Tax Alert - Brace Yourself: No GST/HST ITCs for Orthodontists

October 11, 2017

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Orthodontists have been dealt a tough blow in a recent court decision that resulted in an Ontario-based orthodontist being denied input tax credits (ITCs) in respect of GST/HST incurred on certain expenses and fixed assets consumed in conjunction with perceived supplies of zero-rated orthodontic appliances. In Dr. Brian Hurd Dentistry Professional Corporation versus Her Majesty the Queen, 2017 GTC 42 (“the Hurd case”), the court held that the taxpayer, an orthodontist, did not make multiple supplies of exempt orthodontic treatments and zero-rated orthodontic appliances but, instead, a single supply of an orthodontic treatment that is entirely exempt from GST/HST pursuant to the Excise Tax Act. The result of this decision is that dentists and orthodontists may no longer be eligible to claim ITCs on orthodontic supplies and treatments on the basis that they are not making taxable supplies in the course of commercial activities for GST/HST purposes.

The court’s decision follows a GST/HST Ruling from the Canada Revenue Agency (CRA) in 2004 that provided direction to orthodontists on the treatment of orthodontic supplies and treatments. In that ruling, the CRA provided guidance suggesting orthodontists that separately identify supplies of zero-rated orthodontic appliances from exempt orthodontic treatments could calculate ITCs using “an estimate of 35% of the cost to the patient of the orthodontic treatment to represent the ‘consideration’ for the supply of the orthodontic appliance.” An important consideration in the Hurd case was that, in the view of the judge, Dr. Hurd did not sufficiently identify the consideration of the zero-rated appliances separately from the exempt dental services in patient contracts and billings. Also noteworthy is the judge’s comment about the CRA’s 2004 Ruling: “I believe it to be incorrect and misleading to taxpayers … In the end, the CRA policy statement is simply wrong and more importantly misleading and cannot be defended in the manner [the Minister] would have me do. I simply reject it and I do not intend to follow it.” The court dismissed the taxpayers’ appeal and, by doing so, denied $22,440 of ITCs on the basis that the taxpayer was making a single supply of exempt health care services to patients and had no commercial activities to support the claiming of ITCs.

Although not specifically addressed as part of this decision, it is expected that Revenu Quebec will view the application of Quebec sales tax (QST) in the same manner and deny input tax refunds (ITR) claimed in relation to the supply of orthodontic appliances as part of the single supply of an exempt orthodontic treatment.

As a result of this recent decision, dentists and orthodontists with practices that claim ITCs or ITRs are urged to contact a BDO Indirect Tax specialist to determine how best to treat future GST/HST filings as well as retroactive filings, as this court decision may extend as far back as four years and possibly even further.

Should you have any questions on this matter and how it may impact you, please contact Shelley Smith, Indirect Tax Practice Leader, or a trusted BDO advisor.

Author

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Brian Morcombe

Partner, Indirect Tax

Learn more about our Indirect Tax team.


The information in this publication is current as of September 28, 2017.

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