7 February 2001 GST/HST Interpretation 8441 - Tax Status of Supplies by a Diet Clinic and Input Tax Credits

Dear Sir:

This is in reply to your electronic message of November 18, 1999, to the XXXXX, which was forwarded to us on July 7, 2000. You would like confirmation of the tax status of various supplies made by the XXXXX (the "Clinic"), the Clinic's entitlement to input tax credits, as well as the GST/HST implications with respect to the associates practicing at the Clinic.

The Clinic supplies a weight-loss program to individuals. The weight-loss program involves the following elements and fees that are payable to the Clinic by the individual:

•   an initial consultation for a fee in the range of XXXXX that involves completing a medical history form and a health assessment, an explanation of the program by a nurse, the first week of service, and includes the supply of a diet manual, recipe book, water bottle, sample protein pack, and six vitamin B injections;

•   the ongoing program that consists of a combination of the following activities: weight charting, nutritional counseling by a nurse and vitamin B injections for fees of XXXXX[.] On behalf of the medical practitioners operating at the Clinic, the Clinic bills the XXXXX for certain other services, i.e., insured services, that the medical practitioners provide to the individual recipients of the weight-loss program. These insured services provided by the medical practitioners include office visits for assessments (minor, general and intermediate consultations), routine urinalysis without microscopy, nutritional counselling for educational purposes, and certain injections of B-complex vitamins.

1.(a) Weight-loss program supplied to individuals by the Clinic

The supply of the weight-loss program by the Clinic is a single taxable supply that is subject to the 7% GST (or, where such a program is delivered in a participating province, the 15% HST). Consequently, the 7% GST applies calculated on the value of the consideration, i.e., the initial evaluation fee and the ongoing program fees paid by the individuals, for this taxable supply.

1.(b) Payments by the XXXXX

The Clinic is not making any supplies of exempt services for purposes of section 9 of Part II of Schedule V to the Excise Tax Act (the "ETA"). Based on the information provided, XXXXX does not reimburse the Clinic in respect of the Clinic's supply of the weight-loss program to individuals. Rather, the payments by XXXXX are in respect of the medical practitioners' supplies of insured services they provided to individuals.

2. Additional supplies to individuals by the Clinic

In addition to the weight-loss program, the Clinic sells a variety of goods such as recipe books, water bottles, food scales, protein packs, dehydrated food, oatmeal, cookies, pudding, vitamins and food scales. A separate consideration is charged for these supplies. Most of these separate supplies of goods are subject to the 7% GST (or, where these supplies are made in a participating province, the 15% HST). Consequently, the 7% GST applies calculated on the value of the consideration paid by the individuals for these taxable supplies.

Generally, the supply of basic groceries, which includes the majority of food and beverages marketed for human consumption (including sweetening agents, seasonings and other ingredients to be mixed with or used in the preparation of such food or beverages), is zero-rated pursuant to Part III of Schedule VI to the ETA. However, Part III excludes supplies of baked goods, such as cookies, sold in quantities of less than six, as well as puddings not sold in multiples prepackaged by the manufacturer. Furthermore, certain categories of foodstuffs, for example, carbonated beverages, candies and confections, and snack foods, are taxable at 7% or 15%.

More information is needed to confirm whether some of the separate supplies made by the Clinic, i.e., protein packs, dehydrated food and cookies sold in quantities of six or more cookies, are zero-rated supplies pursuant to Part III of Schedule VI to the ETA.

3. Associate agreements with the Clinic

The terms of the enclosed sample agreement between the Clinic and the associate medical practitioners provide for the making of various supplies between these parties. For instance, these agreements provide for the Clinic to make supplies to the associate medical practitioners consisting of XXXXX training and administrative services.

The terms of the sample agreement specifies that the medical practitioner, in certain circumstances which are enumerated in the agreement, will pay XXXXX to the Clinic for XXXXX training. The XXXXX training provided by the Clinic is a taxable supply and accordingly, the 7% GST would be calculated on the value of the consideration payable to the Clinic by the medical practitioner for this supply.

The terms of the sample agreement also provide for the Clinic to bill XXXXX on behalf of the associate medical practitioners and retain XXXXX of these XXXXX billings, and for the Clinic to provide, at its own expense, staff, all equipment, medications and other supplies, as well as to pay for all other office expenses incurred in the Clinic. These activities undertaken by the Clinic of submitting and distributing the associate medical practitioners' XXXXX billings, making available equipment, medications, staff, etc., to the associate medical practitioners, are indicative of the Clinic making taxable supplies of administrative or management services to the medical practitioners. As such, the Clinic is operating as a management company as described in GST/HST Policy Statement P-238, Application of the GST/HST to Payments Made Between Parties Within a Medical Practice Organization. Accordingly, the 7% GST is calculated on the value of the consideration for this supply, i.e., the XXXXX portion of the medical practitioners' XXXXX billings retained by the Clinic, as explained in scenario (a) under the heading "Management company supplies administrative services" of Policy Statement P-238.

