In the Federal Court of Appeal « FCA » legal corridor, there is an appeal of paramount importance in indirect tax matters. The common thread of a specific fiscal ambiguity is now short-circuited to Dr. Kevin L. Davis, an orthodontist from the Greater Toronto Area. What is at stake for this dentist and his colleagues who are members of the Canadian Dental Association (from now on, « CDA ») cash flows of up to 35% of the estimated/realized value of orthodontic treatment.
The tax ambiguity in the Davis affair has to do with the qualification of the type of supply that needs to be used as per the Excise Tax Act (from now on, «law») as either a single or multiple supply. In a conventional orthodontics practice, multiple supplies may be eligible for input tax credits (from now on, « ITCs »). ITCs are monetary credits, in either GST/HST/QST, that your dental professional may receive due to an orthodontic service or purchases of appliance goods (from now on, “braces”).
Considering the historical context specific to dentists, how did we arrive at this cul-de-sac with the tax authorities?
Legal ambiguities exist when dealing with multiple supplies, as it is difficult to determine the linkage to commercial activities which qualify ITCs entitlement. The law allows, in a different way, the two steps process necessary for conventional orthodontic treatment.
More specifically, the law states that ITCs are not eligible for an orthodontic medical service in one specific schedule. However, in another schedule, the law unequivocally states that purchasing orthodontic appliances such as braces is suitable for ITCs. When there are conflicting provisions of the law, we need to determine whether we can make them work together cohesively.
To bridge this gap, we witnessed in 1991 an administrative framework between CDA and the Canada Revenue Agency (from now on, “CRA”). The administrative arrangement stated that the two organizations agreed to reconcile the tax ambiguity. According to the passage of this agreement, ITCs are granted when the conditions of this framework are met.
Ultimately, the adhesion to the administrative arrangement framework directly benefits orthodontists where it counts (i.e., their wallets). There’s recognition and acknowledgment that orthodontists can make multiple supplies consisting of medical services and purchases of orthodontic braces.
As such, orthodontists must validate and identify each supply to properly acquiesce to the framework. Furthermore, the framework enables the orthodontist to file their GST/HST/QST returns using 35% of the total patient orthodontist treatment cost as consideration for the braces supply. In simple terms, orthodontists can further monetize the value of orthodontic treatment by squeezing and isolating the portion of refundable ITCs and those that are not.
Difference in opinion
The administrative framework, which is designed to bring unity and cohesion amongst two conflicting dispositions in the law, has undoubtedly created a difference of opinion between two tax agencies, Revenu Québec (from now on, (“RQ”) and CRA.
As for RQ’s position, it has always been the same, and has been for several years. Moreover, despite the administrative framework between ADC and the CRA, RQ has always believed that an orthodontic medical service and purchasing orthodontic braces are either an integral or incidental part of a single supply. According to RQ’s line of fire, dentists can’t claim ITCs on their single supply, as they are merely the continuation of a complete orthodontic single supply service.
A few years ago, CRA brainstormed, took a step back, rethought, and regrouped. The collective group thinking resulted in a complete overhaul of its multiple supply position. Acting back, the CRA reversed course and completely changed its tune. As a result, the CRA ultimately aligned itself with RQ’s position that a complete orthodontic service is indeed a single supply.
Similarly, CRA auditors began applying their new single supply position and theory across Canada. To achieve this, they sent notices of assessment to several CDA members; as a result, and as you can imagine, a panic set in in the dental community. RQ took a different approach and chose not to execute CRA’s newfound single supply position.
Indeed, a jurisprudential process is warranted to reconcile and qualify the type of supply dental professionals can employ in their practice. Consequently, how did we migrate toward this showdown in tax court?
The common thread
This trilogy began with Dr. James Singer, converging with Dr. Brian Hurd, and the final Court episode will be heard in the Dr. Kevin Davis affair. All these cases have the same common thread, that of the clarification, the qualification or not, of multiple supplies in the context of medical practice in orthodontics.
In the case of Dr. James Singer, he was a dentist who supplied artificial teeth. Multiple supply problems are inseparable from dentists who make and service artificial teething. In this case, Dr. Singer’s appeal was dismissed because he did not come to his hearing. However, Judge Bowman held, albeit in obiter dictum, that the Minister had erred in arguing that an artificial tooth treatment is ineligible for ITCs.
Yet, in the case of Dr. Brian Hurd, Judge Diane Campbell came to an opposite conclusion. According to her, braces and the orthodontic medical service must be combined and provided together. She concluded that we are dealing with a single supply framework that is not eligible for monetary refunds in ITCs.
Finally, this brings us to our case, that of Dr. Kevin Davis. First, Dr. Kevin Davis did not follow the administrative arrangement policy suggested by the CRA. This opened the door for CRA auditors, who, in turn, concluded that we were dealing with a single supply framework.
The judge, in this case, was Susan Wong, who ultimately rejected the Minister’s single supply argument. According to her, the law is unequivocal, clear, and precise. Moreover, it even added that it was futile to use and consider jurisprudential tests in this proceeding.
In short, until further notice, the administrative agreement framework is applicable and respected by the tax authorities. Dentists can adhere to the CRA’s administrative policy to claim ITAs on their complete orthodontic services. As eluded in my introduction, the decision is under appeal, and there can be a change in its administrative policy at any time.