27 May 2003 GST/HST Interpretation 45766 - APPLICATION OF GST/HST Importation of Spacer Devices

We are writing concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the supply of spacer devices, also known as aerosol chambers. It has recently come to our attention that these devices may be entering Canada without attracting GST/HST at the time of importation.

Spacer devices are conditionally zero-rated medical devices under section 5.1 of Part II of Schedule VI to the Excise Tax Act (ETA). That is, where the supply of a spacer device is made on the written order of a medical practitioner for use by a consumer named in the order, it will be zero-rated (taxable at 0%) and thus no GST/HST is collected upon importation. However, throughout the distribution chain where the two conditions have not been met, the supply of the spacer device will be taxable upon importation at 7% or 15%, depending on where it is supplied, pursuant to sections 212 and 212.1 of the ETA.

Explanation

As you may be aware, Part II of Schedule VI to the ETA provides a listing of supplies of medical and assistive devices that are unconditionally or conditionally zero-rated. Medical devices that are unconditionally zero-rated are zero-rated in their own right or because they have certain design features. An unconditional zero-rating provision attaches no restrictive conditions upon the supply of that product; therefore, the supply stated in the particular provision will be taxed at a rate of 0% throughout the distribution chain. The manufacturer may sell the device to a distributor, the distributor to the retailer and the retailer to the final consumer - all on a zero-rated basis.

Conditionally zero-rated provisions are more restrictive in that the medical device will only be zero-rated when supplied under the specific terms described in the provision. Where the requirements of a conditional provision are met, the supply stated in the particular provision will be zero-rated to the extent allowed in the provision. In circumstances where the terms of a conditional zero-rating provision are not met, the medical device will be taxable at 7% GST or 15% HST depending on where it is supplied.

Pursuant to section 6 of Schedule VII (Non-Taxable Importations) and section 213 of the ETA, medical devices that are unconditionally zero-rated are non-taxable importations, and medical devices that are conditionally zero-rated are non-taxable importations only where the conditions of the particular provision are met. Where the conditions are not met, the medical devices are not zero-rated and therefore are taxable on importation.

Our understanding is that a spacer device is an aerosol chamber that attaches to an inhaler and improves the delivery of metered dose inhaler medication. The device is used in the treatment of asthma. It is therefore our conclusion that the device is conditionally zero-rated under section 5.1 of Part II of Schedule VI to the ETA (A supply of an aerosol chamber or a metered dose inhaler for use in the treatment of asthma when the chamber or inhaler is supplied on the written order of a medical practitioner for use by a consumer named in the order.). This provision requires that a spacer device be "... supplied on the written order of a medical practitioner for use by a consumer named in the order", as a result, both requirements must be met in order for the supply to be zero-rated and therefore non-taxable on importation.

Conversely, where a spacer device is not supplied on the written order of a medical practitioner for use by a consumer named in the order, for example where it is supplied to, or imported by, a distributor, retailer, hospital or other health care organization, it will be subject to the GST at 7% or HST at 15% at the time of importation. As a result, the GST/HST should be collected on all spacer devices entering Canada unless the supply meets the conditions for zero-rating under section 5.1 of Part II of Schedule VI to the ETA.

Should you have any questions or require clarification on the above matter, please do not hesitate to contact me at (613) 954-4395.

Yours truly,

Angela K. Lovric
Municipalities and Healthcare Services Unit
Public Service Bodies and Governments Division
Excise and GST/HST Rulings Directorate