The meaning of HST 'included in' the purchase price for real property (after the CRA has assessed the HST)

Abstract

Greg Farano is a corporate and tax lawyer and partner with Gardiner Roberts LLP in Toronto.

An Agreement of Purchase and Sale for a mixed use (residential/commercial) real property provided that harmonized sales tax (“HST”) was “included in” the purchase price. Following the closing of the purchase and sale of the property, the buyer, an HST registrant, self-assessed HST on the value of commercial portion of the property, and the Canada Revenue Agency (“CRA”) assessed the buyer’s HST return as filed. The Ontario Superior Court of Justice in a hearing (1000029174 Ontario Inc. v. Miculinic Investment Corp., 2023 ONSC 1727) and a subsequent re-hearing (Miculinic Investment Corp. v. 2303515 Ontario Inc., et al., 2025 ONSC 6269) decided that the HST “included in” (and to be deducted from) the purchase price was the HST assessed by the CRA.

Facts and Applicable Law and CRA Administrative Guidance

2303515 Ontario Inc. in Trust for 1000029174 Ontario Inc. (the “Buyer”) and 1612363 Ontario Inc. (subsequently Miculinic Investment Corp.) (the “Seller”) entered into an Agreement of Purchase and Sale dated August 4, 2021, (the “APS”) for the purchase and sale of a 124.42 acre mixed use property in King, Ontario (the “Property”).

The APS provided that purchase price payable by the Buyer to the Seller for the Property was $11,500,000.

Paragraph 7 of the APS (a standard TREB agreement for residential property sales) provided, “If the sale of the property (Real Property described above) is subject to Harmonized Sales Tax (HST), then such tax shall be included in the Purchase Price. If the sale of the property is not subject to HST, Seller agrees to certify on or before closing, that the sale the property is not subject to HST. Any HST on chattels, if applicable, is not included in the Purchase Price.” The amount of HST was not specified in the APS.

The Property included both a used residential component (the supply of which was not subject to HST) (the “Residential Complex”) and a non-residential component (the supply of which was subject to HST) (the “Non-Residential Complex”).

The APS was silent on what portion of the $11,500,000 “purchase price”, inclusive of HST, was to be allocated to each component of the Property, and for the purpose of calculating HST on the taxable commercial component of the Property.

Prior to closing, the Buyer maintained that:

1. to the extent that the sale of the entire Property by the Seller to the Buyer under the APS was subject to HST, the purchase price for the Property exclusive of HST would be $10,176,991.15, and HST thereon (13%) $1,323,008.85;
2. to the extent that the Buyer was registered for HST under section 241 of the Excise Tax Act (Canada) (“ETA”), under paragraph 221(2)(b) of the ETA the Buyer would self-assess the said HST of $1,323,008.85 under subsection 228(4) of the ETA;
3. to the extent that there was a residential building located on the Property which was occupied by one or more individuals as their residence, the supply of the Residential Complex portion of the Property would be a separate supply under subsection 136(2) of the ETA of an exempt used residential complex under section 2 of Part I of Schedule V to the ETA, and where the requirements for the exemption under section 2 had otherwise been met;
4. for the purposes of subparagraph (a)(i) of the definition of "residential complex" in subsection 123(1) of the ETA, paragraph 8 of GST/HST Memorandum 19-2–1 dated February, 1998, provides:

"Land of up to a half hectare that is subjacent and immediately contiguous to a residential building is generally accepted by the Department to be the amount of land qualifying as part of the residential complex. This is the amount of land that is usually considered to be reasonably necessary for the use and enjoyment of the building as a place of residence. Land in excess of a half hectare is generally not considered to form part of the residential complex, unless it can be shown that such land is reasonably necessary for the use and enjoyment of the building as a place of residence for individuals. This "half-hectare rule" follows the treatment of land in connection with the definition of "principal residence" under paragraph 54(e) of the Income Tax Act.”;

5. paragraph 15 of GST/HST Memorandum 19-2–1 provides:

“In cases where value must be apportioned between the portion of the land that is considered part of the residential complex and the portion that is not part of the residential complex, the apportionment must be fair and reasonable, e.g., based on the fair market value of each portion. Severance laws, regulations or restrictions on lot sizes in effect on the date of acquisition of any part of the property, including the portion that does not qualify as the residential complex may affect this apportionment.”

