Dental Crowns And GST/HST Credits: A Dentist Wants To Have His Cake And Eat It Too – Sales Taxes: VAT, GST

• The dispute arose when the Canada Revenue Agency
  (“CRA”) disallowed ITCs claimed by Dr. Axelrod (the
  “Dentist”) in 2013 and 2014 (“Audit Period”)
  for harmonized sales tax (“HST”) payable in respect of
  property or services acquired by him for consumption, use or supply
  in the course of his prosthodontic practice. These professional
  activities, which formed about one-third of the Dentist’s
  overall professional practice, pertained to the supply of dental
  prostheses (such as dental bridges, implants, dentures, crowns, and
  significant tooth reconstructions, defined collectively as
  “Artificial Teeth”) and related dental services to his
  patients.




• Likely based on its long-standing administrative position²
  applicable to orthodontists at the time in respect of supplies of
  orthodontic treatments, the CRA took the position that the
  Dentist’s supplies of Artificial Teeth in connection with
  related dental services supplied to patients were multiple supplies
  of both exempt dental services and zero-rated
  supplies of Artificial Teeth, thereby denying a portion of the ITCs
  claimed by the Dentist in the course of his prosthodontic
  practice.




• Although supplies made by the Dentist in the course of his
  prosthodontic practice could be viewed as being similar to the
  overall supplies made by orthodontists, the Dentist appears to have
  taken a rather ambitious filing position that each procedure that
  had, as its ultimate purpose, the installation of an Artificial
  Tooth in a patient’s mouth, was a single supply of an
  Artificial Tooth and that each such single supply was a
  zero-rated supply included in Schedule VI to the
  Excise Tax Act (“ETA”). HST registrants are
  generally eligible to claim ITCs for the tax paid or payable on
  goods or services acquired for consumption, use or supply in the
  course of making taxable or zero-rated supplies. Accordingly, the
  Dentist claimed ITCs on his taxable expenses based on the extent
  such expenses were incurred for consumption, use or supply in his
  prosthodontic practice.




• Based on a review of the existing case law, including the Tax
  Court decision in Hurd Dentistry³, and a
  detailed analysis of all elements comprising the Dentist’s
  supplies relating to the preparation, fabrication and installation
  of Artificial Teeth, Justice Sommerfeldt concluded, in a manner
  similar to Justice Campbell’s conclusion in Hurd
  Dentistry (also an informal procedure decision), that the
  supplies made by the Dentist to a patient should be characterized
  as single supplies of exempt dental services, rather than
  single zero-rated supplies of Artificial Teeth.
  Accordingly, the Dentist was therefore not entitled to claim ITCs
  in connection with his prosthodontic practice.

Background

The Dentist carried on a general dentistry practice and was a
HST registrant for purposes of Part IX of the ETA. During the Audit
Period, about one-third of the Dentist’s practice was related
to prosthodontic procedures involving the supply of Artificial
Teeth. The Dentist claimed ITCs in respect of HST paid for various
expenses incurred for purposes of supplying Artificial Teeth and
related dental services to his patients in the course of his
prosthodontic practice, taking the position that he was making a
single supply of Artificial Teeth to his patients and such single
supply was zero-rated pursuant to section 11 of Part II of
Schedule VI of the ETA (“Section VI-II-11”).

Issue

Subsection 169(1) of the ETA generally limits an HST
registrant’s ability to claim ITCs with respect to expenses
incurred for consumption, use or supply in the course of commercial
activities. Subsection 123(1) of the ETA notably defines
“commercial activity” as a business or adventure or
concern in the nature of trade carried on by a person but excludes
a business involving the making of exempt supplies. Therefore, ITCs
cannot generally be claimed by HST registrants to recover HST paid
or payable with respect to property and services acquired to make
exempt supplies.

The issue raised in the Dentist’s appeals was whether he was
entitled to claim ITCs for expenses he incurred in the course of
supplying Artificial Teeth and related dental services to his
patients. In his decision, Justice Sommerfeldt examined the nature
of the Dentist’s supplies, by analyzing the term
“artificial teeth” as used in the ETA, determining
whether each separate element of the Dentist’s supplies
constituted either a single supply or multiple supplies, and
finally determining whether such single supply or multiple
supplies, as the case may be, was exempt or zero-rated under the
ETA.

