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Courts straighten out CRA on the matter of ITCs for orthodontists


Canadian orthodontists face considerable uncertainty with respect to how orthodontic services and supplies are treated for GST/HST purposes. For many years, orthodontists have operated under an administrative position issued by the Canada Revenue Agency (CRA) which accepts that orthodontic treatment consists of two separate supplies: an exempt supply of dental services (straightening teeth), and a zero-rated supply of orthodontic appliances such as brackets, wires, and retainers. Subject to certain documentation requirements (that the amount charged for the zero-rated appliances is specifically set out in the treatment fee), this arrangement allows orthodontists to claim input tax credits (ITCs) of up to 35% of the GST/HST paid on certain expenses incurred by their practice.

A recent decision by the Tax Court of Canada provides greater clarity for orthodontic practices and the treatment of ITCs—welcome news to many orthodontists. The recent case of Dr. Kevin L. Davis Dentistry PC v. Queen, 2021 TCC 25, confirmed that the administrative position permitting orthodontists to claim ITCs continues to be valid and provides guidance on the documentation that is sufficient to support an ITC claim by the orthodontist. The decision may also provide an effective basis to dispute previous CRA assessments that deny ITC's claimed by an orthodontic practice.

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.


Dr. Brian Hurd Dentistry Professional Corporation versus Her Majesty the Queen, 2017 GTC 42 (“the Hurd case”)

In this case, the judge ruled that Dr. Hurd had not met the documentation requirements under the administrative agreement but also rejected the long-standing administrative agreement in its entirety, describing it as “incorrect and misleading” and concluding that an orthodontist made only a single supply of an exempt dental service and therefore was not eligible to claim any ITCs. While the CRA, indicated an intention to apply the Dr. Hurd decision going forward, there has been little in the way of formal communication on this issue since 2017.

Dr. Kevin L. Davis Dentistry PC v. Queen, 2021 TCC 25 (“the Davis case”)

In the Davis case, a recent challenge to the CRA's administrative position on ITCs, the orthodontist entered into a “financial agreement” with his patients that set out a total treatment fee. It specifically stated:

"Our orthodontic fee includes a portion, up to 35%, relating to the value of orthodontic appliances as well as the value for the services of installing, maintaining, restoring, repairing or modifying your orthodontic appliances. All of our materials, appliances and services are either zero-rated or exempt for GST/HST purposes. As a result, GST/HST is not added or included in our “orthodontic fees."

The CRA initially denied Dr. Davis ITCs on the basis that his documentation did not meet the requirements set out in the administrative agreement, but subsequently argued (no doubt on the basis of the Dr. Hurd decision) that Dr. Davis made only a single supply of exempt dental services, and did not make a separate supply of zero-rated orthodontic appliances.

In its decision, the court reached two important conclusions:

  • First, that Dr. Davis did indeed make two separate supplies, one of exempt dental services and a separate supply of zero-rated orthodontic appliances. Of key importance was a change to the GST/HST legislation made in 1997 to create a specific zero-rating provision for orthodontic appliances indicating a clear intention of Parliament to recognize that an orthodontic practice included making separate supplies of zero-rated orthodontic appliances, and it was therefore not necessary to undertake a further analysis on the issue of single vs. multiple supplies.
  • Second, the judge found that Dr. Davis' ‘financial agreement' met the documentation requirements of the original administrative agreement since it set out both the total treatment fee and the portion of the total fee that represented the consideration for the zero-rated orthodontic appliances and thus the amount of consideration paid for the appliances was sufficiently clear.

The information in this publication is current as of August 25, 2021.

This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.

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