CORAM: STONE J.A.
LONDON LIFE INSURANCE COMPANY
- and -
HER MAJESTY THE QUEEN
HEARD at Toronto, Ontario, on Thursday, November 23, 2000
JUDGMENT delivered at Ottawa, Ontario, on Thursday, December 21, 2000
REASONS FOR JUDGMENT BY: ROTHSTEIN J.A.
CONCURRED IN BY: STONE J.A.
CORAM: STONE J.A.
LONDON LIFE INSURANCE COMPANY
- and -
HER MAJESTY THE QUEEN
REASONS FOR JUDGMENT
 This is an appeal from the Tax Court of Canada. The issue is whether London Life is entitled to claim input tax credits (ITCs) under Part IX of the Excise Tax Act,1 in respect of goods and services required to improve the premises that it leased for the purposes of its business.
 In its 1991 and 1992 taxation years, London Life leased commercial office space for its regional sales offices. Under the terms of its leases, London Life received tenant improvement allowances from its landlords of approximately $2.2 million. London Life collected GST of approximately $155,000 paid by the landlords on the $2.2 million in tenant improvement allowances.
 In accordance with the terms of its leases, London Life undertook leasehold improvements to the leased premises at a cost of about $2.1 million. As it acquired various construction property and services, it paid GST to its contractors and suppliers a total of approximately $147,000. London Life then claimed ITCs of $147,000 as an offset to the GST of $155,000 it was required to remit to the Minister of National Revenue in respect of the tenant improvement allowances that it had received.
THE MINISTER'S ASSESSMENT
 The Minister disallowed the ITC claim on the ground that London Life was engaged in the business of suppling "financial services" which are "exempt supplies" under the GST legislation.2 Since London Life's "financial services" business does not constitute "commercial activity" for purposes of the GST legislation, and since the leasehold improvements were undertaken to further London Life's "financial services" business, the Minister decided that London Life was not entitled to ITCs.
DECISION OF THE TAX COURT
 In succinct reasons, the learned Tax Court Judge upheld the Minister's assessment. He concluded:
| London Life acquired the leasehold improvements for use in the making of supplies in the course of its tax exempt insurance business. Therefore, the improvements were not undertaken in the course of a "commercial activity" and [ITCs are] not applicable to GST paid for those improvements.3 |
LONDON LIFE'S POSITION
 It is London Life's position that under its lease agreements and in consideration for the tenant improvement allowances it received from its landlords, it supplied leasehold improvements to the landlords. The leasehold improvements were not "exempt supplies" as they were not "financial services". Rather, the improvements reflected an independent "commercial activity" involving the supply of GST taxable property and services to the landlords. Accordingly, London Life says that it should be entitled to ITCs to offset the GST it was required to remit in respect of the tenant improvement allowances it received.
 At first blush, London Life's position seems counter-intuitive. London Life did not enter into its leasing agreements for the purpose of providing leasehold improvements to its landlords. Its acquisition of leasehold improvements was ultimately for the purpose of enhancing its financial services business which involved the provision of "exempt supplies". Viewed in this way, London Life should not be entitled to ITCs for the construction property and services that it obtained for the leasehold improvements, since it was not engaged in a "commercial activity".
 However, a careful consideration of the relevant legislation, the Minister's interpretation bulletins and the precise transactions leads me to the opposite conclusion.
 Subsection 169(1) sets forth the formula for determining input tax credits. In broad terms, ITCs are the product of the GST paid for property or services multiplied by the extent (expressed as a percentage) to which the property or services are used in the course of commercial activities.
 Subsection 169(1) says, in relevant part:
169. (1) Subject to this Part, where property or a service is supplied to [...] a person and, [...] tax in respect of the supply [...] becomes payable by the person or is paid by the person without having become payable, the input tax credit [...] is the amount determined by the formula
A x B
A is the total of all tax in respect of the supply [...]; and
(b) where the property or service is acquired [...] by the
169. (1) Sous réserve de la présente partie, le crédit de taxe sur les intrants d'une personne, [...] relativement à un bien ou à un service [...] qui lui est fourni, correspond au résultat du calcul suivant si, [...] la taxe relative [...] à la fourniture devient payable par la personne ou est payée par elle sans qu'elle soit devenue payable_:
A x B
A représente la taxe relative [...] à la fourniture [...];
b) dans le cas où le bien ou le service est acquis [...] par
person for use in improving capital property of the person, the extent (expressed as a percentage) to which the person was using the capital property in the course of commercial activities of the person immediately after the capital property or a portion thereof was last acquired [...] by the person, and
(c) in any other case, the extent (expressed as a percentage) to which the person acquired [...] the property or service for consumption, use or supply in the course of commercial activities of the person.
la personne pour utilisation dans le cadre d'améliorations apportées à une de ses immobilisations, le pourcentage qui représente la mesure dans laquelle la personne utilisait l'immobilisation dans le cadre de ses activités commerciales immédiatement après sa dernière acquisition [...] de tout ou partie de l'immobilisation;
c) dans les autres cas, le pourcentage qui représente la mesure dans laquelle la personne a acquis [...] le bien ou le service pour consommation, utilisation ou fourniture dans le cadre de ses activités commerciales.
 In examining subsection 169(1), it is first necessary to determine whether paragraph (b) or (c) is applicable. London Life says that only paragraph 169(1)(c) is applicable. The Minister says paragraph 169(1)(b) is the applicable provision and that, in the alternative, paragraph 169(1)(c), even if applicable, does not assist London Life.
 On the facts of this case, I do not think that paragraph 169(1)(b) applies. Under paragraph 169(1)(b), the property or services must be acquired "for use in improving capital property". According to the Minister, the capital property in question is London Life's leasehold interests. The property or services acquired are the leasehold improvements.
 In my opinion, the Minister's argument fails because the leasehold improvements do not qualify as an "improvement" as that term is defined in the Act. An "improvement" is defined in subsection 123(1) as property or services supplied for the purpose of improving the capital property "to the extent that the consideration ... is ... included in determining the adjusted cost base ... of the [capital] property [of the person] for the purposes of [the Income Tax Act]".
 London Life says that the consideration it paid for the leasehold improvements was not included in the capital cost, i.e. adjusted cost base of its leasehold interests, and therefore there were no improvements for the purposes of paragraph 169(1)(b). It states that, under the Income Tax Act (ITA)4, the only amount to be included in the adjusted cost base is the amount by which the cost of the leasehold improvements exceeds the tenant improvement allowances which it received. In this case, the cost of the improvements did not exceed the allowances received. Indeed, London Life acquired only $2.1 million of leasehold improvements, approximately $100,000 less than the $2.2 million that it received from its landlords.
 Under the ITA, inducements which specifically relate to the cost of leasehold improvements are normally included in the tenant's income under paragraph 12(1)(x)(iv) of the ITA, unless the tenant elects to reduce the capital cost of the leasehold improvements by the tenant inducement allowances pursuant to subsection 13(7.4) of the ITA. If the tenant elects under subsection 13(7.4), as London Life did here, the inducement is excluded from income by virtue of subparagraph 12(1)(x)(vii) and is applied to reduce the capital cost of the improvements. In this case, the election resulted in the exclusion of the inducement allowances from London Life's business income for income tax purposes, up to the amount expended for the leasehold improvements. However, as the cost of the leasehold improvements was less than the inducement allowances London Life received from its landlords to effect the improvements, the cost of the leasehold improvements was not added to the adjusted cost base of London Life's leasehold interests.
 Because there was no addition to the adjusted cost base of the leasehold interests from the leasehold improvements, the leasehold improvements were not an "improvement" within the definition of that term in subsection 123(1). Accordingly, as the application of paragraph 169(1)(b) depends upon the property and services being "acquired for use in improving capital property", paragraph 169(1)(b) is not applicable.
 London Life also argued that paragraph 169(1)(b) is not applicable because the leasehold improvements were not supplied for the purposes of improving capital property, ie. its leasehold interests, but rather for the purpose of improving the landlords' property. In view of my conclusion with respect to the definition of "improvement", it is not necessary to decide this question.
 Paragraph 169(1)(c) is applicable "in any other case". Since I have held that the only other potentially relevant provision (paragraph 169(1)(b)) does not apply, paragraph 169(1)(c) must be applicable in this case. The question under paragraph 169(1)(c) is whether the property or services, i.e. the construction inputs for the improvements to the leased premises, were acquired by London Life for "use or supply in the course of commercial activities". "Commercial activity" is defined in subsection 123(1)5:
123(1) "commercial activity" means
(a) any business carried on by the person,
[. . .]
(c) any activity engaged in by a person that involves the supply of real property or of a right or interest in respect of real property by that person,
123(1) « _activité commerciale_ » Constituent des activités commerciales exercées par une personne_:
a) l'exploitation d'une entreprise;
[. . .]
c) les activités comportant la fourniture d'immeubles ou de droits sur des immeubles.
but does not include
(d) any activity engaged in by a person to the extent that it involves the making of an exempt supply by the person,
[. . .]
La présente définition exclut:
d) les activités exercées par une personne, dans la mesure où elles comportent la réalisation par celle-ci d'une fourniture exonérée;
[. . .]
 London Life acknowledges that its principal business is the provision of financial services, and that, since this involves making exempt supplies, it is not a commercial activity. It further acknowledges that, if the leasehold improvements are held to have been acquired for use in the course of its financial services business, the extent to which the leasehold improvements are used in commercial activities would be 0% and it would not be entitled to ITCs.
 However, in the circumstances of this case, London Life says that its acquisition of construction property and services for its leasehold improvements involved the supply of real property to its landlords, i.e. a commercial activity involving the making of taxable supplies. It is this specific activity, rather than its more general business, that it says is relevant to the determination of this case. On this point, London Life emphasizes that under the terms of its leases:
| 1. The tenant improvement allowances it received from the landlords were linked to its provision of the leasehold improvements; and |
| 2. The leasehold improvements became the property of the landlords immediately upon installation. |
 London Life was required to collect GST from the landlords with respect to the leasehold improvement allowances it received. Since GST was applicable to the tenant improvement allowances, it necessarily follows that London Life was making taxable supplies to the landlords. The only possible taxable supplies could be the leasehold improvements. This conclusion is consistent with the fact that under the leases, the improvements became the property of the landlords immediately upon installation.
 The parties and the learned Trial Judge have also relied on subsection 141.01(2). According to the Technical Notes of February 1994 issued by the Department of Finance,6 section 141.01 is designed to clarify and reinforce the requirement to apportion inputs under subsection 169(1) for purposes of ITCs, based on the extent to which they are used in making taxable and non-taxable supplies.
 Thus, a person is deemed to have acquired property or services for use in the course of commercial activities to the extent that the property or services are acquired for the purpose of making taxable supplies for consideration. Conversely, to the extent that the property or services are acquired for making non-taxable supplies or for not making supplies at all, they are deemed not to have been acquired for use in the course of commercial activities.
 Subsection 141.01(2)7 provides in pertinent part:
141.01(2) Notwithstanding subsection 141(5), where a person acquires [...] property or a service for consumption or use in the course of an endeavour of the person, the person shall, for the purposes of this Part, be deemed to have acquired [...] the property or service
(a) for consumption or use in the course of commercial activities of the person, to the extent that the property or service is acquired [...] by the person for the purpose of making taxable supplies for consideration in the course of that endeavour; and
(b) for consumption or use otherwise than in the course of commercial activities of the person, to the extent that the property or service is acquired [...] by the person
(i) for the purpose of making supplies in the course of that endeavour that are not taxable supplies made for consideration, or
(ii) for a purpose other than the making of supplies in the course of that endeavour.
141.01(2) Malgré le paragraphe 141(5), la personne qui acquiert [...] un bien ou un service pour consommation ou utilisation dans le cadre de son initiative est réputée, pour l'application de la présente partie, l'acquérir [...] pour consommation ou utilisation:
a) dans le cadre de ses activités commerciales, dans la mesure où elle l'acquiert [...] afin d'effectuer, pour une contrepartie, une fourniture taxable dans le cadre de l'initiative;
b) hors du cadre de ses activités commerciales, dans la mesure où elle l'acquiert [...]:
(i) afin d'effectuer, dans le cadre de l'initiative, une fourniture autre qu'une fourniture taxable effectuée pour une contrepartie,
(ii) à une fin autre que celle d'effectuer une fourniture dans le cadre de l'initiative.
 In my opinion, subsection 141.01(2) assists London Life. An "endeavour" is defined in subsection 141.01(1) as, amongst other things, "the making of a supply ... of real property." The endeavour here is the supplying of leasehold improvements to the landlords, i.e. the making of a supply of real property. London Life acquired the construction inputs for the purpose of providing taxable supplies, i.e. leasehold improvements to its landlords for consideration, i.e. the tenant improvement allowances. London Life is therefore deemed to have acquired the construction inputs for the leasehold improvements for use in the course of a commercial activity.
 This approach is reinforced by the Minister's most recent GST/HST Memorandum,8 issued in August 1999. According to the Memorandum, if a landlord provides a leasehold improvement allowance, the lessee is considered to have made a taxable supply to the landlord of the construction goods and services used in the leasehold improvements for which the allowance is payment. According to the Memorandum, the lessee could claim ITCs with respect to the GST paid on the construction inputs. Paragraph 46 provides:
| If the landlord provides a cash inducement for the lessee to carry out improvements, the lessee is considered to have made a taxable supply of the construction inputs (i.e., construction services and building materials) used to improve the leased property to the landlord for which the payment is consideration. The lessee, if a GST/HST registrant, must charge and collect GST/HST on the payment received from the landlord. The landlord, if a GST/HST registrant, may claim an ITC with respect to the GST/HST paid or payable on the cash inducement to the lessee. Moreover, the lessee could claim ITCs with respect to the GST/HST paid or payable on purchases used to improve the property. [emphasis added] |
It would appear from this Memorandum that the Minister considers that, when a tenant improvement allowance is paid, the landlord is paying for and acquiring the leasehold improvements (as it legally is, under the terms of the leases in this case) for provision to the tenant. In providing leasehold improvements to the landlord, i.e. the supply of real property, the tenant is carrying on a commercial activity, irrespective of whether the business subsequently conducted by the tenant from the leased premises involves the making of exempt supplies.
 This last point is critical in this case because London Life's business, carried on from the leased premises, only involves the making of exempt supplies.
 A change in the Minister's August 1999 Memorandum from the previous April 15, 1991 Technical Information Bulletin9 relative to this matter, is a further indication that the Minister advocates the interpretation advanced by London Life.10 In the April 15, 1991 Technical Information Bulletin the Minister states:
| The tenant could claim an input tax credit for the GST paid on purchases used to improve the property to the extent that such improvements are for use in a commercial activity. [emphasis added] |
The words "to the extent that such improvements are for use in a commercial activity" have been deleted in the August 1999 Memorandum.
 Prior to the August 1999 Memorandum, it was certainly arguable that the Minister did not consider that the provision of the tenant improvements pursuant to the terms of the lease in itself constituted "commercial activities." Thus, ITCs could only be claimed "to the extent that such improvements are for use in commercial activities", that is, when the lessee was conducting commercial activities from the leased premises. Whether a change or a clarification, the deletion of those words makes it clear that the Minister does not consider that the business to be carried on from the leased premises is relevant as to whether the tenant may claim ITCs. The tenant is thus entitled to claim ITCs simply because of its provision of leasehold improvements to the landlord in consideration for receipt by it of a leasehold improvement allowance from the landlord.
 While the Minister's memoranda do not have the force of law, they may assist in providing an explanation and understanding of statutory provisions. The Supreme Court of Canada and this Court have given weight to Interpretation Bulletins and Minister's Memoranda, in cases where the legislative provision to which they relate is not clear. In Nowegijick v. The Queen,11 Dickson J. (as he then was) held at page 37 that:
| Administrative policy and interpretation are not determinative but are entitled to weight and can be an "important factor" in case of doubt about the meaning of legislation: per de Grandpré, J.,  1 S.C.R. 851">Harel v. Deputy Minister of Revenue of Quebec,  1 S.C.R. 851 at p. 859. |
 In Vaillancourt v. Deputy Minister of National Revenue,12 Décary J.A. said at p. 674:
| It is well settled that Interpretation Bulletins only represent the opinion of the Department of National Revenue, do not bind either the Minister, the taxpayer or the courts and are only an important factor in interpreting the Act in the event of doubt as to the meaning of the legislation. Having said that, I note that the courts are having increasing recourse to such Bulletins and they appear quite willing to see an ambiguity in the statute -- as a reason for using them -- when the interpretation given in a Bulletin squarely contradicts the interpretation suggested by the Department in a given case or allows the interpretation put forward by the taxpayer. When a taxpayer engages in business activity in response to an express inducement by the Government and the legality of that activity is confirmed in an Interpretation Bulletin, it is only fair to seek the meaning of the legislation in question in that bulletin also. As Professor Côté points out in The Interpretation of Legislation in Canada: "The administration's presumed authority and expertise is never more persuasive than when the judge succeeds in turning it against its author, demonstrating a contradiction between the administration's interpretation and its contentions before the Court." |
In the case at hand, London Life's interpretation, that its provision of leasehold improvements to the landlords constitutes a commercial activity, is consistent with the Minister's August 1999 Memorandum dealing with this issue. This is especially the case, having regard to the change from the April 15, 1991 Technical Information Bulletin to the August 1999 Memorandum.
 I have seen no satisfactory explanation as to why the Minister refused to apply the interpretation contained in the August 1999 Memorandum in this case. The fact that the Minister's position in this appeal is not consistent with the approach in the August 1999 Memorandum casts doubt as to the validity of the interpretation advanced on his behalf in this Court.
 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. In this way, London Life's provision of leasehold improvements to the landlords constitutes a commercial activity.
 Accordingly, London Life should be entitled to ITCs in respect of the GST paid for the construction property and supplies acquired for leasehold improvements, i.e. $147,000, as an offset to the GST it would otherwise be required to remit to the Minister, i.e. $155,000 in respect of the tenant improvement allowances it received.
 Allowing ITCs in this case is consistent with the principle underlying the Act that double taxation ought to be avoided. GST is payable on the tenant improvement allowances received by London Life as consideration for improving the leased premises. If ITCs are not allowed with respect to GST paid in relation to the construction inputs for the leasehold improvements as an offset to the GST payable on the tenant improvement allowances, double taxation will be imposed in respect of the same items. As David M. Sherman, author of the Canada GST Service, noted in his editorial comment on the Tax Court decision in this case:
| [A]llowing the ITCs [in this case] is appropriate on policy grounds. Otherwise the GST gets "locked in" and becomes unrecoverable merely because the payment flows through an entity that makes exempt supplies. If the landlord has paid for the improvements directly, or London Life paid for them as the landlord's agent, the ITCs would clearly have been allowed.13 |
 As counsel for London Life pointed out in argument, if the landlord makes improvements and includes their cost in the rent, or if the tenant makes the improvements and the rent is reduced as a result, there is no double taxation. The fact that London Life found it more efficient to receive tenant improvement allowances, carry out the leasehold improvements itself, and turn them over to the landlords so that the landlords could provide improved leased premises to London Life, should not preclude London Life from recovering ITCs and compel it to incur double taxation.
 For these reasons, the appeal should be allowed with costs here and in the Tax Court, the decision of the Tax Court set aside in respect of this issue, and the matter remitted to the Minister of National Revenue for reassessment in accordance with these reasons.
John M. Evans J.A."
1 R.S.C. 1985, c. E-15, as amended.
2 Ibid., (Part IX), Schedule V, Part VII.
3 London Life Insurance Company v. Canada,  G.S.T.C. 93-1, at 93-5 (T.C.C.).
4 R.S.C. 1985, c. 1 (5th Supp.), as amended.
5 The definition of "commercial activity" was amended by S.C. 1993, c. 27, s. 10(1). The amendment was applicable after September 1992. The amendment is not relevant to the determination of the present appeal.
6 Department of Finance, Technical Notes (February 1994), Subsection 141.01(2) - Acquisition for Purpose of Making Supplies.
7 Subsection 141.01(2) was amended for its application after September 1992. The amendment is not relevant to the determination of the present appeal.
8 GST/HST Memoranda Series, Memorandum 19.4.1. "Commercial Real Property - Sales and Rentals", August 1999.
9 Revenue Canada, Technical Information Bulleting B-054: Application of the Goods and Services Tax (GST) to Lease Inducements, April 15, 1991.
10 According to David Sherman in Canadian Tax Research: A Practical Guide, 3rd ed. (Scarborough: Carswell, 1997) at 163, "Technical Information Bulletins contain technical descriptions of recent changes in administrative policy, usually on very specific topics. Many such Bulletins are issued as temporary documents--in the nature of technical press releases--and subsequently cancelled when the material in them is incorporated into a GST Memorandum." The treatment of leasehold improvements and leasehold improvement allowances in the April 15, 1991 Technical Information Bulletin was changed and incorporated in the August 1999 Memorandum and the April 15, 1991 Technical Information Bulletin was cancelled.
11  1 S.C.R. 29"> 1 S.C.R. 29.
12  3 F.C. 663 (C.A.).
13 London Life Insurance Co. v. Canada, supra, at 93-8.