6. paragraphs 10 through 13 of GST/HST Memorandum 19-2–1 list factors to be considered in identifying the portion of a mixed-use commercial/residential property which is to be considered part of a residential complex;
7. section 153 of the ETA provides that, “the value of the consideration, or any part thereof, for a supply shall, for the purposes of this Part, be deemed to be equal to, (a) where the consideration or that part is expressed in money, the amount of the money; and (b) where the consideration or that part is other than money, the fair market value of the consideration or that part at the time the supply was made”; and
8. to the extent that the requirements for the exemption under section 2 of Part I of Schedule V to the ETA would be met in respect of the Residential Complex portion of the Property, it would be necessary to allocate the $11,500,000 purchase price (inclusive of HST) between the Residential Complex and the Non-Residential Complex, and to determine the HST which was “included in” the value of the supply of the taxable Non-Residential Complex portion of the Property.

The Buyer and the Seller disagreed prior to the closing of the sale on the allocation of the $11,500,000 purchase price to the Residential Complex and the Non-Residential Complex portions of the Property.

The purchase and sale transaction closed on November 29, 2021 (the “Closing Date”), subject to resolving the outstanding issue of the FMV of the non-taxable Residential Complex for the purpose of subsection 136(2) of the ETA (the “Residential FMV”), and for the related purposes of identifying the FMV of the taxable Non-Residential Complex and the HST on such taxable commercial component of the Property which was “included in” the $11,500,000 purchase price.

The Seller proposed prior to the closing that the lot size of the Residential Complex and Residential FMV on the Closing Date was 5 acres and $4,780,400, (i.e. 41.57% of the $11,500,000 “purchase price” inclusive of HST), respectively. This allocation was based upon a percentage allocation made by the individual principals of the Seller in a transfer of the Property to the Seller several years earlier. This allocation resulted in the Non-Residential Complex having a value of $6,719,600, inclusive of HST, being the balance of the $11,500,000 “purchase price”. Based on these values, the Seller proposed that the HST included in the “purchase price” was $773,051.33 (i.e. $6,719,600/1.13*0.13).  Accordingly, the Seller proposed that the Buyer would owe the Seller at closing $11,500,000 – $773,051.33 (HST) = $10,726,948.67.

The Buyer submitted prior to the closing that the land reasonably necessary for the use and enjoyment of the Residential Complex was on the Closing Date two acres in size, and that the Residential FMV was $2,400,000. This resulted in the Non-Residential Complex having a value of $9,100,000, inclusive of HST, being the balance of the $11,500,000 “purchase price”. Based on these values, the HST “included in” the “purchase price” would be $1,046,902.65 (i.e. $9,100,000/1.13*0.13).  Pursuant to this calculation, the Buyer would owe the Seller at closing $11,500,000 - $1,046,902.65 = $10,453,097.35.

At the closing on the Closing Date:

1. the Buyer paid to the Seller $9,179,067.29, being $11,502,076.14 ($11,500,000 adjusted for realty taxes) less the Buyer’s previously paid $1,000,000 deposit, less $1,323,008.85 (being the notional HST arising from the sale of the Property calculated by initially allocating $nil value to the Residential Complex); and
2. the Buyer deposited in the Buyer’s counsel’s trust account $549,957.52 to be held by the Buyer’s counsel in escrow pending the determination of the Residential FMV and necessarily the portion of the purchase price to be allocated to the taxable Non-Residential Complex for the purposes of determining the amount of HST thereon to be deducted from the $11,500,000 purchase price.  The suggested escrow terms contemplated the Residential FMV being determined by qualified, independent third-party appraisers.

In March, 2022, Buyer obtained an Appraisal Report from D. Bottero Associates Limited identifying the Residential FMV as $2,400,000.

In October, 2022, the Buyer filed its HST return self-assessing HST payable of $1,046,902.65 under the ETA in respect of the sale of the Non-Residential Complex (based on a Residential FMV of $2,400,000 and a FMV of the Non-Residential Complex of $9,100,000).  The CRA assessed the return as filed several days later.

Following the issuance by the CRA of its assessment and consistent with a FMV of $9,100,000 ($11,5000,000 less $2,400,000) for the Non-Residential Complex and a deduction of HST of $1,046,902.65 from the $11,500,000 purchase price, the Buyer released to the Seller escrow funds of $276,106.19.  The balance of the escrow funds was paid to the Buyer.

Cross-Applications by the Seller and the Buyer to the Ontario Superior Court of Justice (1000029174 Ontario Inc. v. Miculinic Investment Corp., 2023 ONSC 1727)

In February, 2022, the Seller commenced an application to the Ontario Superior Court of Justice requiring the payment to it of the entire $11,500,000 purchase price, including the $549,957.52 held in escrow and the $773,051.33 that was deducted from the amount paid by the Buyer to the Seller on closing (notional HST calculated on the Seller’s assertion of the value of the Non-Residential Complex).

The Buyer subsequently made an application to the Ontario Superior Court of Justice to determine the Residential FMV, and in order to determine the HST “included in” the portion of the purchase price in respect of the Non-Residential Complex.

In her March 16, 2023, decision Justice Pollak of the Ontario Superior Court of Justice dismissed the Seller’s application that it be paid the full $11,500,000 purchase price where the HST “included in” (and to be deducted from) the purchase price was that assessed by the CRA in October, 2022. Justice Pollak stated at paragraphs 29 to 33:

[29] Pursuant to subsection 299(3) of the ETA, “[a]n assessment, subject to being vacated on an objection or appeal under this Part and subject to a reassessment, shall be deemed to be valid and binding”.

[30] The Buyer’s HST return from the sale of the Property has been assessed and the CRA did not take issue with their reported HST payable of $1,046,902.65.

[31] I agree that it is not the court’s role to determine the amount of tax owed to the CRA, it has jurisdiction to interpret the contract between the parties. In this Application, the CRA has made an assessment. Although it is subject to reassessment for a period of three years (which have not yet elapsed), the determination has been made by the CRA. It is therefore not necessary not for this court to do so.

[32] The Seller emphasizes that this assessment is still subject to reassessment for a period of three years from the date of the original notice of assessment. By contrast, the Seller’s previous assessment upon which it relies is now past this three-year reassessment window, and the five-acre residential apportionment reported was consistent with the valuation/apportionment in dispute in this proceeding. It submits that it is premature for the Buyer to claim that the CRA has “accepted” their position as to the HST payable on the sale of the Property.

[33] I do not accept this submission as this does not change the fact that the amount of HST has been determined by the CRA, which has jurisdiction to make that determination. Further, I find on the basis of the evidence that the Buyer’s allocation was not unreasonable.[1]

In a separate decision Justice Pollak also dismissed the Seller’s motion to bring fresh evidence of the CRA’s assessment of the Seller’s claim for an input tax credit for legal fees and sales commissions incurred in connection with the sale of the Property, which the Seller submitted supported its allocation of the $11,500,000 purchase price between the Residential Complex and the Non-Residential Complex.

Seller’s Appeal to the Court of Appeal for Ontario (1000029174 Ontario Inc. v. Miculinic Investment Corp., 2024 ONCA 526)

The Seller appealed the decisions to the Court of Appeal for Ontario.

In its July 4, 2024, decision the Court of Appeal for Ontario set aside the application judge’s judgement, and ordered that the Seller’s and the Buyer’s cross-applications be remitted before another judge of the Superior Court for a new hearing.

The Court stated at paragraph 1:

[1] This appeal and cross-appeal turn on the interpretation of an agreement of purchase and sale that contained an ambiguity concerning the calculation of the purchase price that was inclusive of the Harmonized Sales Tax (“HST”) to be remitted under the Excise Tax Act, R.S.C. 1985, c. E-15.

The Court further stated at paragraphs 10 and 12:

[10] The application judge did not engage in the required analysis of the agreement of purchase and sale. As Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, instructs, the agreement must be interpreted as a whole and the court should look 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: at paras. 57-58. The application judge did not follow this analysis.

