In an informal procedure decision, Axelrod v. The King, rendered on December 12, 2022, the Tax Court of Canada dismissed the appeals of a dentist denying input tax credits (“ITCs”) claimed in connection with certain expenses incurred in the course of his professional practice.
- The dispute arose when the Canada Revenue Agency (“CRA”) disallowed ITCs claimed by Dr. Axelrod (the “Dentist”) in 2013 and 2014 (“Audit Period”) for harmonized sales tax (“HST”) payable in respect of property or services acquired by him for consumption, use or supply in the course of his prosthodontic practice. These professional activities, which formed about one-third of the Dentist’s overall professional practice, pertained to the supply of dental prostheses (such as dental bridges, implants, dentures, crowns, and significant tooth reconstructions, defined collectively as “Artificial Teeth”) and related dental services to his patients.
- Likely based on its long-standing administrative position applicable to orthodontists at the time in respect of supplies of orthodontic treatments, the CRA took the position that the Dentist’s supplies of Artificial Teeth in connection with related dental services supplied to patients were multiple supplies of both exempt dental services and zero-rated supplies of Artificial Teeth, thereby denying a portion of the ITCs claimed by the Dentist in the course of his prosthodontic practice.
- Although supplies made by the Dentist in the course of his prosthodontic practice could be viewed as being similar to the overall supplies made by orthodontists, the Dentist appears to have taken a rather ambitious filing position that each procedure that had, as its ultimate purpose, the installation of an Artificial Tooth in a patient’s mouth, was a single supply of an Artificial Tooth and that each such single supply was a zero-rated supply included in Schedule VI to the Excise Tax Act (“ETA”). HST registrants are generally eligible to claim ITCs for the tax paid or payable on goods or services acquired for consumption, use or supply in the course of making taxable or zero-rated supplies. Accordingly, the Dentist claimed ITCs on his taxable expenses based on the extent such expenses were incurred for consumption, use or supply in his prosthodontic practice.
- Based on a review of the existing case law, including the Tax Court decision in Hurd Dentistry, and a detailed analysis of all elements comprising the Dentist’s supplies relating to the preparation, fabrication and installation of Artificial Teeth, Justice Sommerfeldt concluded, in a manner similar to Justice Campbell’s conclusion in Hurd Dentistry (also an informal procedure decision), that the supplies made by the Dentist to a patient should be characterized as single supplies of exempt dental services, rather than single zero-rated supplies of Artificial Teeth. Accordingly, the Dentist was therefore not entitled to claim ITCs in connection with his prosthodontic practice.
The Dentist carried on a general dentistry practice and was a HST registrant for purposes of Part IX of the ETA. During the Audit Period, about one-third of the Dentist’s practice was related to prosthodontic procedures involving the supply of Artificial Teeth. The Dentist claimed ITCs in respect of HST paid for various expenses incurred for purposes of supplying Artificial Teeth and related dental services to his patients in the course of his prosthodontic practice, taking the position that he was making a single supply of Artificial Teeth to his patients and such single supply was zero-rated pursuant to section 11 of Part II of Schedule VI of the ETA (“Section VI-II-11”).
Subsection 169(1) of the ETA generally limits an HST registrant’s ability to claim ITCs with respect to expenses incurred for consumption, use or supply in the course of commercial activities. Subsection 123(1) of the ETA notably defines “commercial activity” as a business or adventure or concern in the nature of trade carried on by a person but excludes a business involving the making of exempt supplies. Therefore, ITCs cannot generally be claimed by HST registrants to recover HST paid or payable with respect to property and services acquired to make exempt supplies.
The issue raised in the Dentist’s appeals was whether he was entitled to claim ITCs for expenses he incurred in the course of supplying Artificial Teeth and related dental services to his patients. In his decision, Justice Sommerfeldt examined the nature of the Dentist’s supplies, by analyzing the term “artificial teeth” as used in the ETA, determining whether each separate element of the Dentist’s supplies constituted either a single supply or multiple supplies, and finally determining whether such single supply or multiple supplies, as the case may be, was exempt or zero-rated under the ETA.
