Compliance Challenges With New Naturopathic & Acupuncture GST/HST Exemptions

Published by Thorsteinssons LLP

In a case of what could be considered “good news/bad news,” certain naturopathic and acupuncturist services became GST/HST-exempt effective February 12, 2014. The Canada Revenue Agency (“CRA”) recently released its administrative interpretation of these new exemptions (see Technical Information Bulletin TIB B-109, July 2015). This interpretation and some implications of the exemptions are discussed below.

Acupuncturist and naturopathic services are now GST/HST-exempt if they meet the following criteria:

  1. They are acupuncturist or naturopathic services in nature;
  2. They are rendered to an individual by a licenced acupuncturist or licenced naturopathic doctor (or person with equivalent qualifications in provinces where licensing is not required); and
  3. They are provided for the purpose of health care purposes and not for cosmetic purposes.

As a result, acupuncturists and naturopathic doctors (collectively, “Practitioners”) are no longer required to charge on such services. While welcome news for patients, the exemptions create a number of compliance challenges which Practitioners and their advisors should be aware of. To begin with, it becomes necessary to review the Practitioner’s business to determine which activities are now exempt and which remain taxable. This may not always be straightforward. For example, CRA does not consider acupuncturist or naturopathic assessments to be exempt if they are undertaken to provide information to an insurance company or lawyer. Moreover, if a Practitioner’s service includes related activities (such as product sales) or involves other health professionals, it may be necessary to determine whether the Practitioner is making a single exempt supply or multiple supplies with potentially different GST/HST treatments. Practitioners who incorrectly charge GST/HST on exempt supplies are required to remit such amounts to CRA. If they choose to, they may refund their customers and claim a corresponding adjustment in their tax return. Alternatively, customers can apply to CRA for a rebate.

Another key consequence of the new exemptions is that they limit the ability of Practitioners to claim input tax credits (“ITCs”) for GST/HST paid on expenses such as rent, utilities, consumables, and equipment. Previously, Practitioners who are GST/HST-registered could claim full ITCs on expenses used to supply acupuncturist and naturopathic services. Now, they can no longer claim ITCs for expenses related to such services exempt under the new rules, and must apportion ITCs based on the use of their expenses in exempt supplies and taxable supplies (e.g., separate sales of supplements, natural health products, books). A range of potential allocation methods exist (e.g., floor space, revenue) and they are frequently an area of controversy in audits, especially with regards to the treatment of common space.

Perhaps the least intuitive consequence of the exemptions is the potential requirement for Practitioners to self-assess (i.e., self-report and pay) GST/HST on capital personal property and capital real property acquired prior to the new exemptions coming into effect. For example, a Practitioner who purchased a treatment/examination table (assuming it is capital property for income tax purposes) prior to February 12, 2014 may be required to self-assess GST/HST when they use the table primarily to make exempt supplies under the new exemptions. Similar self-assessment may be required with respect to capital real property to the extent that use of the real property in making exempt supplies exceeds 10%. For example, a Practitioner who purchased a clinic prior to February 12, 2014 may be required to self-assess when and to the extent they use the clinic to make exempt supplies (if that use exceeds 10%). Given the high costs typically associated with real property, the self-assessed GST/HST could be significant.