Medical practitioners who specialize in orthodontics may provide their supplies in different ways. The tax status of these supplies under the Excise Tax Act (ETA) will depend on the facts of the particular situation. It is possible that an orthodontist could provide exempt, taxable and zero rated supplies, given the nature of the work being performed on their patient.
For example, an orthodontist may make a supply of a dental service that is performed for cosmetic purposes and not for reconstructive purposes. This supply will be subject to GST/HST depending on the province in which the services are performed. They may also supply a diagnostic treatment to an individual, other than a dental service that is performed for cosmetic purposes, which would be exempt of GST/HST under the ETA. To complicate the issue, an orthodontist may also make multiple supplies consisting of an exempt diagnostic and a zero-rated (taxable at 0%) supply of an orthodontic appliance. However, this will only be the case where the orthodontist identifies that separate, exempt and zero-rated supplies are being provided.
Where an orthodontist makes taxable supplies, and its identified on the invoices to patients, the orthodontist will be eligible to claim input tax credits for the GST/HST on purchases that are consumed or used in the making of taxable (including zero-rated) supplies. The orthodontist will also be able to claim the tax on overhead expenses, to the extent that these expenses are related to the making of the taxable supplies, assuming all of the conditions of section 169 of the ETA are met.
Under the ETA, the method used by an orthodontist (and other business that are involved in both taxable and exempt supplies) to determine the extent to which property or services are used in the course of commercial activities must be fair and reasonable in the circumstances and be used consistently throughout the year. As confirmed in a 2004 CRA Ruling 11601-3, 11860-1, for administrative purposes, the Canada Revenue Agency (CRA) accepts that orthodontists who claim input tax credits on a periodic basis can use an estimate of up to 35% of the cost to the patient of the orthodontic treatment to represent the ‘consideration’ for the supply of the orthodontic appliance. However, the CRA also states that when actual figures are available the orthodontist is required to ensure that the claim for input tax credits corresponds to actual taxable supplies rather than estimated figures. Therefore, it is recommended that the proration percentage be reviewed and analyzed on a year-to-year basis.
Overall, orthodontist should ensure that their billing practices allow them to claim ITC’s on their zero-rated and taxable services as well as annually reviewing their proration percentage, to ensure it is based on actual work performed, and not the CRA’s 35% rule. It should be noted that although this is the CRA’s current position, which is currently under review, and it could be changed at anytime in the future.
Article written by: Greg Sawatsky, MAcc, CPA, CA