Justice Sommerfeldt agreed with both the Appellant and Respondent that dentures, dental implants, bridges, crowns and significant tooth reconstructions all constitute “artificial teeth” as the term is used in the ETA and that for the purpose of Section VI-II-11 of the ETA, an artificial tooth need not be entirely reconstructed to be considered as such, provided that more than half the total surface of the tooth is fabricated (para. 17).
The Tax Court also held that when the Dentist fabricated and installed temporary teeth to cover and protect teeth that had been prepped in advance of an installation, these temporary teeth were also considered “artificial teeth” within the meaning of the ETA (para. 18).
Single supply vs. multiple supplies
Where an agreement provides for the provision of several elements (i.e., package of property and/or services), it must first be determined whether such elements are constituent elements of a single supply or multiple supplies for HST purposes. This determination is especially relevant where, for example, had such package of property and/or services been supplied separately, certain components would be taxable or zero-rated, while others would be exempt under the ETA.
In determining whether the Dentist’s supplies of Artificial Teeth and related dental services to his patients were a single supply or multiple supplies, Justice Sommerfeldt considered the relevant case law, following the test laid down in O.A. Brown as it was applied by the Supreme Court of Canada in the City of Calgary decision.
In making his determination, Justice Sommerfeldt notably examined the billing of the services rendered by the Dentist. As required by the Royal College of Dental Surgeons of Ontario, it is mandatory for dentists issuing invoices to patients to separate laboratory charges from the other elements of the supply of dental services. However, based on the reasoning of the Tax Court in Albert v. The Queen, a decision rendered in an income tax context, Justice Sommerfeldt concluded that separate billings do not necessarily indicate that separate contracts had been entered into between the Dentist and his patients (para. 28).
On the contrary, Justice Sommerfeldt found that the dental services and the Artificial Teeth supplied by the Dentist were so intricately linked to each other that they could not be dissociated:
It is difficult to imagine that a patient of [the Dentist] would have wanted to acquire dentures, a bridge, a crown or an implant without [the Dentist] having first done all of the preliminary work necessary to ensure that the particular prosthesis would fit and function properly in the patient’s mouth, and without [the Dentist] actually installing the prosthesis in the patient’s mouth. Similarly, all of the dental services rendered by [the Dentist] would have made no sense if they had not related to the prosthesis desired by the patient. (para. 30)
The Tax Court thus concluded that all the elements of the Dentist’s supplies were so interconnected, interdependent and intertwined that they could not be viewed as multiple and separate supplies. A common-sense determination would lead one to conclude that the elements, together, formed an overall single supply (para. 19).
Justice Sommerfeldt also distinguished the recent Tax Court decision in Davis Dentistry as applying to orthodontists carrying on a “conventional orthodontic practice”. In his view, the correct legal approach in the present case was to follow the so-called O.A. Brown test contrary to the position taken in Davis Dentistry:
[…] in Davis Dentistry, Justice Wong stated that the ETA makes it clear (and Parliamentary intent confirms) that a conventional orthodontic practice consists of exempt supplies of services and zero-rated supplies of appliances (such as braces), such that it is not necessary to apply the O.A. Brown test to determine whether there is a single supply or multiple supplies, as the ETA has directly addressed the tax status of both supplies.
As the dental services that are the subject of [the Dentist]’s Appeals related to prosthodontic, rather than orthodontic, procedures, and as [the Dentist] submits that both his dental services and the prostheses were part of a single zero-rated supply, Davis Dentistry may be distinguished. Therefore, I am of the view that I should follow the approach set out in O.A. Brown and City of Calgary, in order to determine whether there were multiple separate supplies or a single overall or composite supply. (paras. 22-23)
Characterization of the single supply
Having determined that the elements supplied by the Dentist collectively constituted a single supply, one must next determine which of those elements is “predominant”. In accordance with the test set out in Global Cash Access (Canada) Inc. v. The Queen and Great-West Life Assurance Company v. The Queen, the predominant element is the one that drives the recipient’s willingness to pay for the supply. In this case, the following elements formed the single supply:
- the diagnosis of the patient’s dental needs, the formulation of treatments (including the conceptualization, the design, the impression, the measurements, and the preparation of artificial teeth to which prostheses would be affixed);
- the fabrication of prostheses by the laboratory;
- the fabrication of temporary prostheses to cover and protect any natural teeth that had been prepped; and
- the modification and adjustments to ensure a proper fit and bite. (para. 56)
The key question was therefore which element drove the patients to pay the Dentist’s fees. Justice Sommerfeldt concluded that the predominant element was the Dentist’s professional dental services and not the Artificial Teeth themselves (para. 57), especially given the importance of the time invested by the Dentist in fabricating the Artificial Teeth.
