20 January 2003 GST/HST Interpretation 38285 - Tax Status of In Vitro Diagnostic Test Kits Under the Excise Tax Act

Dear XXXXX:

This is in reply to your letter XXXXX with attachments, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to a group of products for in vitro diagnostic use. These products consist of test kits purchased by medical laboratories and hospitals for use in an assortment of laboratory procedures. In addition, we are addressing your concern noted in our subsequent telephone conversations this past year concerning amounts paid by the Canada Customs and Revenue Agency (the "CCRA") in respect of tax-paid-in-error rebate claims to purchasers of the products under discussion.

Please accept our apologies for the delay in responding to your query. As you are aware, this past year we undertook an extensive review that considered the legislative and policy issues related to these products, which resulted in our delay in responding to your query. We also discussed the approach taken concerning rebate claims with the Audit Directorate of the Compliance Programs Branch of the CCRA.

The outcome of our review is that we are affirming our position that the group of products under discussion; i.e., test kits for in vitro diagnostic use, are, and were, subject to the GST/HST at the rate of 7% or 15%. While there may have been divergent opinions in the past, our position was publicly confirmed in several letters that we issued XXXXX including the letter of the same date that was provided to your firm. The interpretation set out in these letters superseded the interpretation set in the letter XXXXX that you noted in your letter.

As we indicated in our letter XXXXX, a test kit for in vitro diagnostic use is a new composite product that consists of reagents and articles intended to be used together in a laboratory procedure, such as the testing of bodily specimens. A composite product is distinguishable from its components. The tax status of a composite product is not governed by any one of its components and therefore in order for the supply to be zero-rated, the composite product must be a drug that is included among the items listed, by name or description, in the schedules to the Food and Drugs Act (the "FDA") and its regulations that are referenced in section 2 of Part I of Schedule VI to the Excise Tax Act (the "ETA").

We have considered your views concerning the FDA and we recognize that one of the components of a test kit may contain an ingredient that is a substance listed on a schedule to the FDA or its regulations. However, when considering the application of the ETA to a supply, the product that is being supplied must be evaluated and not the product's ingredients or components. When the supply is a manufactured product that is either the result of a combination of ingredients or a composite product such as a test kit made up of various substances and/or articles, then that new product must be a drug that is named or described in one of the noted FDA schedules to fall within paragraph 2(a) of Part I of Schedule VI to the ETA.

Our approach is based on the wording of the ETA, which specifically states "a drug included". It is on this basis that test kits do not fall within paragraph 2(a) of Part I of Schedule VI to the ETA; i.e., they are not themselves drugs named or described in any of the noted schedules to the FDA. In contrast, where a product is a drug named or described in the zero-rating provisions of the ETA, the supply of that product would be zero-rated.

In consideration of the divergent opinions concerning the tax status of in vitro diagnostic test kits that may have resulted in different tax treatment applied to the supply of these products, the CCRA Audit Directorate has advised that it has adopted the following general approach to address this matter. This approach is based on the letters the CCRA issued XXXXX. Please note that this approach is limited to in vitro diagnostic test kits that contain a substance included in Schedule C or D to the FDA. There may be circumstances where this approach does not apply and therefore this approach will be considered on a case-by-case basis.

Supplies made prior to XXXXX

•   If a rebate claim relating to a period prior to XXXXX, has not been paid, the claim will be reviewed to ensure that the claimant has paid the GST/HST to the supplier. If the GST/HST was paid to the supplier, then the claim may be approved for payment.

•   If a rebate claim relating to a period prior to XXXXX, has been paid, the claim may be reviewed to ensure that the claimant has paid the GST/HST to their supplier. The claim will be re-assessed if it is found that claimant had not paid the GST/HST to their supplier.

Supplies made after XXXXX

•   If a rebate claim includes purchases made after XXXXX, and the claim has been paid to the claimant, the rebate claim will be re-assessed for those purchases made after XXXXX.

•   If a rebate claim has not been paid to the claimant and the rebate claim includes purchases made after XXXXX, the tax paid on those purchases made after that date will not qualify for a rebate.

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