Orthodontist denied GST/HST input tax credits
Most businesses can claim a full “input tax credit” (ITC) to recover all the GST/HST they pay on their expenses. That way, the real cost of the GST and HST is imposed only on consumers.
However, businesses that make “exempt” supplies cannot claim ITCs, though they do not charge GST/HST on their services. Thus, the GST/HST is a real cost to such businesses. This includes physicians, dentists, and most other regulated health care providers.
Orthodontists provide dental services (which are exempt), but also sell braces, which are “zero-rated” as medical devices. No tax applies to a zero-rated supply, but the business is allowed to claim ITCs for its costs of making such sales.
Because orthodontists provide both exempt services and zero-rated goods, the CRA has since 1992 an administrative policy allowing orthodontists to claim 35% of their ITCs.
However, in a recent case, Dr. Brian Hurd Dentistry Professional Corp. v. The Queen, the Tax Court of Canada held that this policy is wrong.
The Court ruled that what an orthodontist provides is a “single supply”: the dental services and braces cannot be separated, since neither can usefully be supplied without the other. Under the law developed by the Courts over the past 20 years, a “single supply” has only one status for GST or HST purposes: that of the dominant element.
The Court found that the dominant element was the dental services. Thus, the orthodontist’s sales were all exempt, and he was unable to claim any ITCs.
This case will cause serious problems for orthodontists if the CRA decides to follow it and revise its administrative policy to disallow all ITCs. Since the decision was issued under the Tax Court’s Informal Procedure, it is not a binding precedent, and the CRA may chose to ignore it; but given the Court’s ruling, the CRA may feel that it should re-evaluate its policy to reach the correct legal result.
