On February 11, 2014, the Canada Revenue Agency (CRA) made changes to the GST/HST exemption regarding acupuncture and naturopathic services. Generally, the qualifying health care supplies (a defined term) provided by each of these practitioners, assuming they are licensed or otherwise certified to practice, were added to the list of exempt services in Section 7 of Part II of Schedule V of the Excise Tax Act (ETA). As a result, these practitioners were no longer required to charge GST/HST on those supplies. A downside to this change is that these practitioners would not be eligible to claim input tax credits (ITC’s) on any of their inputs to the exempt revenue stream. In addition, these practitioners may also have had a requirement to deem a supply of some of their property and payback prior ITC’s claimed.
For example, assume that an acupuncturist or naturopath was registered for GST/HST and claimed ITC’s on the acquisition of equipment used in their practice. As a result of the change in tax exempt status as of February 11, 2014, the equipment would now be held primarily (>50%) for use in exempt activities, triggering a deemed supply under subsection 200(2) of the ETA. The tax payable is based on the basic tax content (a defined term) of the property which is usually equal to the GST/HST originally paid, prorated for the decrease in the fair market value since acquisition. From our observation, the deemed supply has not been contemplated by many practitioners after the legislative change, as well as practitioners continuing to claim full ITC’s on all of their expenses.
Also, these practitioners may have a mix of exempt and taxable revenue streams, which would result in some portion of the GST/HST paid being claimable as an ITC, and some not. Generally when there are mixed revenue streams, the taxpayer must allocate the ITC’s on a fair and reasonable basis amongst the taxable and exempt revenue streams. The allocation of these expenses as it relates to an ITC claim can be complex and heavily scrutinized by the CRA. The CRA has published GST/HST Memorandum 8.3 as a guideline to what the CRA considers to be ‘fair and reasonable’ allocation methods. It is important that when determining your fair and reasonable allocation method, that it be documented to defend its reasonableness should it be challenged by the CRA.
For more information on the acupuncture services, please refer to Excise and GST/HST News 97. http://www.cra-arc.gc.ca/E/pub/gr/news97/news97-e.html
Please note that the definitions and rules are more complex than outlined above. Before you make any changes to your GST/HST, please consult your GST/HST advisor for clarification and what your next course of action should be.
Article written by: Greg Sawatsky, MAcc, CPA, CA