28 September 1989 Ruling 58253 F - Scientific Research

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.

September 28, 1989

Dear Sirs:

Re:  Subparagraph 37(7)(f)(i) of the Income Tax Act ("the Act")

We are writing in reply to your letter of June 14, 1989, concerning the interpretation of subparagraph 37(7)(f)(i) of the Act.

In your letter you have outlined a hypothetical situation in which a section of a pre-existing manufacturing plant (built prior to June 18, 1987) was segregated and converted into a laboratory.  All of the work on the conversion was carried out during 1989.  The laboratory is to be used for developing new product lines through basic research.  You stated that officials of Specialty Rulings Division had previously informed you that any expenditures incurred on the conversion would fall under the exclusion in subsection 37(7)(f)(i) of the Act and not be deductible as scientific research and experimental development ("SR & ED") expenditures.  The reason given for this conclusion was that additions and alterations related to a building are considered to be included under the exclusion for acquisition expenditures in subsection 37(7)(f)(i) of the Act.  You have requested that we confirm that this is our Department's position regarding alterations and additions.

Our Comments

We confirm that it is the Department's position that additions and alterations related to an existing building are included under the exclusion for acquisition expenditures in subsection 37(7)(f)(i) of the Act.  Subparagraph 37(7)(f)(i) of the Act states that expenditures on or in respect of SR & ED shall not include any capital expenditure made in respect of the acquisition of a building, other than a prescribed special purpose building.

In our opinion, the legal definition of "building" is such that it includes any additions to an existing building and any alterations of an existing building.  This opinion is based on the following information:

1)     The Oxford English Dictionary, 2cd ed., defines "building" as "that which is built", as additions and alterations are built, they would appear to fit the definition of a building.

2)     Stroud's Judicial Dictionary, 5th ed., gives numerous references to previous judicial decisions related to the definition of "building", some of which are as follows:

a)     "A bay or bow window is a 'building', and its addition to a house will be a breach of a covenant not to erect `any building' in advance of the house",

b)     "Where a statute prohibits a 'building', that will generally, include any.. addition to a building",

c)     "Building ... to be erected" includes alterations and extensions.

3)     A Dictionary of Tax Definitions, 1978, 2cd ed., states that a building "includes any structure or erection, and any part of a building; but excludes plant or machinery comprised in a building".

4)     The term "building" as used in other sections of the Act has been interpreted to include additions and alterations to existing buildings.  For example, for purposes of the investment tax credit a qualified property is defined in subsection 4600(1) of the Income Tax Regulations (the "Regulations") as being "depreciable property of the taxpayer that is a building".  There is no reference made to additions or alterations to an existing building, however, paragraphs 22 to 25 of Interpretation Bulletin IT-331R state that capital additions, alterations or renovations to an existing building will qualify for the investment tax credit provided all other criteria are met.

5)     In British Columbia Forest Products Ltd. v. The minister of National Revenue, 69 DTC 5127, Justice Sheppard reviewed the definition of "building".  On page 5136 the Justice states:

     "In the absence of the ejusdem generis rule the characteristics of a building have been decided as follows.  In Cong Hotel v. London County Council, (1899, 81 L.T., 450) the Hotel had built a glass and iron portico or shelter which projected beyond the general building line of the street and was dovetailed into the main structure of the Hotel.  That was held to be within the statute state that `no building or structure shall without the consent in writing of the Council be erected'. Ridley, J., at page 451 said:

     It is by virtue of the fact that it is a part of a building that it is a building, but I think perhaps one would in more ordinary language call it a structure if you deal with it taken by itself - it is a structure -I think therefore it is in that sense a building.  The Coburg Hotel is a building and this is a portion of it.  It is also, I think, a 'structure'."

6)     Lastly, if a company owned an existing building valued at $50,000 and then added $100,000 in additions and alterations, the company would likely upon completion own a building valued at $150,000.  As the company owns the $150,000 building, it must have acquired the $150,000 building and the $100,000 in additions and alterations must be considered to have been capital expenditures made in respect of the acquisition of that $150,000 building.

We trust this information will be of assistance to you.

Yours truly,

for DirectorBusiness and General DivisionSpecialty Rulings DirectorateLegislative and IntergovernmentalAffairs Branch