In December 2023, the Supreme Court of Canada dismissed the Crown’s application for Leave to Appeal the Federal Court of Appeal (“FCA”) decision in Canada v. Dr. Kevin L. Davis Dentistry Professional Corporation 2023 FCA 76(“Davis”), leaving the FCA decision as the state of the law. The FCA had upheld the Tax Court of Canada’s (“TCC”) judgment (2021 TCC 25) allowing Dr. Davis to claim input tax credits (“ITCs”) incurred in the course of suppling orthodontic appliances and services to patients.
Background & Tax Court Decision
We wrote about the TCC judgment previously here. Briefly, the facts involved Dr. Kevin L. Davis Dentistry Professional Corporation (the “Appellant”), who operated an orthodontic clinic. The CRA denied the Appellant’s ITCs on the basis that it was only making exempt supplies of orthodontic services and was therefore not entitled to claim ITCs. The Appellant’s position, based in part on an historical CRA policy, was that it made both exempt supplies of orthodontic services and zero-rated supplies of orthodontic appliances and was entitled to ITCs in respect of the latter.
The TCC held that the parliamentary intent was clear and that the provision of orthodontic appliances and services were two separate supplies, and thus, the Appellant was entitled to ITCs.
Crown’s Appeal to the Federal Court of Appeal
The Crown appealed to the FCA, submitting that there was a single supply of orthodontic services, citing the TCC’s prior informal procedure decision in Dr. Brian Hurd Dentistry Professional Corporation v. The Queen, 2017 TCC 142 (“Hurd”). In Hurd, the TCC relied on the single/multiple supplies common law test set out in O.A. Brown Ltd. v. Canada (“O.A. Brown”) and held that orthodontic appliances and services were so intertwined as to be a single supply under the Excise Tax Act (“ETA”).
The FCA relied on the fact the ETA expressly zero-rates “orthodontic appliances”, exempting orthodontic services as “health care services” as evidence of an intentional differential treatment given the two are typically supplied together. Noting that the TCC in Hurd had not engaged with this issue the FCA held that the TCC in Davis was right in not following Hurd or applying the O.A. Brown test.
While the Crown suggested the zero-rating provision should be read as limited to sales by manufacturers of orthodontic appliances to dentists/orthodontists, the FCA noted that the Department of Finance’s Explanatory Notes suggested the zero-rating applied to supplies to patients.
Takeaways
The Supreme Court’s refusal to grant leave to appeal is a great win for dental practitioners who have likely been acting not unlike the Appellant in claiming ITCs in part based on an historical CRA policy.
While the application of the Davis case to individual circumstances must be determined on a case-specific factual basis, this decision provides future Appellants with a precedent upon which to base their own appeals.