Orthodontist Wins New Court Case to Preserve GST / HST Input Tax Credits

The Tax Court of Canada has recently issued its judgment pertaining to input tax credits (ITCs) claimable by an orthodontist in Dr. Kevin L. Davis Dentistry Professional Corporation (PC) v The Queen 2021 TCC 25 General Procedure.

The judgment in the Davis case differs from that in the 2017 decision where the Tax Court of Canada heard the Dr. Brian Hurd case 2016-1854 (GST) Informal Procedure and had ruled that Dr. Hurd provided a single supply of GST / HST-exempt orthodontic services and was not entitled to claim ITCs As an informal decision it was not binding. However, the Canada Revenue Agency (CRA) indicated in late 2017 it intended to change its administrative policy to reflect the Hurd decision.

In 2020, we were apprised the CRA’s policy was on hold pending the outcome of this Davis decision.

In this case, the orthodontist, Dr. Kevin L. Davis PC (the Appellant), filed its GST / HST returns in accordance with an administrative arrangement between the Minister of National Revenue and the Canadian Dental Association. This arrangement allowed orthodontists to use up to 35 percent of the patient’s total treatment costs, as an estimate of the consideration for the supply of the zero-rated orthodontic appliance, and to claim proportionate ITCs through the year provided a reconciliation was performed at year-end and the consideration for the appliance and the treatment services were separately stated in the agreement with the patient.

The Minister assessed and disallowed the ITC claims on the basis that patient invoices did not set out the consideration for the zero-rated supply of orthodontic appliances separately from the consideration for the exempt supply of orthodontic services, as required under the administrative arrangement. The Minister asserted it was unable to determine whether the registrant had made multiple supplies and the extent to which the supplies were linked to a commercial activity. On that basis, the Minister determined only one single exempt supply was being made in respect of which no ITCs could be claimed.

The court allowed the appeal by Dr. Davis on the basis there was no conflict between the legislative provisions dealing with orthodontic services and appliances. The legislation clearly recognized a conventional orthodontic practice consisted of exempt supplies of orthodontic services and zero-rated supplies of orthodontic appliances. Therefore, it was unnecessary to use the common-law test for determining single versus multiple supplies or to consider whether the supply of an appliance was incidental to the supply of orthodontic treatment, because the legislation directly addressed the status of both.

The court additionally addressed in detail the specific criteria of the input tax credit information (GST / HST) regulations and determined they had been met.

At this point, we have not heard if the CRA will relax its interpretation of its administrative policy or whether it is looking to appeal to the Federal Court of Appeal. 

To ensure consistency with the CRA’s policy and this recent case, orthodontists who have been claiming ITCs or want to claim ITCs should review:

• their processes including year-end reconciliations; and
• documentation and agreements with their patients.

For more information, contact Danny Crawford, CPA, CMA, at 780.969.1426 or [email protected]