Hurd Dentistry v. R. - TCC: Orthodontic services one supply, not separate supplies

Hurd Dentistry v. R. - TCC:  Orthodontic services one supply, not separate supplies

Dr. Brian Hurd Dentistry Professional Corporation v. The Queen (July 26, 2017 – 2017 TCC 142, Campbell J.).

Précis:  The taxpayer carried on a practice of orthodontic dentistry through a professional corporation.  He claimed input tax credits (ITCs) for GST/HST purposes which CRA denied.  At issue was whether his services involved a single supply of health care services or a supply of health care services and a supply of dental articles (e.g., braces, retainers, etc.).  If the former, he was entitled to no ITCs;  if the latter, he was entitled to the ITCs claimed.  The Tax Court concluded that there was a single supply of medical services and dismissed his appeal.  There was no order as to costs since this was an informal procedure appeal.

Decision:  The decision before the Court was not complex:

[1]             The tax treatment of orthodontic supplies under the Excise Tax Act (the “Act”) is at the centre of this appeal. Specifically, the question is whether there is one supply of orthodontic treatment to a dental patient or two supplies, consisting of an orthodontic appliance and an orthodontic service. The characterization of the supply or supplies will determine whether any supply provided is to be exempt or zero-rated. The result of this characterization has an impact because if a supply is determined to be exempt there will be no tax charged to the patient on the supply of the good or service and the vendor of the supply, the Appellant, will not be able to claim income tax credits (“ITCs”). However, if it is zero-rated, there will again be no tax to the patient on the supply of the good or service but the vendor will be entitled to claim ITCs.

[2]             The Appellant has appealed an assessment under Part IX of the Act for the period January 8, 2010 to December 31, 2012 (the “period”). By Notice of Assessment dated November 13, 2014, the Minister of National Revenue (the “Minister”) denied ITCs of $17,357.00 claimed in respect of expenses and $5,083.00 claimed in respect of fixed assets for the period. The Minister disallowed those ITCs on the basis that the Appellant was providing a single exempt supply of health care services being orthodontic treatments pursuant to sections 2 and 5 of Part II of Schedule V of the Act. Consequently, the Appellant was not entitled to claim ITCs under subsections 169(2) and 199(2) of the Act.

After a very thorough review of the evidence and the law the Court accepted the Crown’s position that there was a single supply of health care services:

[29]        In summary, I conclude that based on the facts before me, the answer to the first issue is that the Appellant supplied a single supply of orthodontic treatment to each patient for a single consideration or fee. This total fee was specified up front for the treatment. Some patients prepaid while others made payments over the period of the maintenance and adjustments or in some cases even longer. The provision of the orthodontic appliance was not distinguished or separated from the related services except for accounting purposes. The evidence supports my conclusion that the appliance and the associated adjustment and maintenance services were so dependant, one on the other, that the treatment goals could not be achieved except that both had to be engaged for the patient’s dental issues to be addressed and rectified. In fact, on cross‑examination of Dr. Hurd, he confirmed that patients are requesting orthodontic treatment and professional care when they seek him out and that they were not wanting to purchase an orthodontic appliance on its own. He also agreed that the fees charged to and paid by the patient were for the treatment he provided. Dr. Hurd also agreed with Respondent counsel’s suggestion that the orthodontic services without the appliance would be useless and vice versa. There can be but one conclusion here and that is that both the appliance and services are indispensable components of the single supply of orthodontic treatment to a patient.

[30]        Finally, in respect to the Appellant’s reliance on the CRA directive and policy in this regard, although it may be a guideline it is not binding on this Court. I believe it to be incorrect and misleading to taxpayers. Respondent counsel submitted a rather weak argument as to why the Appellant does not comply with the requirements of this policy. He contended that the Appellant’s contracts with patients did not identify the cost of the dental service separately from the cost of the appliance. In fact, for accounting purposes in order to take advantage of this policy directive and be able to claim ITCs according to the directive in respect to the appliance, the consideration for the appliance was stated to be 35 percent of the total fees paid for treatment. Simple math and logic leads to the inevitable conclusion that the remaining 65 percent of the total fees related to the associated services without specifically stating that in the contract. In the end, the CRA policy statement is simply wrong and more importantly misleading and cannot be defended in the manner the Respondent would have me do. I simply reject it and I do not intend to follow it.

