Ambiguous HST Clauses In Real Estate Transactions: When “Tax Included” Means Risk Assumed

Real property owners in Canada should be aware that their tax obligations may differ depending on whether a property is used for residential (such as renting as a home or apartment) or for commercial purposes (such as renting for business use).

A 2025 Ontario Superior Court decision highlights the risks arising from ambiguous GST/HST provisions in Agreements of Purchase and Sale (“APS”), particularly where parties fail to clearly allocate value between taxable and exempt components of a transaction or assume that historical tax treatment will govern future outcomes.

Unclear APS Drafting on HST and Property Use Leads to Allocation Dispute

In Miculinic Investment Corp. (2025 ONSC 6269), the applicant vendor sold a mixed-use property consisting of residential and commercial components to the respondents for $11,500,000. The APS provided that any Harmonized Sales Tax (“HST”) payable on the sale was “included in” the purchase price. However, the agreement did not specify how the purchase price was to be allocated between residential (exempt) and commercial (taxable) uses, nor did it quantify the amount of HST expected to be payable.

There was no evidence that the parties discussed or agreed upon any allocation methodology at the time of contracting. Prior to closing, a dispute arose. The purchasers, who were HST registrants intending to claim input tax credits (“ITCs”), took the position that a larger portion of the property was commercial in nature, thereby increasing the HST payable and reducing the net amount payable to the vendor. The vendor, relying on historical use and prior Canada Revenue Agency (“CRA”) tax assessments, argued that a larger portion should be treated as residential, resulting in lower HST liability. The transaction ultimately closed on a “without prejudice” basis, with a portion of the funds held in escrow pending resolution of the dispute.

Court Holds CRA Assessment Governs as APS Failed to Specify HST Methodology and Shared Intention

On rehearing following intervention by the Court of Appeal, the Ontario Superior Court was required to interpret the APS in accordance with the principles set out in Sattva Capital Corp. v. Creston Moly Corp., focusing on the objective intentions of the parties as derived from the contractual text and surrounding circumstances.

The Court found that the APS either contained no true ambiguity, or, at most, an ambiguity arising from the parties’ failure to specify how HST was to be calculated. Importantly, the Court emphasized that the provision stating that “such tax shall be included in the purchase price” effectively meant that whatever amount of HST was determined by the CRA would govern.

The Court rejected the vendor’s reliance on historical allocation practices and prior CRA assessments. While the vendor had adduced evidence supporting its position, including expert evidence and prior accepted allocations, there was no evidence that these matters were known to, or shared with, the purchasers at the time of contracting. As such, they did not form part of the “factual matrix” for purposes of contractual interpretation.

The Court further held that by agreeing to an APS in which HST was “included in” the purchase price without specifying an amount or methodology, the vendor assumed the risk that the CRA might determine the applicable HST differently than expected.

Ultimately, the Court concluded that the CRA’s assessment—based on the purchasers’ filing—must prevail, resulting in a higher HST amount and a corresponding reduction in the net proceeds payable to the vendor.

Pro Tax Tips: Draft Explicit Allocation and Control HST Risk

This decision underscores several important principles for taxpayers and real estate lawyers involved in mixed-use real estate transactions:

• Clarity in drafting is critical: Where a property has both taxable and exempt components, the APS should expressly allocate the purchase price or clearly define the methodology for doing so.
• Boilerplate HST provisions are insufficient: Standard clauses indicating that HST is “included in” the purchase price do not resolve allocation issues and may instead shift risk between the parties. Wording should be drafted by an experienced Canadian tax lawyer.
• Shared intention must be evidenced: Courts will not rely on one party’s internal assumptions, prior practices, or undisclosed expectations in interpreting a contract.
• CRA determinations may control: Where parties fail to specify tax treatment, they effectively defer to the CRA, and must accept the uncertainty that entails.
• Risk allocation is a negotiation issue: Choosing whether HST is “included in” or “in addition to” the purchase price is not merely mechanical—it is a substantive allocation of tax risk that should be carefully considered.

Owners of mixed residential and commercial real property in Canada often face complex compliance obligations, including the allocation of ITCs and the characterization of use. As Miculinic demonstrates, these issues can become significantly more contentious on disposition, particularly where contractual terms fail to clearly reflect the parties’ intentions.

FAQs

1. Does including HST in the purchase price eliminate disputes over tax liability?

No. As demonstrated in Miculinic Investment Corp. (2025 ONSC 6269), a clause stating that HST is “included in” the purchase price does not resolve how that tax is to be calculated. Where the APS does not specify the allocation between taxable and exempt components, the amount of HST remains uncertain. In such cases, the parties effectively leave the determination to the Canada Revenue Agency (“CRA”), and the economic burden of that determination may shift depending on how the purchase price is structured. Clear drafting is required to avoid this uncertainty.

2. Can a party rely on prior CRA assessments or historical use to determine HST on a sale?

Not unless those factors form part of the parties’ shared understanding at the time of contracting. In Miculinic, the vendor relied on prior CRA assessments and historical use of the property to support its proposed allocation. However, the Court rejected this approach because there was no evidence that these matters were known to or agreed upon by the purchaser when the APS was executed. Contractual interpretation focuses on the objective intentions of both parties, not one party’s internal expectations or past practices.