Davis Dentistry Professional Corp. – Tax Court of Canada finds that orthodontic practices make two supplies of services and devices

A professional corporation’s orthodontics practice claimed input tax credits on the basis of an administrative arrangement of CRA with the Canadian Dental Association under which orthodontists filed their GST returns using 35% of the patient’s total treatment cost as an estimate of the consideration for the supply of the orthodontic appliance (which was zero-rated), with only the balance treated as exempt - and with a requirement, when the annual results became available at year end, to reconcile their 35% ITC estimate with their actual taxable supplies. However, in the view of CRA, the corporation did not comply with the requirement under this policy to “identify the consideration for the zero-rated supply of the appliance separately from the consideration for the exempt supply of services” (the agreement with the patient stated that “[o]ur orthodontic fee includes a portion, up to 35%, relating to the value of orthodontic appliances,” but the invoices contained no allocation between the services and device. Accordingly, CRA disallowed the corporation’s input tax credit claims – effectively on the basis that there was a single supply of exempt orthodontic services.

In allowing the corporation’s appeal, Wong J stated (at para. 41):

The statute makes it clear (and Parliamentary intent confirms) that a conventional orthodontic practice consists of exempt supplies of services and zero-rated supplies of appliances. It is unnecessary to use the common law test for determining single versus multiple supplies or to consider whether the supply of an appliance is incidental to the supply of orthodontic treatment because the statute has directly addressed the tax status of both.

Accordingly, she confirmed the corporation’s position that it made both exempt and zero-rated supplies to its patients on a 65/35 basis, so that the zero-rated supplies generated ITCs. She did not discuss Brian Hurd, where Campbell J found that an incorporated orthodontic practice was making a single supply of exempt orthodontic health services rather than (as argued by it) two supplies comprised of a zero-rated supply of medical equipment (the orthodontic appliance) and of exempt orthodontic services (e.g., adjustment and maintenance services).

CRA also justified its ITC disallowance on the basis that the invoices rendered to the patients did not comply with the Input Tax Credit Information (GST/HST) Regulations. (This position was odd, because these Regulations apply to invoices received from a supplier (i.e., to input invoices), and are not directly relevant to the ITC position of a supplier rendering invoices (i.e., output invoices)). In any event, Wong J found that the corporation’s invoices complied with these Regulations. In particular:

  • they showed the tax on the taxable supplies included because they showed nil (overall) tax (s. 3(c)), and they therefore also included the (nil) amount of tax for each supply (s. 3(b)); and
  • they included the total amount paid for the supplies (s. 3(a)).

Neal Armstrong. Summary of Dr. Kevin L. Davis Dentistry Professional Corporation v. The Queen, 2021 TCC 25 under Sched. VI, Pt. II, s. 11.1, s. 169(5) and Input Tax Credit Information (GST/HST) Regulations, s. 3(b).