29 March 2001 GST/HST Interpretation 33654 - The Application of the GST/HST to Supplies of In Vitro Diagnostic Products

Dear Sir:

Thank you for your letter of November 21, 2000, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to in vitro diagnostic kits that you sell to medical laboratories and hospitals in Canada for blood testing and other diagnostic purposes. Depending on their contents and purpose, the in vitro diagnostic kit may contain substances that are listed in Schedule D to the Food and Drugs Act, as well as other reagents and accessories. The in vitro diagnostic kits are sold and invoiced as a single supply.

Interpretation Requested

You are requesting confirmation that when XXXXX supplies an in vitro diagnostic kit which contains a substance listed in Schedule D to the Food and Drugs Act, as well as other reagents and accessories, the supply of that kit will qualify for zero-rated status under paragraph 2(a) of Part I of Schedule VI to the Excise Tax Act (the "ETA"). In this regard, it is your understanding that for purposes of interpreting this provision, the Canada Customs and Revenue Agency (the "CCRA") will be guided by the approach taken by Health Canada which is to consider the entire in vitro diagnostic kit as a "Schedule D" drug.

Interpretation Given

After further analysis of paragraph 2(a) of Part I of Schedule VI to the ETA, it is our view that in vitro diagnostic products are not zero-rated supplies for purposes of this ETA provision. Accordingly, the supply of an in vitro diagnostic kit is subject to the GST at the rate of 7% or, where the supply is made in a participating province (i.e., Newfoundland, Nova Scotia, or New Brunswick), the supply is subject to the HST at the rate of 15%.

Suppliers of drugs and medical devices are required to charge the GST/HST when they supply these products in Canada with the exception of certain drugs and medical devices listed in Schedule VI to the ETA. The supply of a drug included in Part I or a medical device included in Part II of that Schedule is subject to a zero rate of tax, i.e., this supply is zero-rated for purposes of the ETA.

Section 29 of Part II of Schedule VI to the ETA identifies specific in vitro diagnostic products that are zero-rated when supplied in Canada: urinary-sugar testing reagents and urinary-ketone testing reagents. There are no other in vitro diagnostic products identified in either Part I or Part II to the ETA and accordingly, supplies of all other in vitro diagnostic products are subject to the GST/HST at the rate of 7% or, where it applies, the rate of 15%.

Paragraph 2(a) of Part I of Schedule VI to the ETA

We understand that there has been uncertainty about the application of paragraph 2(a) of Part I of Schedule VI to the ETA to supplies of in vitro diagnostic products. This provision gives zero-rated status to a supply of a drug that is included in Schedule C or D to the Food and Drugs Act. The following information is provided to clarify the application of this ETA provision.

An in vitro diagnostic product is comprised of a number of components or parts intended to be used together to fulfill some or all of the product's intended functions and that is sold under a single name and invoiced as a single supply. In vitro diagnostic products include test kits that consist of reagents or articles, or a combination of these, that is intended to be used to conduct a specific test. Depending on its contents and purpose, an in vitro diagnostic product may contain a substance that is listed in Schedule D to the Food and Drugs Act, as well as other reagents and accessories. In vitro diagnostic products are not regulated as drugs under the Food and Drugs Act; rather Health Canada regulates in vitro diagnostic products as devices under its Medical Devices Regulations.

We understand that Health Canada has taken an administrative position that an in vitro diagnostic product will satisfy the definition of "drug" in the Food and Drugs Act if the product carries a claim that its purpose is for the diagnosis of a disease or disorder in humans or animals. Further, if one of the components of that product is a substance that is listed in Schedule D to the Food and Drugs Act, Health Canada will consider the in vitro diagnostic product to be a Schedule D drug. For the following reasons, the Canada Customs and Revenue Agency (the "CCRA") cannot adopt the administrative position taken by Health Canada with respect to in vitro products to apply paragraph 2(a) of Part I of Schedule VI to the ETA to such supplies.

For purposes of the ETA, a composite product such as an in vitro diagnostic product cannot be defined by any one of its components or ingredients. Rather, as explained in the CCRA's Policy Statement P-077, Single Supply vs Multiple Supplies (copy enclosed), the product is defined by the sum of its parts and results in a single supply of a new product. Accordingly, for purposes of the ETA, the fact that one of the ingredients of an in vitro diagnostic product is a substance that is included in Schedule D to the Food and Drugs Act does not result in zero-rated status to the supply of that product.

The fact that in vitro diagnostic products are not regulated as drugs under the Food and Drugs Act but are regulated as devices under Health Canada's Medical Devices Regulations precludes in vitro diagnostic products from being supplies described in paragraph 2(a) of Part I of Schedule VI to the ETA. That is, paragraph 2(a) of Part I of Schedule VI to the ETA specifies that only those drugs that are regulated by Health Canada under Schedule C or D to the Food and Drugs Act are zero-rated supplies pursuant to this ETA provision. Although Health Canada may consider certain in vitro diagnostic products to satisfy the definition of "drug", the regulation of these products takes precedence over Health Canada's administrative position for purposes of the ETA.

Notwithstanding the administrative position of Health Canada, the ETA requires that the supply be a drug that is specifically included in Schedule C or D to the Food and Drugs Act. We note that Health Canada's administrative position does not satisfy the explicit requirement of the ETA. The fact that an in vitro diagnostic product is a composite supply that is not included in either Schedule C or D to the Food and Drugs Act precludes the product from being a supply of a drug described in paragraph 2(a) of Part I of Schedule VI to the ETA.

Finally, we note that the ETA recognizes in vitro diagnostic products as medical devices under Part II of Schedule VI and not as drugs under Part I of Schedule VI. That is, as previously noted in this letter, section 29 of Part II of Schedule VI to the ETA identifies specific in vitro diagnostic products that are zero-rated when supplied in Canada. Accordingly, it would be inappropriate to apply Part II of Schedule VI to certain of these products and Part I to all other in vitro diagnostic products that are not included in Part II.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the ETA, 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 CCRA 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 (613) 952-6761.

Yours truly,

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

Enclosure: Policy Statement P-077, Single Supply vs Multiple Supplies