Dental Crowns and GST/HST Credit: A Dentist Desires to Have His Cake and Eat it Too

In an off-the-cuff process^[1] resolution, Axelrod v. The King, rendered on December 12, 2022, the Tax Courtroom of Canada dismissed the appeals of a dentist denying enter tax credit (“ITCs”) claimed in reference to sure bills incurred in the midst of his skilled apply.

The dispute arose when the Canada Income Company (“CRA”) disallowed ITCs claimed by Dr. Axelrod (the “Dentist”) in 2013 and 2014 (“Audit Interval”) for harmonized gross sales tax (“HST”) payable in respect of property or providers acquired by him for consumption, use or provide in the midst of his prosthodontic apply. These skilled actions, which shaped about one-third of the Dentist’s general skilled apply, pertained to the availability of dental prostheses (akin to dental bridges, implants, dentures, crowns, and important tooth reconstructions, outlined collectively as “Synthetic Tooth”) and associated dental providers to his sufferers.
Probably based mostly on its long-standing administrative place^[2] relevant to orthodontists on the time in respect of provides of orthodontic therapies, the CRA took the place that the Dentist’s provides of Synthetic Tooth in reference to associated dental providers equipped to sufferers had been a number of provides of each exempt dental providers and zero-rated provides of Synthetic Tooth, thereby denying a portion of the ITCs claimed by the Dentist in the midst of his prosthodontic apply.
Though provides made by the Dentist in the midst of his prosthodontic apply could possibly be seen as being much like the general provides made by orthodontists, the Dentist seems to have taken a fairly formidable submitting place that every process that had, as its final function, the set up of an Synthetic Tooth in a affected person’s mouth, was a single provide of an Synthetic Tooth and that every such single provide was a zero-rated provide included in Schedule VI to the Excise Tax Act (“ETA”). HST registrants are typically eligible to say ITCs for the tax paid or payable on items or providers acquired for consumption, use or provide in the midst of making taxable or zero-rated provides. Accordingly, the Dentist claimed ITCs on his taxable bills based mostly on the extent such bills had been incurred for consumption, use or provide in his prosthodontic apply.
Based mostly on a overview of the present case legislation, together with the Tax Courtroom resolution in Hurd Dentistry^[3], and an in depth evaluation of all components comprising the Dentist’s provides regarding the preparation, fabrication and set up of Synthetic Tooth, Justice Sommerfeldt concluded, in a way much like Justice Campbell’s conclusion in Hurd Dentistry (additionally an off-the-cuff process resolution), that the provides made by the Dentist to a affected person ought to be characterised as single provides of exempt dental providers, fairly than single zero-rated provides of Synthetic Tooth. Accordingly, the Dentist was subsequently not entitled to say ITCs in connection together with his prosthodontic apply.

Background

The Dentist carried on a normal dentistry apply and was a HST registrant for functions of Half IX of the ETA. In the course of the Audit Interval, about one-third of the Dentist’s apply was associated to prosthodontic procedures involving the availability of Synthetic Tooth. The Dentist claimed ITCs in respect of HST paid for varied bills incurred for functions of supplying Synthetic Tooth and associated dental providers to his sufferers in the midst of his prosthodontic apply, taking the place that he was making a single provide of Synthetic Tooth to his sufferers and such single provide was zero-rated pursuant to part 11 of Half II of Schedule VI of the ETA (“Part VI-II-11”).

Challenge

Subsection 169(1) of the ETA typically limits an HST registrant’s potential to say ITCs with respect to bills incurred for consumption, use or provide in the midst of business actions. Subsection 123(1) of the ETA notably defines “business exercise” as a enterprise or journey or concern within the nature of commerce carried on by an individual however excludes a enterprise involving the making of exempt provides. Due to this fact, ITCs can not typically be claimed by HST registrants to get well HST paid or payable with respect to property and providers acquired to make exempt provides.

The problem raised within the Dentist’s appeals was whether or not he was entitled to say ITCs for bills he incurred in the midst of supplying Synthetic Tooth and associated dental providers to his sufferers. In his resolution, Justice Sommerfeldt examined the character of the Dentist’s provides, by analyzing the time period “synthetic enamel” as used within the ETA, figuring out whether or not every separate factor of the Dentist’s provides constituted both a single provide or a number of provides, and at last figuring out whether or not such single provide or a number of provides, because the case could also be, was exempt or zero-rated below the ETA.

