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What happens when an Agreement of Purchase and Sale ("APS") leaves tax allocation unclear? In a recent Ontario decision, Miculinic Investment Corp v 2303515 Ontario Inc, 2025 ONSC 6269, the Harmonized Sales Tax ("HST") clause, which included HST in the purchase price, turned an $11.5 million mixed-use real estate deal into a costly tax dispute between the buyer, seller, and the Canada Revenue Agency ("CRA").
This case is a cautionary tale for stakeholders in the commercial real estate industry,1 and shows how even sophisticated parties can leave themselves exposed when HST allocation is unclear, especially on mixed‑use properties. If you work in commercial real estate, this is exactly the kind of clause that can quietly put your deal (and your bottom line) at risk.
What happened in this $11.5M HST dispute?
The case involved the sale of a 125-acre mixed-use property (part commercial, part residential) for $11,500,000.00.2 The APS stated that any HST was "included in" the purchase price, but did not specify how HST would be calculated or how the property's residential and commercial portions would be allocated.3 This omission led to a dispute as HST was only applicable on the commercial portion of the property. The vendor argued that 41.57% of the sale price, about five acres of the property, was residential, resulting in HST of $773,051.33, while the purchaser claimed only two acres were residential, leading to HST of $1,046,902.65.4
The parties had directly competing interests: a higher HST amount favoured the purchaser, who could claim a larger input tax credit and pay less land transfer tax on the reduced purchase price. Meanwhile, the vendor would end up with lower net proceeds because more of the price would be allocated to HST. Complicating the matter, by the time of the decision, the CRA produced conflicting assessments in accepting both the purchaser's and the vendor's positions.5
How did the court deal with the HST clause?
At the Ontario Superior Court of Justice, Justice Schabas held that by agreeing to include HST in the purchase price, but not indicating how HST was to be applied, the parties assumed the risk of CRA's determination.6 The court emphasized that taxpayers do not decide how much tax they owe, the CRA does.7
This ruling underscores the interpretive principles from Sattva Capital Corp v Creston Moly Corp, 2014 SCC 53, which require courts to consider both the contract's wording and the surrounding circumstances, but never to override clear language.8 Justice Schabas cautioned that while surrounding circumstances can inform interpretation, they cannot "overwhelm the words of the agreement" or create a new bargain.9 Here, the APS's plain wording left the parties exposed to CRA's determination, and the vendor bore the risk of an unfavorable assessment.
What does this mean for commercial real estate deals?
This case is more than a tax dispute – it serves as a cautionary tale for stakeholders in the commercial real estate industry. Here is what you need to know:
1. Drafting matters
Boilerplate clauses can create significant financial exposure. The phrase "HST included in the purchase price" seems simple, but it left the parties vulnerable to CRA's interpretation. Always ensure clarity on tax allocation and calculation.
2. Retain legal counsel
For complex commercial real estate transactions, it is strongly recommended to obtain legal advice in addition to working with a real estate agent. Lawyers are uniquely equipped to identify potential risks in standard form agreements and to negotiate provisions that protect your interests.
3. CRA decides tax
Ultimately, the CRA, not the parties, determines tax liability. Agreements should anticipate this reality and allocate risk accordingly.
4. Risk management is key
Consider whether HST should be "in addition to" the purchase price to avoid uncertainty. Alternatively, if HST is to be "included in" the purchase price, parties can expressly indicate the allocation of land subject to HST or how HST is to otherwise be calculated to remove ambiguity.
Bottom line: In commercial real estate transactions, clarity isn't optional – it's critical.
Footnotes
1 Miculinic Investment Corp v 2303515 Ontario Inc, 2025 ONSC 6269.
2 Ibid at para 2.
3 Ibid at paras 2-3.
4 Ibid at paras 6-7.
5 Ibid at para 9 and 11.
6 Ibid at para 25.
7 Ibid at para 24.
8 Sattva Capital Corp v Creston Moly Corp, 2014 SCC 53 at paras 57-58.
9 Supra note 1 at para 29.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
