Orthodontists may now face additional complications when claiming input tax credits (ITCs) in respect of Goods & Services Tax/Harmonized Sales Tax (GST/HST) incurred in the course of operating their practice.
The Canada Revenue Agency (CRA) has announced, in GST Notice 339, that the longstanding administrative arrangement with the Canadian Dental Association (CDA) will be revoked, effective on the first day of a practice’s fiscal year that starts on or after Jan. 1, 2025.
What was the previous arrangement?
The arrangement allowed an orthodontist to use an estimate of up to 35% of the total fees charged for orthodontic treatment to be considered as a supply of zero-rated orthodontic appliances, which would allow them to claim ITCs in respect of certain purchases on that basis. They would then be expected to perform an end-of-fiscal year reconciliation to adjust the ITCs to reflect the actual inputs used for commercial activities, and to meet certain documentation requirements regarding the actual appliance fees charged to patients.
The CRA determined that the administrative agreement became redundant due to recent court decisions on the issue of ITC eligibility.
What are the new ITC rules for orthodontist practices?
The revocation of this agreement means that orthodontists will be required to claim ITCs in each reporting period based on the actual proportion of taxable/exempt supplies, without relying on the 35% estimate.
Generally, a GST/HST registrant can claim an ITC for the GST/HST paid on property or services acquired for commercial activities, but not for exempt activities like orthodontic services. Orthodontists can claim 100% of the GST/HST paid on goods or services used substantially (90% or more) for taxable supplies, but must apportion ITCs if used for both taxable and exempt supplies.
For capital property (such as equipment, furniture, and fixed assets other than real property), ITCs are allowed only if the property is used primarily (more than 50%) for commercial activities.
It is important to note that, due to the requirement under the previous agreement for the orthodontist to perform an annual reconciliation to actual taxable/exempt supplies, the revocation of the agreement should not change the amount of ITCs that an orthodontist is ultimately able to claim. Most notably, the CRA has not attempted to overturn the conclusions reached in the Dr. Davis court decision that was appealed by the Crown and dismissed in the April 12, 2023 case, The King v. Dr. Kevin L. Davis Dentistry Professional Corporation.
While the revocation does not expect to change an orthodontic practice’s annual ITC entitlement, it does pose some challenges. Orthodontists are reminded that they should review their allocation basis for ITCs and any documentation available to support their filing position.
How BDO can help
BDO Canada's Indirect Tax team can assist orthodontists and other medical practitioners with their complicated sales tax matters. If you require assistance, please contact a member of our national team.
The information in this publication is current as of November 29, 2024.
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