Evaluation

Synthetic enamel

Justice Sommerfeldt agreed with each the Appellant and Respondent that dentures, dental implants, bridges, crowns and important tooth reconstructions all represent “synthetic enamel” because the time period is used within the ETA and that for the aim of Part VI-II-11 of the ETA, a synthetic tooth needn’t be solely reconstructed to be thought of as such, offered that greater than half the entire floor of the tooth is fabricated (para. 17).

The Tax Courtroom additionally held that when the Dentist fabricated and put in momentary enamel to cowl and shield enamel that had been prepped upfront of an set up, these momentary enamel had been additionally thought of “synthetic enamel” inside the which means of the ETA (para. 18).

Single provide vs. a number of provides

The place an settlement supplies for the supply of a number of components (i.e., package deal of property and/or providers), it should first be decided whether or not such components are constituent components of a single provide or a number of provides for HST functions. This willpower is particularly related the place, for instance, had such package deal of property and/or providers been equipped individually, sure parts could be taxable or zero-rated, whereas others could be exempt below the ETA.

In figuring out whether or not the Dentist’s provides of Synthetic Tooth and associated dental providers to his sufferers had been a single provide or a number of provides, Justice Sommerfeldt thought of the related case legislation^{^[4]}, following the take a look at laid down in O.A. Brown because it was utilized by the Supreme Courtroom of Canada within the Metropolis of Calgary resolution.

In making his willpower, Justice Sommerfeldt notably examined the billing of the providers rendered by the Dentist. As required by the Royal Faculty of Dental Surgeons of Ontario, it’s necessary for dentists issuing invoices to sufferers to separate laboratory expenses from the opposite components of the availability of dental providers. Nevertheless, based mostly on the reasoning of the Tax Courtroom in Albert v. The Queen^[5], a choice rendered in an revenue tax context, Justice Sommerfeldt concluded that separate billings don’t essentially point out that separate contracts had been entered into between the Dentist and his sufferers (para. 28).

Quite the opposite, Justice Sommerfeldt discovered that the dental providers and the Synthetic Tooth equipped by the Dentist had been so intricately linked to one another that they may not be dissociated:

It’s troublesome to think about {that a} affected person of [the Dentist] would have wished to accumulate dentures, a bridge, a crown or an implant with out [the Dentist] having first achieved the entire preliminary work essential to make sure that the actual prosthesis would match and performance correctly within the affected person’s mouth, and with out [the Dentist] truly putting in the prosthesis within the affected person’s mouth. Equally, the entire dental providers rendered by [the Dentist] would have made no sense if that they had not associated to the prosthesis desired by the affected person. (para. 30)

The Tax Courtroom thus concluded that each one the weather of the Dentist’s provides had been so interconnected, interdependent and intertwined that they may not be seen as a number of and separate provides. A standard-sense willpower would lead one to conclude that the weather, collectively, shaped an general single provide (para. 19).

Justice Sommerfeldt additionally distinguished the latest Tax Courtroom resolution in Davis Dentistry as making use of to orthodontists carrying on a “standard orthodontic apply”. In his view, the right authorized method within the current case was to comply with the so-called O.A. Brown take a look at opposite to the place taken in Davis Dentistry:

[…] in Davis Dentistry, Justice Wong acknowledged that the ETA makes it clear (and Parliamentary intent confirms) {that a} standard orthodontic apply consists of exempt provides of providers and zero-rated provides of home equipment (akin to braces), such that it’s not essential to use the O.A. Brown take a look at to find out whether or not there’s a single provide or a number of provides, because the ETA has instantly addressed the tax standing of each provides.

[…]

Because the dental providers which might be the topic of [the Dentist]’s Appeals associated to prosthodontic, fairly than orthodontic, procedures, and as [the Dentist] submits that each his dental providers and the prostheses had been a part of a single zero-rated provide, Davis Dentistry could also be distinguished. Due to this fact, I’m of the view that I ought to comply with the method set out in O.A. Brown and Metropolis of Calgary, so as to decide whether or not there have been a number of separate provides or a single general or composite provide. (paras. 22-23)

Characterization of the one provide

Having decided that the weather equipped by the Dentist collectively constituted a single provide, one should subsequent decide which of these components is “predominant”.^{^[6]} In accordance with the take a look at set out in World Money Entry (Canada) Inc. v. The Queen^[7] and Nice-West Life Assurance Firm v. The Queen^[8], the predominant factor is the one which drives the recipient’s willingness to pay for the availability. On this case, the next components shaped the one provide:

the analysis of the affected person’s dental wants, the formulation of therapies (together with the conceptualization, the design, the impression, the measurements, and the preparation of synthetic enamel to which prostheses could be affixed);
the fabrication of prostheses by the laboratory;
the fabrication of momentary prostheses to cowl and shield any pure enamel that had been prepped; and
the modification and changes to make sure a correct match and chew. (para. 56)

