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Patterson Dental Loses Court Appeal (GST Anesthetics Case)

By May 5, 2020November 12th, 2020Practice Management

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:

25      Here, even though epinephrine is an important element in the appellant’s anesthetic solutions, it is not the main or predominant element. It is rather the local anesthetic that is the main element.
26      In cases of this nature, useful guidance was given by the English Court of Appeal in Scott v. Customs & Excise Commissioners, [1978] S.T.C. 191 (Eng. Q.B.) (“Scott“), cited with approval by the Tax Court in O.A. Brown Ltd. v. R., [1995] G.S.T.C. 40 (T.C.C.), the relevant passages in which, in turn, were cited with approval by this Court in Hidden Valley Golf Resort Assn. v. R. 257 N.R 164 (Fed. C.A.). In Scott, Chief Justice Widgery noted at page 195 that determining whether there is a single non-taxable supply should not be an overly legalistic inquiry but rather “should be [determined] by a little common sense and concern for what is done in real life…”.
27      In the instant case, both common sense and the expert evidence establish that the reason for administration of dental anesthetics – including those containing epinephrine – is pain control (Expert Report of Dr. Gino Gizzarelli, Hearing Exhibit A-3, Appeal Book Tab 12 at p 545; Expert Report of Dr. Pierre Beaulieu, Hearing Exhibit R-1, Appeal Book Tab 14 at. p 588; Expert Report of Eric Ormsby, Hearing Exhibit R-2, Appeal Book Tab 15 at p. 785; examination-in-chief and cross-examination of Dr. Gino Gizzarelli, Appeal Book Tab 8 at p. 96, 119-120; examination-in-chief of Dr. Pierre Beaulieu, Appeal Book Tab 8 at p. 136). Thus, the predominant element in the appellant’s epinephrine-containing anesthetic solutions is not epinephrine but rather the local anesthetic.
28      It therefore follows that the Tax Court did not err in finding that the appellant’s epinephrine-containing anesthetic solutions are subject to GST.
So now Patterson Dental either has to pay the $1.11-million in GST (plus interest and costs) or further appeal the decision to a higher court.