16 April 2003 GST/HST Ruling 38852 - S Application of GST/HST to Medical Devices

Dear XXXXX:

We are writing in reply to XXXXX letters XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to various items XXXXX sold by XXXXX. (XXXXX has also forwarded to us copies of XXXXX letters on the same topic to the following: XXXXX[.)] We understand that XXXXX is no longer with your office and that our reply should now be addressed to you. We have received additional information on XXXXX queries by means of telephone conversations with XXXXX and your colleagues XXXXX. During these conversations we have advised your office of our anticipated approach to its queries and some of the concepts which we would be discussing.

Please accept our apology for the delay in our written reply to XXXXX queries.

All legislative references are to Part II (Medical and Assistive Devices) of Schedule VI to the Excise Tax Act (ETA) unless otherwise noted.

We are pleased to offer the following comments regarding the interpretation and application of the provisions of Part II. As we advised in our telephone calls XXXXX XXXXX to your office, we will not be offering an individual opinion as to the tax status of each of the hundreds of items identified in your submission. However, we trust that our comments will be useful to you in applying the provisions of Part II to products that you currently XXXXX supply as well as to new or revised products that you may deal with in the future. As well, we have provided rulings on the tax status of three medical devices.

Statement of Facts

Our understanding of the facts, the transactions, and the purpose of the transactions is as follows:

XXXXX a variety of medical devices manufactured by its XXXXX sells the products to Canadian hospitals, primarily for use by the hospitals in surgical and post-surgical procedures. Other clients include long-term care facilities and pharmacies. In some cases, upon hospital referral and under prescription, XXXXX sells items directly to individual consumers.

In your letter XXXXX, you list multiple categories of products. You have provided a binder listing several hundred items, with attachments holding data sheets describing products from the various categories. The types of products that you identify include the following:

•   stents, including ureteral, coronary, endoscopic and percutaneous biliary and pancreatic drainage, biliary, vascular, tracheobronchial, esophageal;

•   catheters, including nephrostomy, suprapubic, urodynamic, endoscopic and percutaneous biliary and pancreatic drainage, enteral/gastrostomy feeding catheters and accessories, emergency airway, abscess drainage, dialysis, cecostomy, percardiocentesis;

•   incontinence products such as a continence ring and a condom catheter;

•   drainage products such as chest tubes; and

•   a variety of products such as XXXXX, embolization coils, implantable ports, vena cava filters, XXXXX, vascular occlusion device, XXXXX, XXXXX; ligators, stone strainers and hernia repair sets.

You have asked us specifically to provide a ruling on each of the three items that follow.

1. The XXXXX drainage pouch set XXXXX is used for nephrostomy or biliary (Dorland's Illustrated Medical Dictionary 27th ed defines "nephrostomy" as the creation of a fistula leading directly into the pelvis of the kidney, while "biliary" is defined as pertaining to the bile, to the bile ducts, or to the gallbladder) drainage. The pouch is worn around the waist, and is held in place by a soft elastic belt. A reed valve mechanism prevents reflux. The pouch collects either urine or bile that drains from the body. The patient attaches the pouch set to a catheter that is implanted in his or her body. XXXXX sells the pouch sets to individuals on prescription and to pharmacies, as well as to hospitals. The hospital supplies the original device to the patient following a surgical procedure. The device is designed for the individual patient who uses the device, maintains it and replaces it as necessary. The patient can purchase the drainage pouch set directly from XXXXX or from a pharmacy. We understand that for purposes of your ruling request this is a single supply.

2. The XXXXX continence ring XXXXX is used intravaginally by females to support the urethra and bladder neck for temporary control of female urinary incontinence. The XXXXX continence ring set comes with XXXXX different sizes, to assist in proper fitting.

3. The XXXXX condom catheter XXXXX is used for male external catheterization due to urinary incontinence. The inflatable retention ring secures the catheter and can be easily deflated for removal. XXXXX comes with the catheter to assist in proper fitting.

Both the XXXXX continence ring and the XXXXX condom catheter are specially designed and intended to be used on a long-term basis by individuals who have a chronic incontinence disability. Both devices work on the same premise, in that they are designed to apply pressure to the urethra to prevent urine leakage. Both items are washable, reusable and designed for easy insertion and removal by the individual several times a day. When necessary the individual replaces the devices.

Directions for both the XXXXX continence ring and the XXXXX condom catheter state that an individual should only use the items after receiving complete instructions from a physician. Individuals are advised to have a full understanding of the instructions for the products before using them.

Rulings Requested

You have asked us to confirm the tax status of the devices described above. You suggest that the XXXXX drainage pouch sets, the XXXXX continence rings and the XXXXX condom catheters may be zero-rated, while the remainder of the items are taxable at 7% GST (15% HST in the participating provinces of Nova Scotia, New Brunswick and Newfoundland and Labrador). This is consistent with the interpretation letter provided to you XXXXX by the XXXXX Office of Revenue Canada (now the Canada Customs and Revenue Agency).