…

[12] Nowhere in her March 16, 2023 judgment does the application judge set out her interpretation of the agreement of purchase and sale and her findings about what the parties’ reasonable expectations or intentions were. Nowhere does she grapple with the discrepancies between the various CRA assessments or indicate why, if she did, she rejected the appellant’s evidence, including its expert evidence, about the use and value of the property at the time the agreement of purchase and sale was entered into by the parties.

Seller’s Application to the Ontario Superior Court of Justice for a Rehearing of its Original Application (Miculinic Investment Corp. v. 2303515 Ontario Inc., et al., 2025 ONSC 6269)

The Seller subsequently commenced an application to the Ontario Superior Court of Justice for a rehearing of its original application.

In his November 12, 2025, decision, Justice Schabas of the Ontario Superior Court of Justice engaged in an interpretation of the meaning of paragraph 7 of the APS. In dismissing the Seller’s application, Justice Schabas decided that the HST “included in” (and to be deducted from) the $11,500,000 purchase price was that assessed by the CRA in October, 2022. Justice Schabas stated at paragraphs 24 to 30:

[24] In my view, it is arguable that the HST provision in the APS is not ambiguous at all, providing that whatever the tax determined by CRA to be owing by the purchaser is to be included in the purchase price. To the extent there is an ambiguity, as the Court of Appeal suggests, it arises from the fact that the parties did not specify what that amount was, or how it was to be calculated. This is not surprising, however, as taxpayers do not decide how much tax they owe, the CRA does.

[25] In my view, by agreeing to include the HST, or “such tax”, in the purchase price, the parties took on risk and uncertainty in leaving that determination in the hands of the CRA. Had the parties wished to avoid that risk, the appropriate step would have been to provide that HST be “in addition” to the purchase price, which would likely have resulted in some reduction in the purchase price.

[26] Just as the purchase price in this transaction was subject to negotiation, so was the provision over whether HST was to be “included in” or “in addition to” the purchase price. But there is no evidence that the parties discussed or entered into the APS with “the mutual and objective intentions” that the HST would be a certain amount or, in particular, would be calculated based on the applicant’s past practice. Indeed, there is no evidence that the applicant’s past allocation, or its expectation of the amount of HST that would be applicable to the sale, was known, or made known, to the respondents. To use the language in Sattva, there is no evidence to find that the amount of HST owing would be reasonably “within the knowledge of both parties.”

[27] The applicant may well have expected that the HST would be in accordance with its prior allocation and which CRA accepted even after the sale in the context of the applicant’s tax returns. But it was not a certainty.

[28] The applicant was not unsophisticated, as seen from the evidence of prior transactions and the professional tax advice it had received on these issues for several years prior to the sale. It chose, in signing the APS with HST “included in” the purchase price, to take on the risk that the CRA could determine, as it did, that a larger portion of the sale price should be attributed to the commercial portion of the property, thereby reducing the amount payable to the applicant.

[29] In Sattva, the Supreme Court cautioned that “[w]hile the surrounding circumstances will be considered in interpreting the terms of a contract, they must never be allowed to overwhelm the words of that agreement.” In my view, the wording of the APS is clear, but to the extent there may be an ambiguity in the HST provision, there is no compelling evidence arising from the surrounding circumstances that would support the conclusion that the parties agreed to allocate HST as had been done by the applicant prior to the sale. By simply including “such tax” in the purchase price, the parties left it to the CRA to determine “such tax” and the applicant took the risk that the CRA might assess the HST differently than it had done in other contexts.

[30] While in this case there appear to be inconsistent rulings from the CRA, it is the assessment received by the respondents which must prevail as it addresses “such tax” owing and payable on the sale of the property. This means that the purchase price shall be reduced by $1,046,902.65, and that no further amount is owed to the applicant.

Footnotes

[1] Subsection 298(1) of the ETA provides that the normal reassessment period for HST in respect of a reporting period is four years after the later of the day on or before which the taxpayer was required to file an HST return for the reporting period.

Greg Farano is Partner and Co-Chair – Tax Law group at Gardiner Roberts LLP in Toronto. Title image: iStock photo ID 171266356 ("Holding file folders with Goods and Services Tax, Provincial Sales Tax and Harmonized sales tax documents").