23 December 1998 GST/HST Interpretation HQR0001502 - PROPOSED LAW/REGULATION GST/HST and the Supply of Pharmaceuticals

XXXXX:

As per our recent telephone conversations, the following contains useful information for XXXXX regarding the supply of certain drugs in Canada and the application of the Goods and Services Tax/Harmonized Sales Tax (GST/HST).

Under the Excise Tax Act (the law which imposes the GST/HST), when drugs are sold by a manufacturer or wholesaler, the rule of thumb should be that the consideration for the supply is generally GST/HST taxable unless the drug is listed as follows:

(a) in Schedule C or D to the Food and Drugs Act,

(b) in Schedule F to the Food and Drug Regulations (other than a drug or a mixture of drugs which may be sold to a consumer without a prescription),

(c) it is a drug or other substance included on Schedule G to the Food and Drugs Act,

(d) it is a drug that contains a substance included on the schedule to the Narcotic Control Act (other than a drug or mixture of drugs that may be sold to a consumer without a prescription pursuant to that Act or Regulations made under that Act),

(e) it is one the following listed drugs:

Digoxin
Digitoxin
Prenylamine
Deslanoside
Erythrityl tetranitrate
Isosorbide dinitrate
Nitroglycerine
Quinidine and its salts
Medical oxygen
Epinephrine and its salts, or

(f) it is a drug the supply of which is authorized under the Food and Drug Regulations for use in emergency treatment.

Further, to be zero-rated, the drugs listed under paragraphs (a) through (f) must not be labeled or supplied for agricultural or veterinary use. When they are labeled or packaged for agricultural or veterinary use, the supply is subject to the GST/HST.

Legislative Changes

Some of the above-noted legislation and schedules thereto have been repealed or been amended. The federal Controlled Drugs and Substances Act (which became effective May 14, 1997) now lists some of these drugs. Amendments were made to the Food and Drugs Act and the Narcotic Control Act was repealed concurrent with the Controlled Drugs and Substances Act receiving Royal Assent. The Excise Tax Act also requires amendment to reflect those changes.

On December 10, 1998, the Secretary of State XXXXX XXXXX, on behalf of Finance Minister XXXXX, tabled in the House of Commons a Notice of Ways and Means Motion that proposes amendments to the Excise Tax Act relating to the goods and services tax and the harmonized sales tax (GST/HST). Included are two proposed amendments to reflect the above drug-related changes. These are:

1) a proposal to repeal the Excise Tax Act reference to

(c) "a drug or other substance included on Schedule G to the Food and Drugs Act, [paragraph 2(c)/I/VI ETA]

and replace it (effective May 14, 1997) with

(c) "a drug or other substance included in the schedule to Part G of the Food and Drug Regulations".

2) a proposal to repeal the Excise Tax Act reference to:

(d) "a drug that contains a substance included on the schedule to the Narcotic Control Act other than a drug or mixture of drugs that may be sold to a consumer without a prescription pursuant to that Act or Regulations made under that Act" [paragraph 2(d)/I/VI ETA]

and replace it (effective May 14, 1997) with:

(d) "a drug that contains substances included in the schedule to the Narcotic Control Regulations, other than a drug or mixture of drugs that may be sold to a consumer without a prescription pursuant to the Controlled Drugs and Substances Act or regulations made under that Act".

Suppliers should be aware that, upon Royal Assent, some changes in tax status may result. Please advise XXXXX to confirm the effects of the legislative changes on the GST/HST status of the products XXXXX. We would like to remind XXXXX XXXXX that confirmation of the status of XXXXX drug products under the Food and Drug Act, the Controlled Drugs and Substances Act or the Narcotic Control Act is not within the purview of Revenue Canada. This information can be obtained from Health Canada.

The remaining information is to clarify misconceptions which may be held by some suppliers.

Drugs Supplied Under Prescription:

If the supply of a drug is zero-rated when supplied under prescription to a consumer, this does not mean that the supply of that drug is zero-rated when supplied further up the distribution chain. If the drug does not satisfy the legislative or regulatory references listed above, the importation by the wholesaler, the supply in Canada by a manufacturer or wholesaler to the retailer and any transaction which is not made to a consumer is GST/HST taxable. It is only zero-rated when supplied to the consumer under prescription (3/I/VI ETA).

Drug Identification Numbers:

The presence of a Drug Identification Number (DIN) merely identifies the fact that the good is considered a drug by Health Canada, it is not a guideline to be used in determining whether the drug is GST/HST zero-rated or taxable.

Ethical Drugs:

The fact that a drug is an "ethical" drug (a term used in the industry) has no bearing on the GST/HST status of the supply. It provides no guarantee that the supply of the drug does not attract GST/HST. Suppliers should be aware of the legislative or regulatory references for all products they sell to confirm the tax status of the supply.

To ease verification efforts by Revenue Canada, suppliers should be able to provide evidence that the drugs they supply meet the required Food and Drugs Act and Narcotic Control Act or Controlled Drugs and Substances Act references if they supply the products on a GST/HST zero-rated basis.

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

The foregoing comments represent our general views with respect to the current provisions of the Excise Tax Act and the proposed amendment(s) thereto as they relate to this matter. Any change to the wording of these proposed amendments or any future proposed amendments to the Excise Tax Act, if enacted, could have an effect on the interpretation provided herein. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST/HST Memoranda Series, do not bind the Department with respect to a particular situation.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at 952-9590.

Yours truly,

Ken Syer
Senior Rulings Officer
Municipalities and Health Care Unit
Public Service Bodies and Governments Division
GST/HST Rulings and Interpretations Directorate