Court File and Parties

COURT FILE NO.: CV-22-677952 DATE: 20230316 SUPERIOR COURT OF JUSTICE - ONTARIO

RE: 1000029174 Ontario Inc. and 2303515 Ontario Inc. in Trust Applicants

AND:

Miculinic Investment Corp., 1612363 Ontario Inc., 5013361 Ontario Inc., Deborah Miculinic and Vel Miculinic Respondents

AND BETWEEN: COURT FILE NO.: CV-22-677307

Miculinic Investment Corporation Applicant

AND:

2303515 Ontario Inc. and 1000029174 Ontario Inc. Respondents

BEFORE: Pollak J.

COUNSEL: Greg Farano & Lauren Rakowski, for the Applicants & Responding Parties 1000029174 Ontario Inc and 2303515 Ontario Inc. Jason Squire & Spencer Jones, for the Respondents Miculinic Investment Corp., 1612363 Ontario Inc., 5013361 Ontario Inc., Deborah Miculinic and Vel Miculinic, and the Applicant Miculinic Investment Corporation

HEARD: January 10, 2023

Endorsement

[1] The Plaintiff, Miculinic Investment Corporation, is the Vendor of a large property in King City, municipally known as 14855 Highway 27, King, Ontario (the “Property”). The Vendor entered into an Agreement of Purchase and Sale (“APS”) of the Property with the Defendant 2303515 Ontario Inc. (“230”), in trust, ultimately for 100029174 (“100”) (collectively, the “Purchaser”). The Property is approximately 124.42 acres and has a large residential home of approximately 5700 square feet, set back 200 feet from Highway 27, and facilities that could be used for farming.

[2] The purchase price for the Property was $11,500,000, inclusive of Harmonized Sales Tax (“HST”). This was at the Purchaser’s request. The amount of HST was not specified in the APS.

[3] In closing documents, the Vendor included its calculation of HST. The Property was part residential (which does not attract HST) and part commercial (which does). The Vendor designated five acres of the Property, $4,780,400 of the purchase price, as being “residential”, with the balance designated as commercial.

[4] Before closing, the Purchaser objected to the Vendor’s residential/commercial allocation. The Purchaser wanted a greater proportion of the purchase price to be allocated to HST, which decreased the non-taxable residential allocation of the Property. The Purchaser was registered for HST and reports the HST payable but is entitled to an equal and offsetting input tax credit (“ITC”). As a result, the Purchaser does not effectively pay any HST. The Purchaser is therefore motivated to allocate the greatest proportion of the purchase price to the commercial value of the Property.

[5] The Purchaser refused to pay the full balance of the purchase price on closing. The evidence is that as the Vendor needed most of the proceeds to complete another real estate transaction, it agreed to provisionally accept only partial closing proceeds. The Purchaser short paid for the Property by $1,323,008.85, keeping $773,051.33, and putting $549,957.52 in escrow in a trust account with its law firm. The Vendor submits that the Purchaser unlawfully withheld the escrow amount. The Purchaser calculated the $1,323,008.85 shortfall as if the entire purchase price would attract HST without attributing any value to the residential portion of the Property. The Purchaser does not now take this position in these Applications.

[6] There are two Applications before the Court. The Vendor’s Application is for the release of the escrow funds, and the Purchaser’s cross-application is for a declaration on the value and size of the residential portion of the Property, and a declaration that the “Escrow Agreement” is valid and binding.

[7] There is no mechanism in the APS to determine the relative values of the commercial and residential uses of the property.

[8] The Vendor argues that it is not this court’s role to appraise the Property or to determine the HST as it is for the Canada Revenue Agency (“CRA”) to reassess or audit the HST payable with respect to the transaction. The Vendor argues that there is no reason for this court to interfere with its reasonable allocation. The Vendor has agreed to indemnify the Purchaser in the event that the CRA adjusts the HST calculated by the Vendor for the transaction. The Vendor asks this court to enforce the APS.

[9] The Purchaser seeks an order from this Court as follows:

a. A declaration that the value of the Residential Complex at closing was $2,400,000 in accordance with the Bottero Appraisal for the purpose of resolving the Residential Fair Market Value (“FMV”) and HST calculation issue; b. In the alternative, an order that the value of the Residential Complex for the purpose of determining the Residential FMV and HST calculation issue shall be determined, and funds released, in accordance with the draft Escrow Agreement, and in particular in accordance with Article 3 thereof; and c. In the further alternative, direction with respect to the mechanism for determining the size and FMV of the Residential Complex for the purposes of resolving the Residential FMV and HST calculation issue.

[10] The Vendor submits that its allocation is based on years of professional advice on the allocation of value between the residential and commercial portions of the Property and should be relied on.

[11] On December 15, 2022, the Purchaser made a with prejudice offer to settle the Applications on the following terms:

a) the Buyer would pay $276,106.19 of the Escrow Funds to the Vendor and the Buyer would retain the remainder; and b) the Seller would pay the Buyer’s legal costs and disbursements, plus HST, on a partial indemnity basis.

[12] The Purchaser owes $276,106.19 of the Escrow Funds to the Vendor. At the time of this hearing, this amount was not yet paid to the Vendor.

[13] On the basis of the evidentiary record on these Applications, I do not accept the Purchaser’s submission that a “Closing Agreement” was entered into. In the Vendor’s counsel’s email of November 29 at 10:17 a.m., he stated that he was unable to get instructions on the specifics of the mechanism that will determine the HST calculation post-closing. At 4:59 p.m. on the same day, the Vendor’s counsel advised that his clients were signing the transfer only in the interest of partially closing the sale and having the undisputed funds released as the Miculinics needed the funds immediately. He advised that by signing the transfer, “it was in no way meant to prejudice the client’s position on the HST applicable to the sale, or any further discussions between the parties related thereto.” I find that such emails establish that there was no “Closing Agreement” as submitted by the Plaintiff.

[14] In support of its Application, the Vendor’s expert, Frédéric Pansieri, a Chartered Professional Accountant at Crowe Soberman LLP, provided an expert opinion on:

a. the part of the sale that is HST exempt due to a portion of the Property forming a residential complex; and b. whether the determination of the HST-exempt portion of the purchase price of the Property is the sole responsibility and prerogative of the Vendor.

[15] Mr. Pansieri’s Report states that the Property includes a “residential complex” as defined in subsection 123(1) of the Excise Tax Act, R.S.C. 1985 c. E-15 (“ETA”), upon which no tax is payable. He further opines that the Purchaser alone is not entitled to determine the portion of the purchase price that should be allocated to the residential complex. As the purchase price of $11,500,000.00 is inclusive of HST, there is no rule in the ETA that would allow the Purchaser to re-allocate the Property use without the consent of the Vendor. The Statement of Adjustments indicated the Vendor’s breakdown of the residential and commercial split.

[16] Mr. Pansieri advises that, as the Purchaser was GST/HST registered, pursuant to s. 223(1.1) of the ETA the Vendor was not required to collect tax from the Purchaser and the Purchaser is able to claim defined ITCs to recover or offset the HST payable on the taxable portion of the purchase price of the Property under s. 169(1) of the ETA. ITCs allow an HST registrant to recover or offset the HST paid or payable on purchases and expenses related to commercial activities conducted by the registrant. There is no disagreement between the parties as to the availability and use of ITCs. The Purchaser’s expert agreed that if the Purchaser intended to acquire the Property for business use, it would be able to fully recover the HST payable on any taxable portion of the Property.

[17] Mr. Muscillo, a principal of the Purchaser, testified that the Property is being used in a mixed residential/commercial capacity. 100 has applied ITCs in the amount of $1,046,902.65 with respect to its purchase.

[18] The Vendor argues that the Purchaser has received a discount on the purchase price due to the operation of the ITCs. The Purchaser does not pay any net HST in respect of the transaction because it reports the HST payable and offsets that HST amount with an equal claim for ITCs.

[19] The Purchaser relies on an opinion by Mr. Albrecht, a tax lawyer at DJA Consulting Legal Professional Corporation, as to what portion of the Property is subject to HST.

[20] The Purchaser, however, submits that the land reasonably necessary for the use and enjoyment of the detached family home located on the Property as a place of residence was on the Closing Date two acres in size, and that the Residential FMV was $2,400,000.

[21] This Residential FMV was set out in its expert’s Bottero Appraisal. The 145-page Bottero Appraisal is comprehensive, and is the only qualified, independent appraisal for the Residential Complex at the Closing Date in evidence before this court.

[22] Further, the Bottero Appraisal states that the “hypothecated lot size” of two acres (or 0.8094 ha.) for the Residential Complex was consistent with the size of estate lots in the area and also reasonably necessary to accommodate a septic system and well. It is also consistent with an area measurement obtained from an aerial photo of the Residential Complex which identifies a distinct rectangular landscaped and tree lined area surrounding the detached family home located on the Property and separating the home from the surrounding arable fields.

[23] In addition, the Bottero Appraisal is based on a detailed analysis of sales of comparable properties, all sold within one to four months of the Closing Date, with lot sizes ranging from two to ten acres. The Bottero Appraisal made appropriate adjustments for time, building size and age, character/condition, location, and lot size.

[24] The representative of the Vendor, Mr. Vel Miculinic, testified on cross-examination that the five-acre lot size for the Residential Complex consisted of (a) a residential building set back a few hundred feet from Highway 27, (b) a frontage along the highway of about eight acres that was cut and used as the residential portion of the Property, (c) near approval of a second residence, and (d) a dressage ring for horses and paddocks. The Purchaser submits that neither the size of the setback of the detached family home from Highway 27 nor the Vendor’s statement of use, without any particulars of the Vendor’s actual use, supports a five-acre lot size being necessary for the reasonable use and enjoyment of the detached family home located on the Property. Mr. Miculinic testified that there was no second dwelling constructed on the Property and used as a residential dwelling. The Purchaser submits that a hypothetical second dwelling that did not exist on the Closing Date cannot be necessary for the reasonable use and enjoyment of the detached family home located on the Property. Similarly, the dressage ring and paddocks relied on by the Vendor are “desirable” and do not appear to be necessary for the reasonable use and enjoyment of the detached family home located on the Property. Mr. Miculinic swore that this area was used for his horse buying, selling and training business and an office was used to run the horse business and that the Vendor claimed ITCs in respect of this business.

[25] The Purchaser submits that the FMV of land is commonly determined by the courts on the basis of expert appraisal evidence, and consistent with the highest and best use of the lands. A highest and best use must be one that is legally permissible and economically feasible.

[26] It relies on the case of Grafton Developments Inc. v. The Queen, 2006 TCC 356, wherein the Tax Court of Canada considered the FMV of the residential portion of a mixed-use property to determine the HST payable in respect of the supply of the taxable commercial portion of the property. The court relied on expert reports and testimony provided by each of the parties and reviewed each report in detail in determining the FMV of the taxable commercial and non-taxable residential portions of the property.

[27] This court considered the interpretation of an Agreement of Purchase and Sale where HST was included in the purchase price in the recent decision of Plewes v. Chaudhry et al., 2022 ONSC 919, citing Bumac Properties Inc. v. 1221 Limeridge Inc. (2000), 37 R.P.R. (3d) 315, at para. 41. In Plewes, at paras. 19-33, the Court held that:

Term 7 was a standard term in the 2014 OREA standard form 100 APS used by the parties. Prior cases have interpreted the meaning of term 7 in accordance with the “grammatical and ordinary sense” of the words in the term. There are two possible outcomes when using this term: HST is either “included in” or “in addition to” the purchase price … There is no ambiguity in the meaning of this term from a writing perspective, looking at the ordinary sense of the words in the context. It means that all the risk regarding HST is allocated to the vendor. Gillespie v. 1766998 Ontario 2014 ONSC 6952 at paras. 11-12.

Moreover, there is nothing from the context of the transaction that would challenge the reliance on the plain meaning of the provision, as interpreted by case law. The context of this transaction was that the property sale was subject to HST. The parties are ad item that they each understood HST to be applicable to the sale because of commercial and/or farming activity on the property.

The decision to have term 7 read “included in” was an express choice, a purposeful election by the vendor Plewes. The words were voluntarily added: Plewes herself typed the words “included in” into the document, with no evidence of duress or compulsion to have to do so. Rather, the evidence was that Plewes chose to have HST “included in”, rather than “in addition” to the purchase price, on the advice and direction of her husband, despite the advice of her lawyer, Mr. Summerville, that choosing “included in” would be unwise because she would assume the risk of HST. The choice was made irrespective of the risk of assuming the cost of HST. The motivation for having chosen “included in” appears to be expediency and certainty of the closing date, as her husband was terminally ill.

