Under the terms of its leases, the Appellant, whose principal buisness was providing exempt financial services, undertook leasehold improvements to the leased premises at a cost of about $2.1 million and received tenant improvement allowances from its landlords of approximately $2.2 million.
The availability of an ITC was governed by s. 169(1)-B(c) rather than (b) because (under the definition of "improvement" in s. 123(1)), the cost of the improvements was not included in their adjusted cost base for purposes of the Income Tax Act because an election was made under s. 13(7.4) of the Income Tax Act to reduce the capital cost of the improvements by the amounts paid by the landlords.
Full ITCs were available under s. 169(1)-B(c) because the Appellant was supplying the leasehold improvements to the landlords for the leasehold improvement allowances, which was a commercial activity. Rothstein JA stated (at para. 33):
Certainly, the ultimate purpose of London Life is to lease improved premises for its financial services business of providing exempt supplies. But when the leasing transactions are considered independently, London Life is supplying the leasehold improvements to the landlords for the consideration of the leasehold improvement allowances. In turn, the landlords are providing the improved leased premises to London Life for its financial services business.