As such, Justice Sommerfeldt concluded that the supplies made by the Dentist to his patients were single supplies of dental services, which were exempt supplies pursuant to section 5 of Part II of Schedule V of the ETA as supplies of health care services rendered to an individual by a medical practitioner. Based on the foregoing, the Dentist’s appeals were dismissed.
The Dentist’s counsel filed an appeal of the Tax Court decision on January 11, 2023.
- Even though Hurd Dentistry involved a conventional orthodontic practice, rather than a dentist’s prosthodontic practice, Justice Sommerfeldt essentially followed the reasoning of that informal procedure decision in his ruling in this case. As a result, he concluded that the supplies rendered by the Dentist were single supplies of which the exempt dental services were the predominant element and accordingly denied the Dentist’s ITC claims in respect of the expenses he had incurred in providing his prosthodontic supplies.
- The taxpayer in this case, in taking the position that his prosthodontic practice, taken as a whole, was a “commercial activity” for HST purposes, took a gamble that doesn’t appear to have paid off (pending any further appeal), considering that the more conservative middle-ground approach of claiming ITCs on his expenses as instructed by the CRA in its administrative policy applicable to orthodontists during the Audit Period, was apparently an acceptable stance in the CRA’s view.
- Justice Sommerfeldt’s decision to distinguish Davis Dentistry is understandable, in our view. With respect, Justice Wong’s reasoning in that case for not applying the A. Brown test to determine whether there is a single supply or multiple supplies where an orthodontist is supplying both orthodontic appliances and orthodontic dental services – “because the statute has directly addressed the tax status of both” – appears to be flawed. In fact, this is exactly the practical purpose behind this common law test where a combination of elements is supplied, and the ETA specifically addressesthe tax status of one or certain of these elements as being taxable, and other element(s) as being zero-rated or exempt, if supplied separately.
- In light of Justice Sommerfeldt’s ruling, it is noteworthy that the Crown’s appeal of Davis Dentistry was heard on November 1, 2022, by the Federal Court of Appeal (“FCA”), with a decision likely to be released within the next few weeks. Both orthodontists and dentists involved in a prosthodontic practice should:
- follow the release of the FCA decision in Davis Dentistry, which will most likely affect the Dentist’s appeal; and
- closely monitor how the CRA may ultimately change its administrative policy based on the FCA decision.
For now, dentists should be aware that ITCs claimed in connection with a conventional prosthodontic practice could be at risk.
The authors would like to thank Antonin Lapointe, stagiaire, for his collaboration.
 In theory, decisions issued pursuant to the informal procedure may not be treated as precedents for other cases.
 See GST/HST Ruling RITS #56427 dated December 1, 2004—Eligibility by an Orthodontist for Input Tax Credits.
Dr. Brian Hurd Dentistry Professional Corporation v. The Queen, 2017 TCC 142 (Informal Procedure). [Hurd Dentistry]
City of Calgary v. The Queen, 2012 SCC 20 [City of Calgary]; O.A. Brownv. The Queen,  GSTC 40 (TCC) [O.A. Brown]; Mercantile Contracts Ltd.v. Customs & Excise Commissioners, File No. LON/88/786, U.K. (unreported); Hurd Dentistry, supra note 3; Dr. Kevin L. Davis Dentistry Professional Corporationv. The Queen, 2021 TCC 25 [Davis Dentistry]; and Haden (Commissioner of Revenue)v.McCarty, (1963) 275 Ala 76, a decision of the Supreme Court of Alabama.
Albert v. The Queen, 2009 TCC 16, a decision decided under the Income Tax Act (Canada).
 As confirmed by the Federal Court of Appeal in Canadian Imperial Bank of Commerce v. The Queen, 2021 FCA 96.
Global Cash Access (Canada) Inc. v. The Queen, 2013 FCA 269.
Great-West Life Assurance Company v. The Queen, 2016 FCA 316.
Davis Dentistry, para. 41.