a regular basis. The general administrative areas of the building are used for the provision of services to all of the company employees. The research and development sector particularly uses administrative services for mail, photocopies, fax, personnel matters, accounting, secure storage in the vault and the storage of darkroom materials. The research and development employees must also use hallways to access both the common and administrative areas, as well as certain research and development work areas. Furthermore, the common and administrative areas of the building would have been smaller, logically by 50 per cent, if the research and development sector had not been included in the building.

These facts, when considered in their totality, establish that the common and administrative areas of the building are integral to the functioning of the research and development sector and are used routinely and regularly by its employees. I therefore conclude that the 47.3 per cent construction costs claimed by Imapro as a capital expenditure for SR&ED in relation to the common and administrative areas are reasonable given the particular facts of this case and ought to be allowed as a deduction.

Decision

The transitional provision applies to the circumstances of Imapro. The Current expenditures claimed in 1988 as SR&ED expenditures for a portion of the maintenance and upkeep expenses of the common areas of the building were properly disallowed by the Minister of National Revenue. However, the capital expenditures claimed by Imapro in 1987 and 1988 for a portion of construction expenses of the common and administrative areas of the building qualify as SR&ED expenditures and ought to have been allowed as a deduction by the Minister of National Revenue.

The appeal is therefore allowed in part with costs and the matter is returned to the Minister of National Revenue for reassessment in accordance with this judgment.

Appeal allowed in part.