So from May 1, 2005 to December 1, 2008, Patterson Dental was selling anesthetic solutions and NOT charging GST.
Why not? Well, the theory (per the court case) goes that Patterson learned that a competitor wasn’t charging GST during that timeframe. So, in order to stay competitive back in 2005, Patterson stopped collecting GST. Keep in mind that they WERE charging GST before 2005. And in 2008 Patterson apparently learned from an interpretation letter issued by the Minister of Finance that these sorts of solutions WERE taxable. That’s why Patterson apparently altered course and started charging GST again.
Now, for those 4 years in which it wasn’t charging GST, the Minister of Finance assessed Patterson $1.11-million for unremitted GST plus interest and penalties.
Patterson’s defence of why it wasn’t charging? Because it didn’t need to. Specifically: the anesthetic solution contained EPINEPHRINE which was GST-exempt (more technically: epinephrine is a zero-rated supplies under the Excise Tax Act so the whole anesthetic solution was GST-exempt). The Minister of Finance disagreed with that interpretation.
So all parties went to court and Patterson lost at trial (Tax Court of Canada): see Patterson Dental Canada Inc. v. The Queen (2018), G.S.T.C. 67. The Tax Court found that the PRINCIPAL INGREDIENT (we’ll come back to this) in those anesthetic solutions is the anaesthesia agent; the epinephrine is added to the formula to prolong or improve the efficacy of the local anesthetic agents. The epinephrine is considered as an additive or as an adjuvant. It is not designed to serve as an emergency relief for patients who are suffering from health conditions.
Patterson appealed the loss. But the Federal Court of Appeal dismissed the appeal and sided with the Tax Court of Canada: see Patterson Dental Canada Inc. v. Canada 2020 FCA 40.
Why did the Federal Court of Appeal rule against Patterson?
Basically, the way that the Excise Tax Act works is that every recipient of a “taxable supply” made in Canada MUST pay GST based on the value of what they paid for the “supply”. Here, “supply” means the provisions of property or service and “taxable supply” means a supply made in the course of a commercial activity.
Now, it’s common ground that the sale of anesthetic solutions IS A TAXABLE supply so GST IS APPLICABLE. The only exception to that rule is if the particular supply QUALIFIES as one of the zero-rated supplies listed in Schedule VI of the Excise Tax Act. If you look at Schedule VI, it specifically says that “Epinephrine and its salts” are zero-rated. That’s why Patterson Dental was arguing that it shouldn’t have had to charge, collect and remit GST on the sale of anesthetics to dentists.
But the Courts examined the caselaw and noted that a zero-rated element (such as EPINEPHRINE) must be the PRINCIPAL ELEMENT in the single supply if the supply is to be zero-rated. So was epinephrine the principal element in anesthetics? Simple put: No. Once again, the anesthetic and not epinephrine is the principal element in anesthetic solutions.
Per the Federal Court of Appeal:
