New GST/HST Notice 339, published on October 25, 2024, provides that as of the first day of the fiscal year that begins on or after January 1, 2025, dentists will no longer be able to claim GST/HST input tax credits (“ITCs”) for expenses relating to the supply of orthodontic services on a “reasonable estimate” basis, as per the CRA’s longstanding special administrative arrangement with the Canadian Dental Association (“Arrangement”). Instead, dentists will be required to ascertain their actual entitlement to ITCs for each reporting period, creating an added administrative burden for many dental practices.
Background
Since 1991, dentists registered for GST/HST purposes have been allowed to avoid an in-depth analysis of their inputs and outputs at the end of each GST/HST reporting period by relying on the Arrangement. Instead, dentists have been allowed to use a reasonable estimate (of up to 35%) of the total consideration charged for supplies that had both an exempt and a taxable/zero-rated component (such as orthodontic treatments) to calculate the estimated consideration charged for taxable/zero-rated supplies (such as orthodontic appliances).
This estimated percentage is intended to approximately reflect dentists’ commercial activities for purposes of claiming ITCs and establishing an estimated net tax for each reporting period. At the end of the fiscal year, the Arrangement requires dentists to reconcile the estimated percentage with the actual amounts charged for their taxable/zero-rated supplies. Where appropriate, dentists may have to reimburse the CRA for overclaimed ITCs at that point.
However, in light of recent case law – notably the Federal Court of Appeal (“FCA”) decision in Canada v. Dr. Kevin L. Davis Dentistry Professional Corporation (“Davis Dentistry”), in which the FCA held that supplies of orthodontic appliances should be zero-rated (i.e., taxable at 0%) even where such appliances are supplied together with GST/HST-exempt orthodontic services – the CRA now considers that the Arrangement no longer meets the requirements of the Excise Tax Act (Canada) (“ETA”) and has essentially become redundant.
Revocation of the Arrangement
GST/HST Notice 339 confirms the revocation of the Arrangement. The CRA argues that this should not have any net economic impact on dentists given that the Arrangement requires them to accurately perform a year-end reconciliation of their estimated and actual ITC eligibility. However, dentists may find that the revocation imposes an additional administrative burden going forward, as they will now be required to calculate their actual ITC entitlement for each reporting period.
Overview of the ITC Rules
The reader may find the following overview of the ITC rules helpful in this context:
- As a general rule, unless otherwise exempt by specific provisions in the ETA, goods and services supplied in Canada are considered to be taxable supplies. Taxable supplies include supplies that are subject to specific “zero-rating” provisions in the ETA (i.e., taxable at zero per cent).
- Dentists and other health professionals that provide health care services generally find themselves making exempt supplies where such services are captured by the definition of “qualifying health care supply” in Schedule V, Part II of the ETA. Activities of a consultative or diagnostic nature, or those aimed at treating a health issue will, for example, generally be characterized as exempt supplies. Supplies of medical and assistive devices could also be zero-rated. For example, supplies of orthodontic appliances are zero-rated under Schedule VI, Part II of the ETA.
- Procedures of a purely cosmetic nature and any appliances used in connection therewith are not exempt supplies under Schedule V or zero-rated under Schedule VI and are therefore generally considered to be fully taxable supplies.
- In GST/HST Notice 339, the CRA provides a summary of the rules regarding ITC claims after the revocation of the Arrangement but mostly focuses on orthodontic services and appliances:
“A GST/HST registrant dentist cannot claim an ITC for the GST/HST paid or payable on property or a service if the dentist acquires it for consumption or use substantially all (90% or more) in the course of the dentist’s exempt activities, such as making supplies of orthodontic services.
Conversely, a dentist may generally claim an ITC equal to 100% of the GST/HST paid or payable on property or a service if the dentist acquires it for consumption or use substantially all in the course of making taxable supplies for consideration, including zero-rated supplies of orthodontic appliances.
An ITC must generally be apportioned where the property or service is acquired, imported or brought into a participating province for consumption or use, directly or indirectly, for the purpose of a dentist making both taxable supplies for consideration and exempt supplies.” [Our emphasis]
- As confirmed by the FCA in Davis Dentistry, even where a dentist (in this case, an orthodontist) supplies both exempt health care services (orthodontic services) and zero-rated goods (orthodontic appliances) in conjunction, he or she is not precluded from claiming ITCs for expenses incurred in respect of zero-rated supplies of orthodontic appliances. However, this conclusion was drawn from a practical consideration of the realities of such practice in which orthodontic appliances are virtually always supplied with orthodontic services.
- We understand that the CRA has also applied the Arrangement to prosthodontists, notably those supplying “artificial teeth” (which are also zero-rated under Schedule VI to the ETA) to their patients. However, as mentioned above, GST/HST Notice 339 only provides examples related to the supply of orthodontic services and appliances and it is unclear whether prosthodontic services and appliances (such as crowns and bridges) will also be treated similarly by the CRA.
- Contrary to most orthodontic appliances which may only be supplied in conjunction with orthodontic services, supplies of zero-rated “artificial teeth” to customers are not always combined with supplies of exempt dental services. The question is whether the conclusions of the FCA in Davis Dentistry are also, in the CRA’s view, applicable to supplies of artificial teeth, which include “manufactured good[s] that [are] anatomical in nature and fabricated for use as a substitute for natural teeth”, to the extent that such goods replace 50% or more of a natural tooth (GST Headquarters Letters 2004, 52348, “Application of GST/HST to supplies by medical practitioners who are licensed to practice the profession of dentistry”.)
- It is noteworthy that the Tax Court of Canada (“TCC”), in the informal procedure decision Axelrod v. The King (“Axelrod”) denied a prosthodontist’s ITC claims related to supplies of prosthodontic services (including artificial teeth). The TCC stated that supplies of zero-rated artificial teeth formed part of a single supply of exempt dental services (to the extent the supply was not for cosmetic purposes) and therefore no ITCs could be claimed in connection therewith. However, such informal procedure decision is technically not binding for future cases, and prosthodontists could still argue that where “artificial teeth” are customarily supplied in conjunction with prosthodontic services (such as crowns and bridges), the more recent FCA decision in Davis Dentistry should also apply to such specific prosthodontic supplies. (The authors discussed the Axelrod decision in a previous post.)
- The CRA has yet to provide clear guidance on the availability of the apportionment rules provided for in GST/HST Notice 339 to dentists supplying prosthodontic services and appliances.
Key Takeaways
- Dentists should be aware that, as of the first day of their fiscal year that starts on or after January 1, 2025, estimates of eligible ITCs will no longer be allowed by the CRA for purposes of calculating net tax for each reporting period.
- Though the CRA’s decision to revoke the Arrangement following the FCA decision in Davis Dentistry was predictable, it may put a strain on dentists who will now need to devote additional time and resources to the accurate determination of ITC eligibility for each reporting period.
With the revocation of the Arrangement, dentists carrying on a classic prosthodontic practice (i.e., including the supplies of artificial teeth such as crowns and bridges) should be aware that the CRA does not provide specific guidance in GST/HST Notice 339 as to the application of the FCA decision in Davis Dentistry to the supplies of prosthodontic services and appliances in connection with the apportionment of ITCs (contrary to examples provided in respect of dentists carrying on an orthodontic practice).
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