As the saying goes, there are only two certainties in life—death and taxes. Unless, as in the case of Miculinic Investment Corp. v. 2303515 Ontario Inc., et al., you're dealing with the amount of tax owing on a purchase of mixed-use property without a clear purchase price allocation between the residential and commercial portions. In this case, there most definitely was uncertainty.
Background and Transaction Overview
On August 4, 2021, Miculinic Investment Corp. (the Vendor) entered into an agreement of purchase and sale (the APS) with 2303515 Ontario Inc. and 1000029174 Ontario Inc. (the Purchaser), to sell a mixed residential and commercial use property for C$11,500,000. The APS contained a standard form fill in the blank provision that stated that harmonized sales tax (HST) was "included in" the purchase price. The APS did not set out the amount of HST owing, or what portion of the property was residential versus commercial (which, in this case, had an impact on the amount of HST owing). The dispute arose when the Vendor prepared a statement of adjustments showing that a greater portion of the property was for residential use than what the Purchaser had calculated, meaning less HST was payable.
As the Purchaser would self-assess the HST and claim input tax credits to fully offset the HST owing to the Canada Revenue Agency (the CRA), the impact to the Purchaser of lower HST was, simply put, a higher purchase price. The parties ultimately entered into an agreement on the closing date, which in essence stated that the Purchaser would remit any HST owing to the CRA. The parties closed the transaction without prejudice to the adjudication of this dispute and the Purchaser subsequently filed its HST return with the CRA.
HST Refresher
By way of refresher, recall that pursuant to the Excise Tax Act (the Act), a purchaser of real property is generally obligated to pay HST, unless there is an express exemption (such as for used residential property). The vendor is obligated to collect and remit the tax. Where the purchaser is an HST registrant and meets certain other criteria, however, the vendor generally does not need to collect the HST and the purchaser must instead self-assess the tax. In the ordinary course, the purchaser self-assesses the tax in the applicable HST return but claims a corresponding input tax credit, resulting in a nil amount owing.
Sales of several properties for a single purchase price often take on the character of the dominant property, whereby the HST status of such dominant property governs the entire sale. However, residential and commercial real estate is expressly separated under the Act, such that each distinct parcel receives its own HST treatment. Additionally, where there are multiple items sold for a single purchase price, the Act generally requires that the consideration be allocated "reasonably" among such items. Therefore, there is a duty to allocate the purchase price among the residential and commercial portions of real property in a transaction.
Court Analysis and Decision
At the time the matter was heard before Justice Pollack, the CRA had assessed the Purchaser's return and accepted the Purchaser's allocation. Nevertheless, the Vendor took the position that its proposed allocation was consistent with past practice, based on professional advice, and that it accorded with the actual use of the property which included about 8 acres where the residential home was located (with the surrounding lawns).
The Vendor also filed expert evidence in support of its position. The Vendor produced its own assessment from the CRA which accepted the Vendor's position on the commercial-residential split in the Vendor's past tax returns (based on various expenses and revenue when it owned the property). The Vendor sought to reopen the matter on the basis of this fresh evidence, but was denied by Justice Pollack.
The Court of Appeal, found, among other things, that Justice Pollack erred by not interpreting the agreement as a whole by looking “to the words of the agreement and the factual matrix at the time the agreement was made to determine the objective intentions of the parties”, as required by the Supreme Court of Canada in Sattva Capital Corp. v. Creston Moly Corp.
The Superior Court of Justice (the Court), which reheard the decision of the Court of Appeal, also engaged in an analysis of the APS and HST provision to determine the parties' reasonable expectations and objective intentions.
The Purchaser's position was that the language in the APS was clear and meant that whatever the CRA determines to be "such tax" shall be the amount included in the purchase price and accordingly deducted from the balance due on closing to the Vendor.
The Court was of the view that it was arguable that the HST provision in the APS was not ambiguous in fact, as the relevant provision in the APS provided that whatever the tax was determined by the CRA to be owing by the Purchaser, was to be included in the purchase price. Therefore, the parties accepted the risk and uncertainty that came with a CRA determination, namely that the CRA might assess the HST differently than it had done in other contexts. The Court found that there was no evidence that the parties entered into the APS with the expectation that HST would be a certain amount or be calculated based on past practice. Further, the Vendor was not an unsophisticated party.
In conclusion, the Court found that while there were seemingly inconsistent rulings from the CRA regarding the assessment the Vendor had received versus the assessment the Purchaser obtained in connection with the subject transaction, it is the assessment that the Purchaser received that prevails here, given that the term "such tax" used on the APS refers to the tax deemed to be owing under this specific transaction.
Practical Implications and Key Takeaways
Note that if the APS had specified that HST was in addition to the purchase price, then this issue wouldn't have arisen, as the amount of HST payable would be of no consequence to the Vendor.
So, the key takeaways from this case are:
- in cases where HST is specified to be included in the purchase price, give due thought and consideration to what type of real property you are dealing with, and whether any part of the property may be exempt from HST. If you are dealing with mixed use property, always err on the side of caution and specify the purchase price allocation upfront; and
- as a purchaser, it is prudent to seek representations and warranties from the vendor regarding the use of real property, and if you are relying on the fact that a portion of the real property is HST exempt, the necessary particulars to confirm same.
There are many uncertainties in life, but the amount of HST owing on the purchase of mixed use real property doesn't need to be one of them.
Note: The amount of tax payable, as well as the purchase price allocation between the residential and commercial portions, can always be subject to reassessment by the CRA.
