The Canada Revenue Agency (CRA) has announced the revocation of its administrative 35 percent arrangement (the Arrangement) with the Canadian Dental Association (CDA) through GST/HST Notice 339. This change outlines new input tax credit (ITC) regulations that GST/HST registrant dentists must now adhere to.
Since its introduction in 1991, the Arrangement permitted GST/HST registrant dentists to estimate the portion of total fees charged for orthodontic treatments that represented the supply of orthodontic appliances, allowing for an estimate of up to 35 percent of total fees for each reporting period. This estimation was utilized to determine the dentist’s level of commercial activity for GST/HST purposes within that period.
The CRA has deemed the Arrangement unnecessary due to recent legal precedents affirming that dentists are eligible to claim ITCs for the supplies of orthodontic appliances provided alongside orthodontic services. Additionally, it was found that the Arrangement permitted ITC claims that were inconsistent with the Excise Tax Act.
As a result, dentists will now be required to follow the same ITC rules that apply to all GST/HST registrants. Dentists currently utilizing the Arrangement may continue until the end of their current fiscal year; however, the revocation will take effect for any fiscal year commencing on or after January 1, 2025.
GST/HST registrant dentists can claim ITCs for GST/HST paid or payable on property and services acquired, as long as these acquisitions are used in their commercial activities. Commercial activities include taxable cosmetic services and zero-rated sales of orthodontic appliances. However, exempt supplies, such as the provision of orthodontic services, do not qualify as commercial activities for GST/HST purposes.
The following general ITC rules will apply to GST/HST paid or payable by dentists on their acquisitions of property and services, provided all other conditions are met:
No ITC eligibility: If an acquisition consists of operating expenses used 90 percent or more in exempt activities, such as providing orthodontic services.
Full ITCs available: If an acquisition consists of operating expenses used 90 percent or more in taxable supplies, including zero-rated orthodontic appliances.
Apportionment required: If an acquisition consists of operating expenses used for both taxable and exempt supplies.
Full ITCs available: If the acquisition is capital personal property (e.g., dental equipment) and is used primarily (more than 50 percent) in commercial activities. No ITC eligibility if usage is 50 percent or less in commercial activities.
Full ITCs available: If the acquisition is capital real property (e.g., a dentist’s office) and used more than 90 percent in commercial activities. No ITC eligibility if used 10 percent or less for commercial activities. ITCs can be claimed for use between 10 percent and 90 percent in commercial activities.
With the revocation of the CRA’s arrangement with the CDA, GST/HST registrant dentists must comply with the standard ITC regulations applicable to all registrants. By understanding and implementing these guidelines, dentists can ensure compliance with the Excise Tax Act and avoid potential reporting errors. As these changes take effect for fiscal years beginning January 1, 2025, it is essential for dental practices to review their GST/HST processes to align with the new requirements.
Related topics:
