Challenging an ITC and ITR allocation method in a mixed real estate transaction.

A business engaged in acquiring and reselling land disposed of several properties in a single transaction. Most of the sales were taxable, while one property included a previously occupied residential complex and gave rise to an exempt supply.

Following an audit, the tax authority denied a significant portion of the input tax credits and input tax refunds claimed in respect of the real estate brokerage fees. The assessment relied on the allocation of the sale price stated in the agreement, even though that allocation did not reasonably reflect the relative values of the properties or the nature of the broker’s services.

Alexandre filed a notice of objection and challenged the allocation method used in the assessment. He argued that, for GST and QST purposes, the contractual allocation should be replaced with a reasonable allocation. An alternative method was proposed based on the actual relationship between the brokerage services and all of the properties sold, supported by objective measures relating to the selling effort and the properties involved.

The assessment was revised in the client’s favour. The disputed input tax credits and input tax refunds were restored, and the related interest and penalties were adjusted accordingly.

An allocation of value in an agreement does not necessarily determine how common expenses should be treated for GST and QST purposes. When one expense supports both taxable and exempt supplies, the allocation method should reflect the economic reality and the relationship between the acquired service and the commercial activities.