Any suggestion that the deal was somehow premised on a fixed amount of HST at a point in time is not credible. There was no correspondence or discussion proximate to the signing of the agreement about permanently fixing the vendor’s risk regarding HST to a named amount, nor ever any agreement or undertaking that would have limited the vendor’s risk regarding possible reassessments by CRA in future, nor any indication that this was just a provision that related to the remittance of HST, irrespective of its impact on price.

The outcome always was understood to mean a net reduction in funds retained by the vendor for the amount attributable to HST, because the vendor was assuming all the risk of HST in terms of how much the vendor would retain, with all the protection to the buyers in never having to pay more than the total purchase price of $1.285 million. This is patently the reason why Mr. Summerville tried to make the taxable liability as small as possible, so that the vendor would retain more of the funds; all his correspondence to PWC demonstrates his intention to reduce the overall tax payable, understanding that the risk was on the side of the vendor.

The amount of HST payable for the transaction is the amount assessed by the Minister: s.299(3) Excise Tax Act. This fact was acknowledged by Mr. Summerville in his letter to the brokerage, as referenced above. This court does not have to make a determination of the correct amount of HST payable other than by reference to the CRA’s determination, because there is evidence of the CRA’s sequential determinations of the amount of HST payable, first in accordance with the vendor’s suggestion of $45,500, then refunding that amount to both parties, and reassessing on June 1, 2017 and re-assessing again on August 18, 2017 at $130,466.88 the 13% HST payable for the transaction, representing the taxable 78% portion of the purchase price according to CRA’s adjustment of the amount payable.

There has not been a sufficient reason put forward for the court to choose the first assessment of $45,500 as the correct or final amount of the vendor’s responsibility for HST. The language of the agreement and undertaking does not suggest that the parties understood anything other than that the HST amount would be that as approved by the Minister, which at this point is $130,466.88. As noted above, the HST amount in the transaction as a fluid potential liability for the vendor was clearly understood from the vendor’s communications, and the undertakings signed at closing to adjust for such items. If the tax amount had been final as decided by the parties, there would have been no reference by the vendor to the CRA’s role in the endeavour; the parties would have instead specifically contracted for a set amount irrespective of a CRA determination, or the vendor would have off-loaded the risk to the buyer in making the HST “in addition” to whatever purchase price they set.

The HST amount in the statement of adjustments was understood by the parties to be subject to reassessment by the CRA according to operation of the Excise Tax Act, and subject to their duties to adjust. This understanding was confirmed in the correspondence filed, where the vendor’s solicitor, following the initial assessment by CRA, that the $45,500 deductible from the purchase price was subject to change in future if CRA reassessed.

While the court is not required to assess the correctness of the CRA’s assessment, the evidence presented at trial demonstrates an ample basis to conclude correctness. The HST assessed as payable by the CRA was in line with the portion of the property designated as agricultural or farmland by the municipality. [Emphasis added.]

[28] I find the reasons of the court to be of assistance in this Application.

[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 Purchaser’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 Vendor 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 Vendor’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 Purchaser 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 Purchaser’s allocation was not unreasonable.

[34] It is therefore not necessary for the court to address the Plaintiff’s alternate argument that Article 3 of the draft Escrow Agreement provides a reasonable mechanism to resolve the Residential FMV and HST calculation issue.

[35] For the above noted reasons, I grant the Vendor’s Application and order the Purchaser to release the amount of the escrow funds that they have already agreed are owing to the Vendor as I have indicated above.

Costs

[36] The Vendor has been the successful party on this Application, as this court has ordered that the funds held in escrow be released to the Vendor.

[37] As the Vendor is the successful party in this Appeal, it is entitled to its costs. If the parties are unable to agree on costs by reason of the operation of the Rules as a result of offers to settle, the Vendor may make submissions of no more than two pages, double spaced sent to the Appellant, uploaded to CaseLines with a copy sent to my assistant Roxanne Johnson at Roxanne.johnson@ontario.ca by March 27, 2023. The Purchaser may make submissions of no more than two pages, double spaced sent to the Vendor, uploaded to CaseLines with a copy sent to my assistant by April 5, 2023. No reply submissions will be accepted.

Pollak J. Date: March 16, 2023