ITCs Disallowed for Orthodontists

In Dr. Brian Hurd Dentistry Professional Corporation v. The Queen (2017 TCC 142), the TCC disallowed ITCs claimed by an orthodontist on the basis that a single supply of an exempt orthodontic treatment was being made in the orthodontic practice; the court applied the general principle that taxpayers making exempt supplies cannot claim ITCs. This decision could affect ITC eligibility for all orthodontists.

The taxpayer took the position that two separate supplies were made in its business: (1) the supply of the orthodontic appliance (zero-rated), and (2) the supply of a service to maintain the appliances (exempt). The taxpayer argued that it was making "multiple supplies," and therefore was entitled to claim ITCs with respect to the GST/HST paid related to the provision of the zero-rated orthodontic equipment.

As the taxpayer noted, its position was in accordance with the CRA's administrative policy (RITS 56527, "Eligibility by an Orthodontist for Input Tax Credits," December 1, 2004), which was to permit orthodontists to claim ITCs in situations where "multiple supplies" are made and where the supply of the orthodontic appliance is separately identified on the billing statement. By virtue of this policy, orthodontists were able to claim ITCs up to a maximum of 35 percent of sales. This estimate represented the consideration for the supply of the orthodontic appliance. Once the actual figures were available (for example, at year-end), the orthodontist was required to calculate the actual percentage of taxable supplies and adjust the ITCs claimed accordingly. The taxpayer fully complied with these rules.

The minister argued against the CRA's own administrative position, maintaining that the orthodontic treatments combined with the orthodontic appliance supplied by the corporation constituted a single supply of an exempt orthodontic treatment; therefore, no ITCs were available. The court upheld the minister's assessment based on this single-exempt-supply argument. Of particular note is the judge's comment on the CRA's administrative policy: "[A]lthough it may be a guideline it is not binding on this Court. I believe it to be incorrect and misleading to taxpayers."

The CRA has not withdrawn its administrative policy, and it is unclear whether this decision should be interpreted as a change in policy or as a one-off assessing position based on a particular set of facts. Regardless, orthodontists should err on the side of caution when claiming ITCs.

Mitchell Donnelly
Grant Thornton LLP, Halifax

Canadian Tax Focus
Volume 7, Number 4, November 2017
©2017, Canadian Tax Foundation