Sale Of Mixed Use Real Property Problematic

Most real property owners in Canada are 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 recent Ontario Superior Court decision identifies problems that can arise from poorly drafted Agreements for Purchase and Sale ("APS") and highlights the need to obtain proper GST/HST advice before signing such agreements.

Miculinic Investment Corp. v. 2303515 Ontario Inc., et al.

In  Miculinic Investment Corp. (2025 ONSC 6269), the Seller sold a mixed residential and commercial property to the Buyers. The APS, using a standard form provision, stated that any HST payable on the sale was included in the purchase price, but did not specify an HST amount or allocate the property between residential and commercial use.

As the Buyers intended to claim input tax credits ("ITCs"), they disputed the commercial-residential allocation proposed by the Seller, asserting that a greater portion of the property was for commercial use and therefore attracted more HST. The Seller countered that its allocation was consistent with actual use and had been accepted by the CRA in prior assessments of the same property.

To resolve the dispute, the Seller brought an application in the Ontario Superior Court, seeking a determination of the proper residential-commercial allocation of the purchase price under the APS, and the corresponding HST payable.

Superior Court's Decision

In the Ontario Superior Court, the court ultimately concluded that the CRA's prior assessing position should prevail, though inconsistent with the Seller's position and evidence.

The Court acknowledged that the APS contained ambiguity concerning the commercial-residential allocation and how HST was to be calculated. Although compelling evidence was led by the Seller regarding historical use of the property, the Court held that there was no evidence to establish that the parties shared a common understanding as to either the allocation of use or the amount of HST that would ultimately be payable.

The Court further noted that, to the extent there was ambiguity in the APS, the parties effectively left the determination of the HST payable to the CRA, and the Seller must assume the risk and uncertainty that the CRA might assess the HST differently than it had in prior contexts.

Takeaways

Owners of mixed residential and commercial real property in Canada often have difficult day-to-day compliance issues, including allocating ITC eligibility as between commercial use (proportionate ITCs, based on technical rules) and non-commercial use (no ITCs).

Unanticipated issues can also arise on the sale of such properties. One such issue is the proper allocation of the selling price of what is being sold as between prior taxable and exempt uses.

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