Taxpayers regularly argue that an administrative policy adopted by the Canada Revenue Agency (CRA) constitutes an incorrect interpretation of the law that courts should reject. The courts sometimes side with these taxpayers and choose not to follow the CRA's administrative positions. For example, in Bozzer (2011 FCA 186) the Federal Court of Appeal refused to follow the CRA's administrative position that the Income Tax Act did not vest the minister of national revenue with discretion to waive interest in respect of tax deficiencies that had arisen in taxation years ending more than 10 years before the date on which discretionary relief had been requested by the taxpayer. The court stated: "In law, the Information Circulars of the Canada Revenue Agency are nothing more than administrative policy statements. They are not finally determinative of the meaning of a provision of the Act."(1)
In Bozzer, and as is generally the case where the courts refuse to follow a CRA administrative policy, this rejection was a positive outcome for the taxpayers. However, in the recent Hurd Dentistry (2017 TCC 142) decision, the Tax Court's rejection of a CRA administrative policy was made to the detriment of the taxpayer.
The Hurd Dentistry decision deals with the tax treatment of orthodontic supplies made by an incorporated orthodontic practice under the Excise Tax Act. As expressed in the 2004 interpretation letter "Application of GST/HST to Supplies by Medical Practitioners Who Are Licensed to Practise the Profession of Dentistry" (ie, the CRA administrative concession), the CRA generally permits orthodontists to claim input tax credits (ITCs) in respect of orthodontic appliances if they:
- identify the provision of orthodontic treatment as two separate supplies (ie, an orthodontic service and an orthodontic appliance); and
- separate the consideration related to the supply of the appliance from the consideration for the exempt supply of the dental service.
In accordance with the CRA administrative concession, an orthodontist who claims ITCs on a periodic basis can use an estimate of 35% of the cost to the patient of the orthodontic treatment to represent the consideration for the supply of the orthodontic appliance. The concession is based on the assumption that orthodontic treatment to a patient consists of multiple supplies – namely, an exempt dental service and a zero-rated appliance.
Relying on the CRA administrative concession, the taxpayer in Hurd Dentistry referred to the appliance cost in his patient contracts as the "appliance portion… of the fee" and calculated it separately as 35% of the total fee. The CRA denied the ITCs claimed by the taxpayer on the basis that he was providing a single exempt supply of healthcare services being orthodontic treatments, which are exempt supplies and in respect of which he was not entitled to claim ITCs.
The CRA justified its position, which appeared to be a departure from its administrative concession, by submitting that the taxpayer did not comply with the policy requirements because the patient contracts did not identify the cost of the orthodontic service separately from the cost of the appliance. The Tax Court rejected this argument, which it qualified as "rather weak", and determined that the taxpayer had met all requirements of the CRA administrative concession.
The court conducted an extensive review of the legislation and relevant case law and concluded that the supply of orthodontic treatment to a patient constitutes a single supply that is exempt, resulting in no tax charged to the patient and no entitlement for the orthodontist to claim ITCs.
In the course of its analysis, the court expressly rejected the CRA administrative concession and commented:
"Finally, in respect to the Appellant's reliance on the CRA directive and policy in this regard, although it may be a guideline it is not binding on this Court. I believe it to be incorrect and misleading to taxpayers. … In the end, the CRA policy statement is simply wrong and more importantly misleading and cannot be defended in the manner the Respondent would have me do. I simply reject it and I do not intend to follow it."(2)
The taxpayer's appeal was dismissed.
The Hurd Dentistry decision should serve as a cautionary example to taxpayers that CRA administrative concessions which are not supported by the law are not binding on the courts and may therefore be ignored.
For further information please contact Florence Sauve at Thorsteinssons LLP by telephone (+1 416 864 0829) or email ([email protected]). The Thorsteinssons LLP website can be accessed at www.thor.ca.