4. Input tax credits

The rules for claiming input tax credits are provided in section 169 of Part IX of the ETA. These rules state that a person is entitled to input tax credits for the GST/HST payable on the acquisition or importation of property or services, to the extent that the person acquired or imported the property or services for consumption, use or supply in the course of that person's commercial activities. The supply of the weight-loss program, as well as the separate supplies of protein packs, dehydrated food, oatmeal, cookies, pudding, vitamins and food scales, are commercial activities.

Since the Clinic is engaged in commercial activities that involve making taxable supplies for consideration, it is entitled to claim input tax credits for its expenditures incurred for consumption, use, or supply in the course of its commercial activities, i.e., the supply of the weight-loss program and other sales of goods and services. With a few possible exceptions of zero-rated basic groceries, all of the Clinic's supplies to individuals are subject to the 7% GST.

Analysis

The supply of the weight-loss program to individuals by the Clinic

The weight-loss program constitutes a single supply. For purposes of the ETA, goods and/or services provided together as a single package for a single consideration constitute one supply, as explained in Policy Statement P-077R, Single and Multiple Supplies. The sum of this new composite supply has its own distinct identity and is different from the individual elements. A single supply vs. multiple supplies analysis of the weight-loss program, using the factors discussed in Policy Statement P-077R, clearly concludes that the various elements of this program, e.g., nutritional counselling, vitamin injections, protein packs, etc., constitute a single composite supply. For instance, it is clear that the vitamin injections are an integral element of the weight-loss program supplied to the recipient. Furthermore, the terms of the contract or invoice and the fact that there is only one supplier - the Clinic - are all indicative of the weight-loss program being a single supply.

The administration of vitamin injections

The administration by the Clinic of the vitamin injections to its clients is not a separate zero-rated supply because, as noted above, the vitamin injections are an integral element of a single supply of a weight-loss program. As such, the administration of the vitamin injections cannot be "carved out" and treated as a separate supply from the weight-loss program. Accordingly, the vitamin injections have the same tax status as the weight-loss program itself. Since the weight-loss program is a taxable supply subject to the 7% GST (or the 15% HST where the supply is made in a participating province), the portion of the consideration for the program payable by the individuals that relates to the vitamin injections is also subject to the 7% GST. Therefore, the assertion by the Clinic that the vitamin injections constitute a zero-rated supply under section 3 of Part I of Schedule VI to the ETA is incorrect.

Section 3 of Part I of Schedule VI

The assertion by the Clinic that the vitamin injections it administers to its clients constitute a zero-rated supply because they are "prescribed" by a medical practitioner is incorrect as this assertion is based on a misinterpretation of section 3 of Part I of Schedule VI to the ETA. Although this provision has no bearing in the case at hand, an interpretation of this provision is warranted to clarify its application.

Section 3 provides zero-rated status to a supply of a drug that is for human use and is dispensed:

(a) by a medical practitioner to an individual for the personal consumption or use of the individual, or an individual related thereto; or

(b) on the prescription of a medical practitioner for the personal consumption or use of the individual named in the prescription.

It is important to note the defined terms in section 1 of Part I of Schedule VI to the ETA:

•   "medical practitioner" means a person who is entitled under the laws of a province to practice the profession of medicine or dentistry;

•   "pharmacist" means a person who is entitled under the laws of a province to practise the profession of pharmacy; and

•   "prescription" means a written or verbal order, given to a pharmacist by a medical practitioner, directing that a stated amount of any drug or mixture of drugs specified in the order be dispensed for the individual named in the order.

Accordingly, for the purposes of section 3 of Part I of Schedule VI, only those drugs for human use that are dispensed by one of the following are zero-rated supplies:

•   a medical practitioner to an individual or individual related thereto (paragraph a); or

•   a pharmacist on the order of a medical practitioner for an individual named in the order (paragraph b).

The ETA recognizes that provincial and territorial legislation regulates the dispensing of drugs. These authorities define the meaning of "dispense" and regulate the manner in which prescription drugs are dispensed. In order for it to be evident that a medical practitioner dispensed the drug for purposes of section 3 of Part I of Schedule VI, the drug must be dispensed in a manner as described in provincial or territorial regulations.

Please note that the term "dispense" has a specific meaning. Drug dispensing means to provide one or more doses of a prescribed medication in a container that is correctly labeled to indicate the name of the individual, the name of the pharmacy, the contents of the container, and other specific information needed to facilitate correct usage and drug administration. Drug dispensing does not include the administration of a drug (such as the vitamin injections) or the sale of an over-the-counter proprietary medicine, such as vitamins. When the Clinic is administering vitamin injections to individuals or selling over-the-counter vitamins, it is not dispensing a drug for purposes of section 3 of Part I of Schedule VI to the ETA.

As previously stated, the vitamin injections are precluded from zero-rated status because they are an element of a single supply of a weight-loss program. However, even if the vitamin injections were to be treated separately, the fact that the Clinic administers these injections directly to the individuals precludes them from zero-rated status under section 3 of Part I of Schedule VI. That is, neither paragraph 3(a) or 3(b) applies because the vitamin injections are administered directly to the individuals as opposed to being dispensed as explained above.

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