The CRA's New ITC Rules: What Dentists Need to Know (and How to Get Ready!)

Xponents CPA
Sep 6
3 min read

When it comes to taxes, the Canada Revenue Agency (CRA) has made some big changes over the years to keep up with the times. One of the latest—and most important for dental practitioners—relates to how Input Tax Credits (ITCs) are claimed.

The CRA’s ITC policy has evolved significantly, and a recent court case has reshaped the rules in a way that will directly affect dental practices across Canada. Let’s break down the history, the turning point case, and the new rules coming into effect.

The Good Old Days: Simplified ITC Estimation for Dental Practices

Back in 1991, the CRA reached an agreement with the Canadian Dental Association that allowed orthodontists and dentists offering orthodontic services to use a simplified estimation method. Instead of tracking every dollar spent, dentists could assume that up to 35% of their total orthodontic fees related to zero-rated orthodontic appliances (like braces).

This meant they could claim ITCs on that portion without detailed tracking. The system was simple and convenient, but it was also imprecise. Since the allocation was based on estimates, there was always a risk of over- or under-claiming ITCs, and it didn’t always reflect the true mix of exempt healthcare services and taxable supplies.

The Game Changer: The Davis Dentistry Case

The landscape shifted dramatically with the Davis Dentistry case at the Federal Court of Appeal.

Here’s what happened:

The dental practice in question charged patients a single “bundled” fee that covered both orthodontic treatment (an exempt service) and orthodontic appliances like braces (a zero-rated supply).
The CRA argued that most of the fee should be treated as exempt healthcare, with only a small portion eligible for ITCs.
The taxpayer countered that a significant part of the fee was attributable to the appliances, meaning more ITCs should be available.

The Court ultimately decided that the old 35% flat-rate method was not sufficiently accurate. Instead, it emphasized that dental practices need to use a method that reasonably reflects the actual portion of expenses related to taxable (zero-rated) vs. exempt services. In other words, ITC claims should be tied to direct evidence and proper allocation, not blanket estimates.

Out with the Old, In with the New

Old Method (1991–2024):

Flat-rate estimate (up to 35% of orthodontic fees).
Easy compliance, little record-keeping.
Risk of mismatch between actual taxable vs. exempt supplies.

New Method (effective Jan 1, 2025):

No more blanket percentages.
Dentists must allocate expenses based on actual usage and evidence.
ITCs only available where costs clearly relate to taxable (zero-rated) appliances or supplies.
Requires stronger bookkeeping and documentation.

The court’s ruling effectively pushed the CRA to modernize its policy, and starting in 2025, the simplified estimation method will no longer apply.

What This Means for Dentists

For dental practitioners, the new rules mean the end of easy approximations. Going forward:

You’ll need to track expenses more carefully to identify which relate to exempt services (no ITCs) and which relate to taxable supplies (ITCs allowed).
Bundled billing for orthodontics will need a reasonable, supportable allocation between services and appliances.
Record-keeping becomes crucial—detailed invoices, receipts, and cost allocations will protect your claims if the CRA comes knocking.

While this adds some administrative work, it also creates a fairer, more accurate system for everyone.

Wrapping It Up: Navigating the New ITC Rules

The CRA’s move away from simplified estimates is all about accuracy and fairness. Dental practitioners must now ensure ITCs are directly tied to the taxable parts of their practices. With strong bookkeeping systems and proper allocation methods in place, the transition can be smooth.

Get Help Before the Rules Kick In

At Xponents CPA, we specialize in helping healthcare professionals like dentists stay compliant while maximizing their tax efficiency. Our team can: