http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/108101/index.do 
Sun Life Assurance Company of Canada v. The Queen (February 16, 2015 – 2015 TCC 37, Owen J.).
Précis: Sun Life Assurance Company of Canada is in the business of providing financial services and, as such, most of its inputs do not give rise to ITCs. However it has a force of independent contractor financial advisers (“Advisers”) selling its products. In the normal course Sun Life sublets space to its Advisers. Sun Life claimed ITCs in the amount of $1,279,180.49 for the reporting periods ended December 31 in each of 2004, 2005 and 2006. The claim was based on its calculation of space leased by, or held for the purpose of leasing to, its Advisers. The claim also included a proportion of common space, corridors and hallways. CRA rejected the claim as far as it related to space not actually leased at the time to Advisers, including the allocation of common space, etc. CRA argued that leasing space to advisers was a secondary business; accordingly holding vacant space formed part of its exempt business activity. CRA also argued that the common space was used by the Advisers in selling Sun Life product and therefore was not used in the course of taxable activity. The Tax Court rejected CRA’s position. The method of allocation was fair and reasonable and the Court would not second guess Sun Life’s business judgment in terms of how much vacant space inventory it needed for future subleases to its Advisers.
Decision: Sun Life is engaged in the sale of financial products using Advisors. For this business activity it leases property throughout Canada:
[3] Sun Life is a corporation incorporated under the laws of Canada that operates as an insurance company. Sun Life sells a range of financial products and services that are primarily insurance-based but that also include wealth management products, such as investments and retirement products (collectively, the “Financial Products”). The Financial Products are sold through many different channels, including through independent contractors called sales advisers (“Advisers”). The sale of Sun Life’s Financial Products is considered to be the supply of a financial service that is an exempt supply by virtue of Part VII of Schedule V to the ETA.
[4] Sun Life maintains financial centres across Canada which focus on the sale of Financial Products. The financial centres house both employees of Sun Life and Advisers. The space occupied by the financial centres is leased from third party landlords and Sun Life pays GST on the rent it pays for each financial centre as well as on any leasehold expenditures associated with the financial centre.
In the course of its business it subleases space to Advisers:
[9] The rental arrangement is implemented through a sublease agreement between the Adviser and either Sun Life or a predecessor of Sun Life. The financial terms of the sublease are set out in an e-mail to the Adviser, which is referenced in the body of the sublease agreement. Generally, the rent is calculated as the area of the Adviser’s office in square feet times a monthly rate per square foot plus GST. The Adviser is also subject to a monthly charge for the telephone and ethernet connection in the rented office. In cross-examination, Mr. Coutu acknowledged that, although the Adviser was renting a specific office within the financial centre, under the sublease the Adviser would have full access to the financial centre and the building common areas and would access the financial centre through the same entrance as the employees of Sun Life.
Sun Life claimed ITCs for 2004, 2005 and 2006 in connection with the subleases. The computation of those ITCs included both common areas and vacant space:
[13] Mr. Coutu testified that Sun Life’s model targets a ratio in each financial centre of one employee of Sun Life to eight Advisers. This ratio dictates the amount of space at each financial centre that is considered by Sun Life to be available to Advisers. On average, a portion of the space allocated to Advisers is vacant. A chart at paragraph 32. r) of the Reply, with which Mr. Coutu agreed, summarizes the information regarding the amount of vacant space in each year as follows:
| |
Vacant Office Space (Square feet) |
| 2004 |
83,566 |
| 2005 |
82,924 |
| 2006 |
81,932 |
[14] Mr. Coutu testified that the vacant office space varies from financial centre to financial centre and represents space that is kept available for new Advisers who choose to rent space from Sun Life, so that the financial centres have the capacity to grow. The variability of the vacancy rate from financial centre to financial centre during 2004, 2005 and 2006 is shown in three charts at Tabs 1, 2 and 3 of the Joint Book under the column titled “Vacant Space As a % of Total Area under Lease”.
[15] In cross-examination, Mr. Coutu conceded that the vacancy rate could be as high as 50% if measured as a percentage of the area available for rent to Advisers instead of the total area under lease. Mr. Coutu further stated that the vacant space would not be rented to someone who was not an Adviser but that a vacant office could be used by an employee of Sun Life, at which point it would no longer be considered Adviser space. If the area of a financial centre is determined to be too large for Sun Life’s needs, the excess space may be returned to the landlord or it may be physically segregated and subleased. Mr. Coutu did not know whether this had occurred during the periods in issue.
…
[20] In a nutshell, Sun Life determined what it considered to be the area acquired for the use of Advisers in each financial centre (including the area of any vacant space held for such use) and then grossed up that area by three factors intended to attribute to the Advisers their share of (1) the jointly used spaces within the financial centre, (2) the internal corridors and hallways of the financial centre, and (3) the building common areas attributed to Sun Life in the lease for the financial centre (for clarity, I will refer to these three areas collectively as the common-use space). The total so allocated to the Advisers was then divided by the total area under lease to provide the percentage of the GST paid by Sun Life on rent and leasehold expenditures that was attributable to the Advisers.
The Crown argued that Sun Life’s allocation was unreasonable:
[26] The Respondent states that the facts and the numbers in this appeal are not in dispute. The Respondent’s position is simply that the method chosen by Sun Life is not a “fair and reasonable” method for determining the extent to which the acquisition of the Leased Space was for the purpose of making taxable supplies for consideration. The Respondent submits that the primary business of Sun Life is the rendering of financial services, which is an exempt supply under the ETA and does not give rise to ITCs. Sun Life also carries on a side business which consists of subleasing office space to Advisers.
[27] The Respondent submits that, while there is no doubt that the subleasing of the office space to Advisers is a taxable supply that entitles Sun Life to ITCs, the method chosen to determine those ITCs does not reflect the fact that Sun Life’s efforts are focused not on the subleasing of the space but on the recruitment of Advisers, who may or may not sublease space from Sun Life. The intention to sublease the vacant space is thus secondary to the intention to recruit Advisers to sell Financial Products for Sun Life. The Respondent argues that the Advisers play two roles. The first is as tenants of Sun Life. The second is as workers helping Sun Life carry on its business of selling Financial Products. In the Respondent’s view, the allocation of the common space to the taxable supply of space to the Advisers fails to recognize that the Advisers are using the common space not because they are tenants but because they are selling Financial Products on behalf of Sun Life. The Respondent says that this is most evident in the allocation of the closing room space to the taxable supply of space to the Advisers. When using that space, the Adviser is not acting as a tenant but as a seller of Financial Products for Sun Life.
[28] To support this position, the Respondent points to the fact that the percentage of vacant space is considerable when compared to the space actually subleased to the Advisers and that there was no evidence of any attempt by Sun Life to downsize the space rented by it from the third party landlords. As well, Sun Life admitted that it would not rent the vacant space to anyone other than an Adviser. The Respondent submits that this situation is therefore different from the case of a landlord who is in the business of subleasing space but has vacancies due to economic conditions. The Respondent also states that Sun Life’s assertion that all the vacant space is intended for Advisers ignores the possibility that the space could be used for another purpose, such as occupation by an employee of Sun Life.
The Court noted that the ETA required that Sun Life’s allocation be fair and reasonable:
[41] Mr. Coutu testified that one purpose for which Sun Life acquired the Leased Space was to rent a portion of that space to Advisers (that is, one purpose for acquiring the Leased Space was to make taxable supplies for consideration in the course of Sun Life’s business). The objective facts support this stated purpose, as offices in the Leased Space were rented by Sun Life to Advisers who in turn used the space to conduct their own businesses, which included the sale of Financial Products. The evidence is that Leased Space was also acquired by Sun Life for the purpose of making exempt supplies in the course of its financial services business (that is, for the purpose of making supplies in the course of its business that are not taxable supplies made for consideration).
[42] The dual purpose for the acquisition of the Leased Space requires Sun Life to adopt a method for determining the extent to which the Leased Space was acquired for the purpose of making taxable supplies for consideration or for other purposes. The method chosen must be fair and reasonable and must be used consistently throughout the year. The consistency requirement is not in issue in this case.
The Court rejected the Crown’s argument that the Advisers were using the common space to carry on Sun Life’s business:
[48] The Respondent argued, however, that the explicit allocation of the common-use space to the taxable supply of space to the Advisers that occurs under the new method fails to recognize that the Advisers are using the common-use space not because they are subtenants but because they are selling Financial Products on behalf of Sun Life. In my view, this argument fails to recognize that the Advisers are independent contractors and that their use of the subleased space is in furtherance of their own business objectives, which include the sale of products other than the Financial Products [of Sun Life].
The Court accepted Sun Life’s evidence that the vacant space was acquired for future use by Advisers and declined to second guess its business judgment in that regard:
[52] I accept Mr. Coutu’s uncontradicted testimony that the vacant space was reserved for the use of Advisers to accommodate the growth of the financial centres. In my view, attributing the purpose of making taxable supplies for consideration to the vacant space is fair and reasonable in the circumstances of this case because it accurately reflects Sun Life’s purpose with respect to the direct use of that vacant space. The attribution of common-use space to that vacant space in accordance with the new methodology is fair and reasonable for the reasons already stated in respect of the subleased space.
[53] The Respondent did suggest that the vacant space could be used for a different purpose, such as to house an employee of Sun Life. However, there was no evidence that this in fact occurred during 2004, 2005 or 2006. The evidence was that, if a change in use occurred, the particular vacant space (and its associated common-use space) would be removed from the pool of space reserved for the Advisers such that ITCs would no longer be claimed in respect of that space.
[54] The Respondent also pointed to the amount of vacant space as supportive of her position. However, the fact that there was a significant amount of vacant space reserved for the use of Advisers does not alter Sun Life’s purpose in acquiring that space. The amount of vacant space that is required for rental to Advisers is a business judgment that is best left to Sun Life absent a sham or window dressing or similar vitiating circumstances, none of which are present here.
As a result the appeal was allowed with costs.