The effect of the Canada Revenue Agency’s (“CRA”) administrative policies on GST/HST audits is often misunderstood by taxpayers and CRA auditors alike. While policies carry some interpretive value, they do not supplant actual law in the form of legislation and regulations.

This sometimes makes relying on CRA administrative policy a risky proposition, particularly where the policy provides a benefit or relief against the legislation and regulations. This is because where CRA assesses a registrant for non-compliance with a beneficial policy, the Tax Court is bound to apply the legislation and regulations as-written, and cannot allow a CRA policy – even one that benefits the taxpayers – to take precedence over the law.

The decision in Dr. Kevin L. Davis Dentistry Professional Corporation v. The Queen, 2021 TCC 25 (“Dr. Davis Dentistry”) considered this very issue.

BACKGROUND

The Excise Tax Act (“ETA”) has two general categories of supplies upon which, functionally, no tax is due: exempt supplies (which are exempt from tax), and zero-rated supplies (which are taxed at 0%). Because the latter are technically “taxable” (unlike exempt supplies), the making of zero-rated supplies is considered a commercial activity which entitles a registrant to claim ITCs in respect of tax paid in the course of making those zero-rated supplies. This distinction between exempt and zero-rated supplies can be a challenge for healthcare professionals, who often make both exempt and zero-rated supplies.

Dr. Davis Dentistry involved a CRA administrative policy (the “Policy”) which was created to facilitate GST reporting for dentists and orthodontists (para. 19). The CRA recognized that orthodontists made supplies of both orthodontic services (exempt under Part II to Sch. V of the ETA) and orthodontic appliances (zero-rated under s. 11.1 of Part II to Sch. VI of the ETA). The Policy allowed orthodontists to estimate that 35% of the patient’s fee was for zero-rated orthodontic appliances with the actual figures reconciled at year-end. The Policy also required the separate supplies be identified: “[g]enerally, … consideration for the zero-rated supply of the orthodontic appliance is identified separately from the consideration for the exempt supply of the orthodontist's services”.

DECISION

In Dr. Davis Dentistry, the Appellant, Dr. Kevin L. Davis Dentistry Professional Corporation (“Davis”), operated as an orthodontic clinic. Patients received invoices which included certain standard terms and conditions (the “Agreement”), stating: “[a]ll of our materials, appliances and services are either zero-rated or exempt for GST/HST purposes” (para. 29). The Agreement also stated that “up to 35%” of the fee related to the zero-rated orthodontic appliance. At year-end, Davis’s bookkeeper reconciled the 35% estimate against Davis’s actual taxable supplies, per the Policy.

The CRA disallowed Davis’ ITCs on the basis that it had failed to provide a breakdown of the consideration payable for the zero-rated and exempt supplies as required by the Policy. Accordingly, CRA took the position Davis was only making exempts supplies of orthodontic services – with any supply of zero-rated orthodontic appliances being merely part of that single exempt supply.

The Tax Court framed the issue as whether Davis had made one or multiple supplies, and held that “[t]he statute makes it clear (and Parliamentary intent confirms)” that orthodontic supplies and services are meant to be treated as two different supplies.

Additionally, the Tax Court found the 35% reference combined with the total consideration was sufficient to calculate the consideration of the zero-rated and exempt supplies, stating: “it is calculable and unambiguous as to what 35% of a specific amount is”. Accordingly, the Tax Court found Davis made taxable supplies, and was entitled to claim ITCs.

Although the CRA assessment focussed on the Policy, the Court noted that resolving the issue in terms of the Policy was outside of the Tax Court’s jurisdiction, which is limited to applying the legislation and regulations, which could not be overruled by the Policy. The Tax Court also confirmed there was “no requirement to separate the consideration for zero-rated versus exempt supplies” despite the Policy.

TAKEAWAY

In this case, while the Tax Court ruled in favour of the taxpayer, tax practitioners should be aware that the Tax Court has also ruled against CRA policy to the disadvantage of the taxpayer. While resources such as Memoranda and Guides on the CRA website can be a helpful starting point, it is important to understand whether that information accurately represents the law before relying on it.

When in doubt, it is always advisable to seek the assistance of a tax professional!

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