In an interpretation given to the Canadian Dental Association in 2004, CRA set out a policy to allow orthodontists to claim up to 35% of their taxable inputs as input tax credits. The letter explained that orthodontists could “use an estimate of 35% of the cost to the patient of the orthodontic treatment” as the cost of zero-rated orthodontic appliances. Dentists were supposed to adjust their allocation at year end to reflect actual taxable supplies. To qualify, “consideration for the zero-rated supply of the orthodontic appliance [must be] identified separately from the consideration for the exempt supply of the orthodontist’s services.”
The orthodontic appliances (such as braces or retainers) and their installation are listed as zero-rated in Schedule VI (listing zero-rated supplies) Part II (Medical and Assistive Devices) sections 11.1 (for the braces) and 34 for their installation.
Despite that arrangement, it seems that CRA has been assessing orthodontists to disallow the input tax credits. Apparently, the basis for the disallowance was that “patient invoices did not set out the consideration for the zero-rated supply of orthodontic appliances separately from the consideration for the exempt supply of orthodontic services.” Consequently, the CRA said that it could not tell the portion of supplies that were for zero-rated appliances and the portion that was exempt dental services. So it treated all the supplies as exempt, with the result that no ITC could be claimed. (See the Kevin Davis reasons at para. 2.)
The agency succeeded on this basis in the Informal Procedure decision of Justice Campbell in Dr. Brian Hurd Dentistry Professional Corporation v. The Queen, 2017 TCC 142. But there, Justice Campbell took the view that, regardless of the zero-rating rules, dentists treating patients for orthodontics are making a single supply of an exempt dental service and not separate supplies of (1) exempt dental services and (2) zero-rated appliances (with their installation).
Despite that earlier decision, Justice Wong decided that the intent of the law was to allow dentists to treat their supplies of orthodontic appliances and their installation as zero-rated, not exempt. And her reasoning makes sense, as why are those two rules in the statute if Parliament expected a single supply analysis?
That said, it was very odd to see that Justice Wong gave no discussion of Justice Campbell’s reasons in Dr. Brian Hurd Dentistry Professional Corporation.
Justice Wong wrote:
[42] I am unaware of a legislative basis for finding that Schedule V takes precedence over Schedule VI where there is an apparent or potential conflict between the two. In my view, the correct reading of the provisions dealing with orthodontic services and appliances does not lead to a conflict in any event.
That conclusion is hard to reconcile with the fact that she obviously looked at section VI:II:34, which excludes “a service the supply of which is included in any provision of Part II of Schedule V”. And there is caselaw that says that a supply cannot be zero-rated if it is also exempt. (See below.)
After considering the Department of Finance explanations of these rules and their changes in 1997, she wrote at paragraph 41:
“The statute makes it clear (and Parliamentary intent confirms) that a conventional orthodontic practice consists of exempt supplies of services and zero-rated supplies of appliances. It is unnecessary to use the common law test44 for determining single versus multiple supplies or to consider whether the supply of an appliance is incidental to the supply of orthodontic treatment45 because the statute has directly addressed the tax status of both.”
That certainly wasn’t how Justice Campbell approached the rules. Justice Campbell decided Hurd on the basis that there was a single exempt supply. Justice Campbell nonetheless does go on to say (para. 44) that, had there been separate supplies, she would have come to the precise conclusion that Justice Wong does in Kevin Davis:
“… According to the decision in Buccal Services, Schedule V however takes precedence over Schedule VI in the event that a supply falls within either of those Schedules.”
That passage addresses Justice Wong’s view that there is no legislative basis for finding that the exempt supply rules override the zero-rated rules. The legislative basis is that the definition of a “taxable supply” requires a “commercial activity” and commercial activity excludes exempt supplies.”
Justice Campbell continued in her para. 44, where, had she agreed with Justice Wong that there is no place for single supply analysis, she offers reasons that parallel those of Justice Wong:
“The term “orthodontic appliance” appears only in Schedule VI and does not appear anywhere in Schedule V. While a prosthesis may, according to the medical definitions of “prosthesis, orthodontics and appliance” include an orthodontic appliance, the Act has set out the scheme for an orthodontic appliance entirely separate and apart from the provisions that apply to a prosthesis. In addition the evidence, which remained unchallenged, suggests that the only way to manufacture or assemble an orthodontic appliance is in the patient’s mouth. Therefore, the supply of an orthodontic appliance, being a medical device assembled by a licensed dental professional in a patient’s mouth, falls within the zero-rated scheme contained in Schedule VI. This interpretation is also consistent with the Department of Finance Technical Notes to section 11.1 of Schedule VI, Part II which unconditionally zero-rates an appliance.”
So, we now have two divergent approaches to precisely the same issue. Typically, one would expect the Court to explain why it was deviating from its prior decision, even if it was an Informal Procedure decision, which is not binding precedent. But Justice Wong has not done that.
In Friedman v. Canada (National Revenue), 2021 FCA 101, the Federal Court of Appeal explained judicial comity:
“[30] [The fact that there is no error of law in failing to follow the decision of a judge of the same court] does not mean that judges are free to disregard the decisions of their colleagues. Judicial comity is a doctrine which seeks to promote uniformity and predictability in the law. Litigants and appellate courts expect that judges will consider the decisions of their colleagues carefully and, if they choose to differ, will explain why. One way of doing this is to distinguish the facts of the two cases or to identify relevant legal principles which were not addressed.
[31] But the failure to do so, or to do it convincingly, while regrettable, is not a basis for appellate intervention. As a result, the use of the expression “horizontal stare decisis” to refer to judicial comity is misleading precisely because judicial comity is not enforced by courts of appeal while stare decisis is.”
Curiously, Justice Wong has an “obiter” discussion about ITC documentation in which she focuses on supplies made to patients, not receipts or invoices issued to Kevin Davis PC. Was Justice Wong confused about the ITC documentation to be considered?
In para. 43 of her reasons, we seem to be concerned with Davis’s failure to allocate inputs clearly between its taxable and exempt supplies. That apportionment issue is one under ETA s. 169(1), not one under the documentation requirements for ITCs under s. 169(4) and s. 3 of the Input Tax Credit Information (GST/HST) Regulations. Nor would it be relevant to discuss, as she does, ministerial discretion under s. 169(5) to waive ITC documentation requirements.
It’s not quite clear what drove that discussion. It may be that she was misled by the fact that CRA was objecting to the failure of the financial agreements with patients to specify which parts of the fee was for orthodontic appliances. (The statements simply had a generic claim that the “fee includes a portion, up to 35%, relating to the value of orthodontic appliances as well as the value for the services of installing, maintaining, restoring, repairing or modifying your orthodontic appliances.” (Para. 29) But there was no specific itemized of those charges.)
This was more an issue of proof to support the allocation of the ITCs to zero-rated appliances and installation services. (See especially ETA ss. 169(1) and 141.01(5)). It was not the kind of ITC documentation issue covered by section 169(4).