4 May 1999 GST/HST Ruling HQR0001655 - Tax Treatment of Contact Lens Blanks

Dear XXXXX

This is in reply to your letter of December 15, 1998, with attachments, which was forwarded to us from the XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the supply of contact lens blanks.

Statement of Facts

On the basis of the information provided, our understanding of the facts is as follows:

1. XXXXX is a non-resident importer of prescription soft contact lenses and semi-finished XXXXX contact lens blanks. XXXXX ships to several Canadian contact lens laboratories, hospitals, and practitioners.

2[.] XXXXX has recently received invoices indicating that GST is due on the XXXXX contact lens blanks.

3. XXXXX contact lens blanks are of unique design with specific elements incorporated that eye care practitioners prescribe for their patients. The patient requires certain prescription parameters to correct the impaired vision, and the XXXXX lenses have several of these prescription parameters already manufactured into the lens blank. XXXXX manufactures various XXXXX contact lens materials, in blank form, that have some or all of the following prescription parameters built into the lens blank:

a) different Dk values to tailor oxygen transmissibility to the eye;

b) Refractive Index and Specific Gravity which are variables that affect the positioning and thickness of the finished contact lens; and

c) UV (Ultraviolet) absorber.

4. XXXXX supplies three types of XXXXX contact lenses: XXXXX[.] All three are available as the lathe cut or molded firm contact lenses as well as with or without an ultraviolet absorber.

5. XXXXX[.] They are available in spheric, aspheric multifocal, toric, bitoric, and bifocal designs. Daily wear and extended wear lenses are available with spherical front and back surfaces in clear and tinted versions. The posterior curve is selected so as to properly fit an individual eye and the anterior curve selected to provide the necessary optical power to correct refractive error. These lenses are available in clear and tinted versions.

6. XXXXX materials with higher oxygen delivery. These lenses are available in spheric, aspheric multifocal, toric, bitoric, and bifocal designs. Daily wear lenses are available with spherical, aspheric, bifocal, or toric anterior, posterior, or bitoric surfaces in clear and tinted versions. The extended wear lenses are available with spherical or aspheric anterior or posterior surfaces in clear and tinted versions. The posterior curve is selected so as to properly fit an individual eye and the anterior curve selected to provide the necessary optical power to correct refractive error.

7. XXXXX[.] These lenses are available in spheric, aspheric multifocal, toric, bitoric, and bifocal designs. They are available for daily wear only, and are with spherical, aspheric, bifocal, or toric anterior and posterior, or bitoric surfaces in clear and tinted versions. The posterior curve is selected so as to properly fit an individual eye and the anterior curve selected to provide the necessary optical power to correct refractive error.

8. XXXXX contact lens blanks have only been approved by the XXXXX for prescription use, they have not been approved for alternate uses such as cosmetic purposes.

Ruling Requested

You are requesting a ruling on the application of the GST/HST to the supply of XXXXX[.]

Ruling Given

Based on the facts set out above, we rule that the supply of the XXXXX blanks when imported into Canada are subject to the GST at 7% or, as explained below, if they are imported into a participating province, the XXXXX blanks are subject to the HST at 15%.

On April 1, 1997, the HST replaced the GST and the provincial sales tax in the three participating provinces of Nova Scotia, New Brunswick and Newfoundland with a harmonized tax rate of 15%. Goods that are delivered or made available in a participating province, and services performed in a participating province, to the extent they are taxable supplies (which are not zero-rated), tax must be collected at the harmonized rate.

This ruling is subject to the general limitations and qualifications outlined in section 1.4 of Chapter 1 of the GST/HST Memoranda Series. We are bound by this ruling provided that none of the above issues is currently under audit, objection, or appeal; that there are no relevant changes in the future to the Excise Tax Act, or to departmental interpretative policy; and that you have fully described all necessary facts and transaction(s) for which you requested a ruling.

Explanation

Under the GST/HST system, the supply of goods and services is taxable at rates of 15%, 7%, or 0% (zero-rated), or they may be exempt from tax. Zero-rated supplies are listed in Schedule VI and exempt supplies are listed in Schedule V of the Excise Tax Act (the "ETA").

Section 9 of Part II of Schedule VI to the ETA provides a zero-rated GST/HST status for the supply of the following:

"A supply of eyeglasses or contact lenses when the eyeglasses or lenses 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 a province in which the professional practises to prescribe eyeglasses or contact lenses for such purpose."

Under this provision, the supply of corrective contact lenses is zero-rated when supplied under the written order of an eye-care professional to treat or correct a defect of vision of a consumer named in the order. This zero-rated status is only available when the supply is made where there is acceptable evidence of the written order. Where a person purchases corrective contact lenses or contact lens blanks for inventory, the supply would be subject to the GST/HST at 7% or 15%.

We understand that when "soft" contact lenses are supplied, the lenses are manufactured for a specific prescription. On the other hand, contact lens blanks require finishing by a laboratory. Therefore, the supply of contact lens blanks which do not yet have corrective properties incorporated into them is subject to the GST/HST at 7% or 15%, regardless of whether the lens blanks contain some prescription parameters.

Section 32 of Part II of Schedule VI to the ETA provides a zero-rated status to a supply of a part that is specially designed for a property described in that Part, such as prescription eyeglasses described in section 9. In order for an item to fall within section 32, it must first be a part and second be specially designed for use in prescription eyeglasses. Please note that in order to be a "part", the good must be an identifiable and integral constituent component of a larger entity. A contact lens cannot be considered a part for itself regardless of whether it needs further finishing. It is not an identifiable and integral constituent component of a larger entity. Therefore, contact lens blanks are not a zero-rated part for the purposes of section 32.

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