Rulings Given

Based on the facts set out above, we provide the following rulings:

1. The supply of XXXXX drainage pouch sets is zero-rated under section 25 of Part II of Schedule VI to the ETA.

2. The supply of XXXXX continence rings is zero-rated under section 37 of Part II of Schedule VI to the ETA.

3. The supply of XXXXX condom catheters is zero-rated under section 37 of Part II of Schedule VI to the ETA.

These rulings are subject to the general limitations and qualifications outlined in section 1.4 (enclosed) of Chapter 1 of the GST/HST Memoranda Series. We are bound by these rulings 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 our interpretative policy; and that you have fully described all necessary facts and transaction(s) for which you requested rulings.

Explanation

Ruling 1

Based on the information provided by you, the XXXXX drainage pouch set meets the conditions of section 25 of Part II, as a urinary appliance or similar article that is designed to be worn by an individual.

Rulings 2 and 3

Based on the information provided by you, the XXXXX continence ring and the XXXXX condom catheter meet the conditions of section 37 of Part II, as incontinence products that are specially designed for use by an individual with a disability.

General Information - Part II Schedule VI

Part II of Schedule VI to the ETA lists medical devices for human use that are zero-rated (taxable at 0%) under the ETA. Some devices are zero-rated in their own right (e.g. supplies of artificial eyes, artificial teeth, hearing aids) while other devices are zero-rated only when supplied under certain conditions (e.g. on the written order of a medical practitioner for use by a consumer named in the order, or specially designed for use by an individual with a disability).

The policy intent of Part II is to provide tax relief on devices and appliances for use by individual consumers. This intent is apparent by the specific devices and appliances named in Part II and some of the requirements for zero-rating, e.g. "... specially designed for use by an individual with a disability", "... that can be used in the residence of an individual", "... supplied on the written order of a medical practitioner for use by a consumer named in the order".

Accordingly, in general Part II does not apply to devices and other items designed for use by a hospital for surgical procedures, or that are designed for use on a temporary basis as a result of a surgical procedure.

It will be a question of fact whether a specific item meets the criteria listed at a specific zero-rating provision. Such a determination requires research and analysis of the facts particular to that item.

Goods the supply of which is included in Part II of Schedule VI are not subject to the GST/HST upon importation, by virtue of section 6 of Schedule VII to the ETA. If you have any specific questions regarding the application of the GST/HST to the importation of items into Canada, please contact your local Tax Services Office.

The following is a discussion of some specific terms used within Part II.

Specially Designed

A condition of several provisions of Part II is that the device must be "specially designed" for use by an individual with a disability. What does this phrase mean for our purposes?

The term "specially designed" relates to the intention of the initial manufacturer as to the ultimate use of the goods as reflected in the qualities and features of the goods themselves. Goods are "specially designed" if they are designed for the particular use set out in the legislation. That is, they compensate for or alleviate limitations or conditions flowing from the disability. The specially designed features must be significant in that the features make the article recognizably different from similar goods without the features. The specially designed article is not reasonably expected to have an alternative use.

Some devices might have been originally designed for some other purpose and later turned to other uses, such as assisting disabled individuals. However, the fact that disabled individuals can benefit from them does not mean that those items were "specially designed" for use by an individual with a disability. The qualifier "specially" imposes a restriction on the word "designed" which excludes general-purpose goods from the zero-rating provision.

The following factors may be relevant in ascertaining the manufacturer's intention as to the ultimate use of the good:

-    the extent to which the 'special design' is expressed in the goods, that is, the goods have features, qualities or capabilities not found in general purpose goods but which support the needs of the disabled individuals for which the goods are designed;

-    the extent to which the goods are designed for use by disabled individuals relative to the extent of their use by those individuals without a disability;

-    the extent to which the advertising and marketing of the goods is directed towards disabled individuals.

We will administer these provisions so that where we determine a certain manufactured good to be 'specially designed' for a particular provision of the ETA, we will assess similar goods by taking into consideration the information provided by the 'first' manufacturer. The result will be that 'similar goods' with 'similar characteristics' will be treated consistently. However, where there are 'differences' in the goods and/or the characteristics, we may require that the 'new good' be evaluated independently of any previous decision.

Disability

A disability is generally defined as a long-term impairment. Dorland's Illustrated Medical Dictionary 27th Edition defines "disability" in part as "a lack of the ability to function normally, physically or mentally".

Consequently, to be zero-rated under a provision of the ETA that refers to a disability, the product must be specially designed for individuals with a long-term impairment and not for those experiencing a temporary restriction. There must be evidence that the product was designed to be used by the individual with the disability.

Substantiation

In many cases the descriptions in the manufacturer's or retailer's catalogue will be insufficient to demonstrate how an item meets the criteria for being considered "specially designed". In some cases it may be necessary for either the manufacturer or the retailer to substantiate zero-rating by providing more detail on how the qualities and features of a specific good are specially designed for one of the purposes named in Part II, rather than being general purpose items.

Review of Certain Legislative Provisions of Part II

We have identified the following provisions as being particularly relevant within the context of your query.

Section 5.2 zero-rates "a supply of a respiratory monitor, nebulizer, tracheostomy supply, gastro-intestinal tube, dialysis machine, infusion pump or intravenous apparatus, that can be used in the residence of an individual".

The gastro-intestinal tubes sold by XXXXX can be zero-rated under section 5.2 only if they can be used in the residence of an individual. The intent of the provision is to zero-rate the types of items listed that would be used in the residence of an individual. We understand that XXXXX gastro-intestinal tubes do not meet this criterion, as they are used exclusively by hospital staff in the hospital.

Section 25 zero-rates "a supply of a medical or surgical prosthesis, or an ileostomy, colostomy or urinary appliance or similar article that is designed to be worn by an individual".

"Prosthesis" may be defined as "an artificial substitute for a missing body part, such as an arm or leg, eye or tooth, used for functional or cosmetic reasons, or both". (source: Dorland's Illustrated Medical Dictionary 27th Edition)

Not all prostheses are zero-rated under this provision. Rather, only a selective type of prosthesis is zero-rated, i.e. medical or surgical prostheses that are designed to be worn by an individual.

The ordinary meaning of "worn by an individual" implies that the medical device must be an external prosthesis or appliance that the individual uses, rather than a device that is used by a health care facility and implanted in the individual's body. The sense of "wear" implies some regular action on the part of the individual associated with the wearing of the device and some degree of control over the care and maintenance of the device.

For example, we have determined that a breast implant that is entirely implanted in the body would not qualify for zero-rating under section 25. Similarly, certain vascular prostheses designed to be implanted in a patient's circulatory system have been found not to be prostheses for the purposes section 25 of Part II of Schedule VI to the ETA.

Some of the devices that XXXXX distributes to hospitals are medical or surgical prostheses, ileostomy, colostomy or urinary appliances or similar articles (e.g. the cecostomy set XXXXX and the urethral sling XXXXX XXXXX). However, where these devices are not designed to be worn by an individual, they will fall outside the provisions of section 25 and will not be zero-rated under that provision.

Regarding urinary appliances, the scope of section 25 takes into account urinary catheters including urethral or ureteral as well as collection bags including tubing. Dorland's Illustrated Medical Dictionary 27th Edition defines "appliance" in part as a device, apparatus or instrument for performing or facilitating the performance of a particular function.

The term "similar article" will be limited to a class to which the preceding items belong. Thus, only an item that is or is like a medical or surgical prosthesis, an ileostomy appliance, a colostomy appliance or a urinary appliance will qualify for zero-rating under section 25, assuming it also meets the other condition of that section, i.e. the article is designed to be worn by an individual.

Section 26 provides for zero-rating "a supply of an article or material, not including a cosmetic, for use by a user of, and necessary for the proper application and maintenance of, a prosthesis, appliance or similar article described in section 25".

In other words, to be zero-rated under section 26, the article or material must by for use by an individual who wears a device that is zero-rated under section 25, for the purpose of properly applying or maintaining that medical device.

Section 32 provides for zero-rating "a supply of a part, accessory or attachment that is specially designed for a property described in this Part". Section 32 zero-rates items that are specially designed for medical devices that are zero-rated elsewhere in Part II. Accordingly, one must first determine if the property qualifies as a medical device in this Part that is zero-rated. If the item in question is then determined to be a part, accessory or attachment that is "specially designed" for that zero-rated medical device, then it will be zero-rated. Items such as the adjuster and the belt for the XXXXX drainage pouch sets may qualify if sold separately as replacement parts for the pouch set.

In order to be zero-rated under section 32 a part, attachment or accessory must be specially designed for a zero-rated item described in Part II, rather than being a multi-use or alternative use item.

Section 37 zero-rates "a supply of an incontinence product that is specially designed for use by an individual with a disability".

In order to be zero-rated under this section, the product must be an incontinence product. That is, a device will not be zero-rated under section 37 if it has been designed for other applications and may be used for conditions other than incontinence. In addition, to be zero-rated by this section, the product must have been specially designed to be used by the individual suffering from a disability and not by someone else, such as a health care practitioner.

Types of products that fall under this section include disposable and reusable briefs, pads, adult diapers and liners that are specially designed to assist an individual in coping with incontinence. We also consider that this section applies to products specially designed for use by an individual with a disability in treating incontinence.

Products that we have treated as zero-rated under this provision include certain devices specially designed to treat incontinence and for use by an individual.

Types of products that would not fall under section 37 include catheters used by persons to cope with temporary incontinence as a result of a surgical procedure, since such temporary incontinence does not meet the "disability" requirement of section 37.

Enclosed for your reference is section 4.2 of the GST/HST Memoranda Series, Medical and Assistive Devices. This publication provides information on zero-rated medical and assistive devices and the corresponding services for purposes of the GST/HST provisions of the ETA. [required only when the decision is unfavourable]

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 954-4280.

Yours truly,

(Mrs.) S.C. Cahill
Municipalities and Health Care Services Unit
Public Service Bodies and Governments Division
Excise and GST/HST Rulings Directorate