After more than 30 years, the Canada Revenue Agency (“CRA”) is revoking an administrative arrangement with the Canadian Dental Association that simplified claiming input tax credits (“ITCs”) for GST/HST registered dental practitioners who make both taxable zero-rated supplies (e.g., orthodontic appliances and cosmetic services) and tax-exempt supplies (e.g., dental and orthodontic services). 

Per CRA Notice 339, the CRA is revoking its administrative arrangement as it moves towards a stricter adherence to the rules in the Excise Tax Act (“ETA”) – likely requiring more detailed records. 

This shift appears to be a response to recent Court decisions holding that supplies of orthodontic appliances and orthodontic services are separate supplies – opening up the ability to claim ITCs (which we have written about here). 

The changes take effect beginning as early as January 1, 2025!

Background

Since 1991, GST/HST registered dental practitioners providing orthodontic services and orthodontic appliances have been able to rely on a CRA administrative arrangement with the Canadian Dental Association which permitted the use an estimate of up to 35% of the total fees charged for orthodontic treatments to represent the consideration for the supply of the zero-rated orthodontic appliances when claiming ITCs (the “Arrangement”). 

While this method simplified the calculation of dentists’ “commercial activity” for GST filings, practitioners still had to perform a reconciliation based on the actual amount charged for orthodontic appliances at the end of each fiscal year.

The CRA has now decided that this Arrangement is no longer appropriate – noting that it was found not to be binding on the courts (which is true of any administrative arrangement).  The Arrangement will be revoked for fiscal years beginning on or after January 1, 2025.

The Change

Dentists will now be expected to claim ITCs throughout the year based on the actual extent their inputs are acquired for the consumption or use in commercial activity (e.g., for taxable cosmetic dental services, orthodontic appliances, etc.).

Some of the technical rules that apply include the following:

1. Apportionment – ITCs for property or services acquired for the purpose of making both taxable supplies and exempt supplies must generally be apportioned.
2. Capital Personal Property – ITCs are available for capital property acquired for use more than 50% in commercial activities (subject to conditions).
3. Capital Real Property – ITCs can be claimed if capital real property is acquired for use 90% or more in commercial activities (subject to conditions).

More information can be found in the CRA’s Notice 339.

Takeaways

The end of the Arrangement brings with it new recordkeeping requirements.  Rather than simply applying a 35% estimate, dentists will need to sit with their accountants and come up with actual figures.  With January 2025 rapidly approaching, now is the time to understand how the changes may impact your business.

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