[35]        As a licensed orthodontist in the Province of Ontario, Dr. Hurd is entitled to practice within the dentistry profession and he is therefore a medical practitioner under section 1 of Schedule V, Part II. The evidence of Dr. Hurd was that the appliances were used for treating and correcting problems related to a patient’s teeth, jaw or occlusion. Consequently, a treatment was being rendered by a medical practitioner, Dr. Hurd, to individual patients of a dental clinic operated by the Appellant. According to the definitions of “health care facility” and “institutional health care service” contained in section 1 of Schedule V, Part II, the dental clinic was a facility that operated for the purpose of providing medical care and, according to (h) of the definition of institutional health care service, those services were rendered by Dr. Hurd who received remuneration from the Appellant, a professional corporation, which operated the facility. The supply of orthodontic treatments were dental services, consisting of a supply of consultative, diagnostic, treatment or other health care services rendered by a medical practitioner to patients and as such are exempt supplies within the parameters of section 5 of Schedule V, Part II. Further, the single supply of orthodontic treatment by the Appellant in its dental clinic was an exempt supply pursuant to section 2 of Schedule V, Part II of the Act  because the supply was made by an operator of a health care facility in respect to institutional health care service rendered to a patient of the facility.

However the Court did hold that if there had been a separate supply of the orthodontic appliances, that supply would have been zero-rated:

[44]        I am of the view that if I had concluded that the Appellant provided multiple supplies, then applying a textual, contextual and purposive analysis as the decision in Canada Trustco Mortgage Co. v Canada, 2005 SCC 54, [2005] 2 SCR 601 would have me do, the supply of the orthodontic appliance would be zero-rated pursuant to section 11.1 of Schedule VI, Part II of the Act. In my opinion, the term “medical prosthesis”, as it is used in Schedule V of Part II, does not include an orthodontic appliance. The term “orthodontic appliance” appears in Schedule VI separate and apart from the word “prosthesis”. It is not used anywhere in Schedule V. A medical prosthesis can be either an exempt or zero-rated supply depending on the circumstances. It can be an exempt supply if installed in conjunction with services rendered for remuneration (section 1, “institutional health care service”, paragraphs (b) and (h) and section 2 of Schedule V, Part II). It may also be zero-rated pursuant to section 25 of Schedule VI, Part II. According to the decision in Buccal Services, Schedule V however takes precedence over Schedule VI in the event that a supply falls within either of those Schedules. The term “orthodontic appliance” appears only in Schedule VI and does not appear anywhere in Schedule V. While a prosthesis may, according to the medical definitions of “prosthesis, orthodontics and appliance” include an orthodontic appliance, the Act has set out the scheme for an orthodontic appliance entirely separate and apart from the provisions that apply to a prosthesis. In addition the evidence, which remained unchallenged, suggests that the only way to manufacture or assemble an orthodontic appliance is in the patient’s mouth. Therefore, the supply of an orthodontic appliance, being a medical device assembled by a licensed dental professional in a patient’s mouth, falls within the zero-rated scheme contained in Schedule VI. This interpretation is also consistent with the Department of Finance Technical Notes to section 11.1 of Schedule VI, Part II which unconditionally zero-rates an appliance.

In the result the appeal was dismissed, without costs:

[50]        Based on my determinations that the Appellant made a single supply of orthodontic treatment which is an exempt supply, the appeal is dismissed. The Respondent did not request costs in this matter and so I am making no award of costs. If I had determined that the Appellant had made multiple supplies consisting of an orthodontic appliance and an orthodontic service, it is my view that section 138 would not apply in those circumstances to deem that a single supply would have been made. A supply of an orthodontic appliance on its own would therefore be a zero-rated supply.