The important thing query was subsequently which factor drove the sufferers to pay the Dentist’s charges. Justice Sommerfeldt concluded that the predominant factor was the Dentist’s skilled dental providers and never the Synthetic Tooth themselves (para. 57), particularly given the significance of the time invested by the Dentist in fabricating the Synthetic Tooth.

As such, Justice Sommerfeldt concluded that the provides made by the Dentist to his sufferers had been single provides of dental providers, which had been exempt provides pursuant to part 5 of Half II of Schedule V of the ETA as provides of well being care providers rendered to a person by a medical practitioner. Based mostly on the foregoing, the Dentist’s appeals had been dismissed.

The Dentist’s counsel filed an enchantment of the Tax Courtroom resolution on January 11, 2023.

Key Takeaways

Regardless that Hurd Dentistry concerned a traditional orthodontic apply, fairly than a dentist’s prosthodontic apply, Justice Sommerfeldt primarily adopted the reasoning of that casual process resolution in his ruling on this case. In consequence, he concluded that the provides rendered by the Dentist had been single provides of which the exempt dental providers had been the predominant factor and accordingly denied the Dentist’s ITC claims in respect of the bills he had incurred in offering his prosthodontic provides.
The taxpayer on this case, in taking the place that his prosthodontic apply, taken as an entire, was a “business exercise” for HST functions, took a bet that doesn’t seem to have paid off (pending any additional enchantment), contemplating that the extra conservative middle-ground method of claiming ITCs on his bills as instructed by the CRA in its administrative coverage relevant to orthodontists through the Audit Interval, was apparently a suitable stance within the CRA’s view.
Justice Sommerfeldt’s resolution to differentiate Davis Dentistry is comprehensible, in our view. With respect, Justice Wong’s reasoning in that case for not making use of the A. Brown take a look at to find out whether or not there’s a single provide or a number of provides the place an orthodontist is supplying each orthodontic home equipment and orthodontic dental providers – “as a result of the statute has instantly addressed the tax standing of each”^[9] – seems to be flawed. The truth is, that is precisely the sensible function behind this widespread legislation take a look at the place a mixture of components is equipped, and the ETA particularly addressesthe tax standing of 1 or sure of those components as being taxable, and different factor(s) as being zero-rated or exempt, if equipped individually.
In gentle of Justice Sommerfeldt’s ruling, it’s noteworthy that the Crown’s enchantment of Davis Dentistry was heard on November 1, 2022, by the Federal Courtroom of Enchantment (“FCA”), with a choice more likely to be launched inside the subsequent few weeks. Each orthodontists and dentists concerned in a prosthodontic apply ought to:
- comply with the discharge of the FCA resolution in Davis Dentistry, which is able to most certainly have an effect on the Dentist’s enchantment; and
- intently monitor how the CRA might finally change its administrative coverage based mostly on the FCA resolution.

For now, dentists ought to be conscious that ITCs claimed in reference to a traditional prosthodontic apply could possibly be in danger.

The authors wish to thank Antonin Lapointe, stagiaire, for his collaboration.

[1] In principle, selections issued pursuant to the casual process might not be handled as precedents for different instances.

[2] See GST/HST Ruling RITS #56427 dated December 1, 2004—Eligibility by an Orthodontist for Enter Tax Credit.

[3]Dr. Brian Hurd Dentistry Skilled Company v. The Queen, 2017 TCC 142 (Casual Process). [Hurd Dentistry]

[4]Metropolis of Calgary v. The Queen, 2012 SCC 20 [City of Calgary]; O.A. Brownv. The Queen, [1995] GSTC 40 (TCC) [O.A. Brown]; Mercantile Contracts Ltd.v. Customs & Excise Commissioners, File No. LON/88/786, U.Okay. (unreported); Hurd Dentistry, supra notice 3; Dr. Kevin L. Davis Dentistry Skilled Companyv. The Queen, 2021 TCC 25 [Davis Dentistry]; and Haden (Commissioner of Income)v.McCarty, (1963) 275 Ala 76, a choice of the Supreme Courtroom of Alabama.