8 September 1999 General Information Letter HQR0001740 - GENERAL INFORMATION LETTER Application of the GST/HST to Optometry Service Contracts

Dear XXXXX

This in reply to your memorandum of March 29, 1999, and our subsequent telephone conversations, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to optometry service contracts.

The subject of your inquiry concerns an optometrist who, in addition to supplying zero-rated contact lenses, also supplies a contact lens service plan (the "plan) for a separate consideration of $XXXXX[.] The purchase of the plan entitles the recipient to the following:

•   reduced rate on replacement contact lenses;

•   professional fees incurred by the doctor for contact lens checks;

•   a XXXXX reduction on any glasses purchased while the service plan is in effect;

•   a XXXXX reduction on any sunglasses purchased while the service plan is in effect;

•   for standard soft and gas permeable lenses, professional cleanings and polishings free of charge (a XXXXX[).]

The client must renew the plan yearly and will receive a renewal letter previous to the end of the month in which the plan expires.

You are requesting our opinion on the tax status of the supply of the plan, that is, whether the supply of the plan and the supply of the contact lenses is a single supply that is zero-rated pursuant to section 9 of Part II of Schedule VI to the Excise Tax Act (the "ETA"). If the plan and the contact lenses are two separate supplies, you would like our opinion as to whether the supply of the plan is zero-rated pursuant to section 34 of that same Part.

First of all, it is the Department's view that the plan as described above represents a supply of a right that entitles the recipient to various discounts on purchases of goods and services. As such, although it is referred to as a "service plan," for the purposes of the GST/HST the plan is a supply of intangible personal property.

The supply of the plan is a separate and distinct supply from the supply of the contact lenses. Since it is not an element of a supply of contact lenses, the supply of the plan is not zero-rated under section 9 of Part II of Schedule VI. Furthermore, as explained below, section 34 of that same Part does not apply to the supply of the plan. Since there are no other applicable zero-rating or exempting provisions in the ETA, the supply of the plan is subject to the GST at the rate of 7% or, in the participating provinces of Newfoundland, Nova Scotia, and New Brunswick, the HST at the rate of 15%.

Analysis

The supply of eyeglasses or contact lenses is zero-rated under section 9 of Part II of Schedule VI to the ETA when they are supplied on the written order of an eye-care professional for the treatment or correction of a defect of vision of a consumer named in the order where the eye-care professional is entitled under the laws of the province in which the professional practices to prescribe eyeglasses or contact lenses for such purpose. In addition to the prescription eyewear, the optometrist's clients have the option to purchase for a separate consideration of $XXXXX a plan which entitles them to a variety of benefits, such as rights to discounts on certain goods and services. The supply of the plan is not part of a single supply of contact lenses under the Department's single and multiple supply policy as described in Policy P-077R, Single and Multiple Supplies. Although there is only one supplier and one recipient, the plan is clearly not an input to a supply of contact lenses. Furthermore, the contact lenses and the plan are supplied separately under different invoices. There is a supply of contact lenses along with the availability of a plan to those who wish to use and pay for it. The supply of the contact lenses and the supply of the plan are thus distinct and separate supplies.

As per our telephone conversations, the facts of the cases you referred to in your memorandum, XXXXX are distinguishable from the circumstances surrounding the supply of the optometry plan and therefore the decisions rendered in those cases are not applicable to the case at hand. In order to purchase the discounted rail transportation, the student had to first purchase the identity card. Similarly, in order to purchase a vacation package with XXXXX a person must first purchase a membership. Thus, it was concluded that the supply of the railway student identity card or the vacation membership fee could not realistically be omitted from the overall supply of the transportation or the vacation package. There is no similar connection between the supply of the optometry plan and the supply of the contact lenses. It is not mandatory for the customer to purchase the plan. Furthermore, the benefits of the plan are not restricted to a particular supply, rather the plan offers discounts related to a variety of goods and services that are taxable at 7% or 15% and zero-rated. Therefore, the supply of the optometry plan is not zero-rated under section 9 of Part II of Schedule VI as an element of a supply of contact lenses.

Section 34 of Part II of Schedule VI gives zero-rated status to supplies of certain services, i.e., installing, maintaining, restoring, repairing or modifying, in respect of zero-rated medical devices. As stated above, the supply of the optometry plan represents a supply of a right to various discounts and as such it is a supply of property, not prepayment for a service. Thus, it is not a zero-rated supply pursuant to section 34 of Part II of Schedule VI. We also note that the discounts offered by the plan (replacement of contact lenses, professional fees, reductions on future purchases of any glasses, etc.) are not in respect of any of the services described in section 34.

Finally, you noted that a letter dated May 28, 1993, File no. 11860-2, issued by Headquarters to the XXXXX that contact lens service contracts and repairs of eyeglasses are zero-rated pursuant to section 34 of Part II of Schedule VI to the ETA as the contract is essentially a service contract for goods zero-rated pursuant to section 9 of that Part. As we do not have the details of that particular contract other than it covers, free of charge, the replacement and repair of eyewear, we cannot comment on that contract and its application to the case at hand.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-6761.

Yours truly,

Susan Eastman
Municipalities and Health Care Services Unit
Public Service Bodies and Governments Division