Analysis

Artificial teeth

Justice Sommerfeldt agreed with both the Appellant and
Respondent that dentures, dental implants, bridges, crowns and
significant tooth reconstructions all constitute “artificial
teeth” as the term is used in the ETA and that for the purpose
of Section VI-II-11 of the ETA, an artificial tooth need not be
entirely reconstructed to be considered as such, provided that more
than half the total surface of the tooth is fabricated (para.
17).

The Tax Court also held that when the Dentist fabricated and
installed temporary teeth to cover and protect teeth that had been
prepped in advance of an installation, these temporary teeth were
also considered “artificial teeth” within the meaning of
the ETA (para. 18).

Single supply vs. multiple supplies

Where an agreement provides for the provision of several
elements (i.e., package of property and/or services), it must first
be determined whether such elements are constituent elements of a
single supply or multiple supplies for HST purposes. This
determination is especially relevant where, for example, had such
package of property and/or services been supplied separately,
certain components would be taxable or zero-rated, while others
would be exempt under the ETA.

In determining whether the Dentist’s supplies of Artificial
Teeth and related dental services to his patients were a single
supply or multiple supplies, Justice Sommerfeldt considered the
relevant case law⁴, following the test laid down in
O.A. Brown as it was applied by the Supreme Court of
Canada in the City of Calgary decision.

In making his determination, Justice Sommerfeldt notably
examined the billing of the services rendered by the Dentist. As
required by the Royal College of Dental Surgeons of Ontario, it is
mandatory for dentists issuing invoices to patients to separate
laboratory charges from the other elements of the supply of dental
services. However, based on the reasoning of the Tax Court in
Albert v. The Queen⁵, a decision rendered in an income
tax context, Justice Sommerfeldt concluded that separate billings
do not necessarily indicate that separate contracts had been
entered into between the Dentist and his patients (para. 28).

On the contrary, Justice Sommerfeldt found that the dental
services and the Artificial Teeth supplied by the Dentist were so
intricately linked to each other that they could not be
dissociated:

It is difficult to imagine that a
patient of [the Dentist] would have wanted to acquire dentures, a
bridge, a crown or an implant without [the Dentist] having first
done all of the preliminary work necessary to ensure that the
particular prosthesis would fit and function properly in the
patient’s mouth, and without [the Dentist] actually installing
the prosthesis in the patient’s mouth. Similarly, all of the
dental services rendered by [the Dentist] would have made no sense
if they had not related to the prosthesis desired by the patient.
(para. 30)

The Tax Court thus concluded that all the elements of the
Dentist’s supplies were so interconnected, interdependent and
intertwined that they could not be viewed as multiple and separate
supplies. A common-sense determination would lead one to conclude
that the elements, together, formed an overall single supply (para.
19).

Justice Sommerfeldt also distinguished the recent Tax Court
decision in Davis Dentistry as applying to orthodontists
carrying on a “conventional orthodontic practice”. In his
view, the correct legal approach in the present case was to follow
the so-called O.A. Brown test contrary to the position
taken in Davis Dentistry:

[…] in Davis Dentistry, Justice Wong stated that the
ETA makes it clear (and Parliamentary intent confirms) that a
conventional orthodontic practice consists of exempt supplies of
services and zero-rated supplies of appliances (such as braces),
such that it is not necessary to apply the O.A. Brown test
to determine whether there is a single supply or multiple supplies,
as the ETA has directly addressed the tax status of both
supplies.

[…]

As the dental services that are the subject of [the
Dentist]’s Appeals related to prosthodontic, rather than
orthodontic, procedures, and as [the Dentist] submits that both his
dental services and the prostheses were part of a single zero-rated
supply, Davis Dentistry may be distinguished. Therefore, I
am of the view that I should follow the approach set out in
O.A. Brown and City of Calgary, in order to
determine whether there were multiple separate supplies or a single
overall or composite supply. (paras. 22-23)

Characterization of the single supply

Having determined that the elements supplied by the Dentist
collectively constituted a single supply, one must next determine
which of those elements is “predominant”.⁶ In accordance with
the test set out in Global Cash Access (Canada) Inc. v. The
Queen⁷ and Great-West Life Assurance
Company v. The Queen⁸, the predominant element is the
one that drives the recipient’s willingness to pay for the
supply. In this case, the following elements formed the single
supply:

• the diagnosis of the patient’s dental needs, the
  formulation of treatments (including the conceptualization, the
  design, the impression, the measurements, and the preparation of
  artificial teeth to which prostheses would be affixed);




• the fabrication of prostheses by the laboratory;




• the fabrication of temporary prostheses to cover and protect
  any natural teeth that had been prepped; and




• the modification and adjustments to ensure a proper fit and
  bite. (para. 56)

The key question was therefore which element drove the patients
to pay the Dentist’s fees. Justice Sommerfeldt concluded that
the predominant element was the Dentist’s professional dental
services and not the Artificial Teeth themselves (para. 57),
especially given the importance of the time invested by the Dentist
in fabricating the Artificial Teeth.

As such, Justice Sommerfeldt concluded that the supplies made by
the Dentist to his patients were single supplies of dental
services, which were exempt supplies pursuant to section 5
of Part II of Schedule V of the ETA as supplies of health care
services rendered to an individual by a medical practitioner. Based
on the foregoing, the Dentist’s appeals were dismissed.

The Dentist’s counsel filed an appeal of the Tax Court
decision on January 11, 2023.

Key Takeaways

• Even though Hurd Dentistry involved a conventional
  orthodontic practice, rather than a dentist’s prosthodontic
  practice, Justice Sommerfeldt essentially followed the reasoning of
  that informal procedure decision in his ruling in this case. As a
  result, he concluded that the supplies rendered by the Dentist were
  single supplies of which the exempt dental services were the
  predominant element and accordingly denied the Dentist’s ITC
  claims in respect of the expenses he had incurred in providing his
  prosthodontic supplies.




• The taxpayer in this case, in taking the position that his
  prosthodontic practice, taken as a whole, was a “commercial
  activity” for HST purposes, took a gamble that doesn’t
  appear to have paid off (pending any further appeal), considering
  that the more conservative middle-ground approach of claiming ITCs
  on his expenses as instructed by the CRA in its administrative
  policy applicable to orthodontists during the Audit Period, was
  apparently an acceptable stance in the CRA’s view.




• Justice Sommerfeldt’s decision to distinguish Davis
  Dentistry is understandable, in our view. With respect,
  Justice Wong’s reasoning in that case for not applying the
  A. Brown test to determine whether there is a single
  supply or multiple supplies where an orthodontist is supplying both
  orthodontic appliances and orthodontic dental services –
  “because the statute has directly addressed the tax status of
  both”⁹ – appears to be flawed. In
  fact, this is exactly the practical purpose behind this common law
  test where a combination of elements is supplied, and the ETA
  specifically addressesthe tax status of one or
  certain of these elements as being taxable, and other element(s) as
  being zero-rated or exempt, if supplied separately.




• In light of Justice Sommerfeldt’s ruling, it is noteworthy
  that the Crown’s appeal of Davis Dentistry was heard
  on November 1, 2022, by the Federal Court of Appeal
  (“FCA”), with a decision likely to be released within the
  next few weeks. Both orthodontists and dentists involved in a
  prosthodontic practice should:
  

  • follow the release of the FCA decision in Davis
    Dentistry, which will most likely affect the Dentist’s
    appeal; and

  
  

  • closely monitor how the CRA may ultimately change its
    administrative policy based on the FCA decision.

For now, dentists should be aware that ITCs claimed in
connection with a conventional prosthodontic practice could be at
risk.

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

Footnotes

1. In
theory, decisions issued pursuant to the informal procedure may not
be treated as precedents for other cases.

2. See
GST/HST Ruling RITS #56427 dated December 1, 2004—Eligibility
by an Orthodontist for Input Tax Credits.

3.Dr.
Brian Hurd Dentistry Professional Corporation v. The Queen,
2017 TCC 142 (Informal Procedure). [Hurd
Dentistry]

4.City 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.K. (unreported);
Hurd Dentistry, supra note 3; Dr. Kevin L. Davis
Dentistry Professional Corporationv. The Queen, 2021
TCC 25 [Davis Dentistry]; and Haden (Commissioner of
Revenue)v.McCarty, (1963) 275 Ala 76, a
decision of the Supreme Court of Alabama.

5.Albert v. The Queen, 2009 TCC 16, a
decision decided under the Income Tax Act
(Canada).

6. As
confirmed by the Federal Court of Appeal in Canadian Imperial
Bank of Commerce v. The Queen, 2021 FCA 96.

7.Global Cash Access (Canada) Inc. v. The
Queen, 2013 FCA 269.

8.Great-West Life Assurance Company v. The
Queen, 2016 FCA 316.

9.Davis Dentistry, para. 41.

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