Citation: 2007 FCA 74
CORAM: DÉCARY J.A.
HER MAJESTY THE QUEEN
1524994 ONTARIO LIMITED
REASONS FOR JUDGMENT
 In the late 1990s, audiology services were insurable in Ontario under very strict guidelines. The respondent in this case is a health clinic that used an agreement with certain doctors to get around the requirements of the Ontario Health Insurance Plan (OHIP). By all indications the contracting parties benefited greatly from the contractual arrangement. Now, faced with a request by the Minister of National Revenue to collect and remit GST payable under that agreement, the respondent health clinic says that the agreement was never intended to be what it said it was. The clinic asserts that the contract it held out to the provincial government as valid, and under which OHIP fees were collected, is now unenforceable in these proceedings involving the Minister. The Tax Court agreed (2006 TCC 87). This Court does not.
 Counsel for both sides concede that this Court should allow the appeal if the agreement is found to be legally binding. Also, it was not suggested by the respondent that there existed a further agreement between the parties which amended or re-characterized their contractual relationships.
 The respondent corporation carries on business as an audiology clinic in Ontario. The controlling shareholder of the respondent is Brian Field, a licensed audiologist in the Province of Ontario. The clinic employs Mr. Field as the audiologist and provides services through him to patients, most of whom were referred by medical practitioners.
 At all material times, the Ontario Health Insurance Plan provided coverage to patients for hearing tests and audiological services only if required by and performed under the supervision of medical doctors. Accordingly, the services received by patients at the clinic would not be covered by OHIP nor could the respondent bill OHIP.
 On November 11, 1989, the respondent clinic and Mr. Field entered into an agreement with two doctors operating a family practice across the hallway. The agreement provided that:
1) The respondent would lease the premises used in connection with the operation of the clinic to Doctors Campbell and Rooney together with all equipment during the term of the agreement for the sum of $5,000 per month. This provision was later amended by changing the monthly fee to $6,000 and allocating the amount agreed to for these rentals to $1,000 for the premises and $5,000 for the rental of equipment.
2) Brian Field would be employed by Campbell and Rooney on a non-exclusive basis to provide the services of an Audiologist to the patients referred to the Clinic. Field’s salary would be $1,000 per month. Brian Field’s wage was later increased to $5,000 per month.
3) The respondent would operate and manage the clinic the Clinic including the maintenance of all business and patient records, patient scheduling, report preparations and general conduct of the management of the day to day affairs of the clinic. The respondent would prepare and submit all billings of the clinic for services covered by OHIP to Campbell and Rooney for their approval and submission to OHIP.
 The doctors would keep 10% of the OHIP fees in consideration of the consulting and administrative services provided by them. They would then deduct from the remaining 90% of the OHIP fees, Mr. Field’s salary and all employer and employee deductions, and the monthly rent. They would pay the remainder, if any, to the respondent as a consulting/management fee. In the event the OHIP billings in any particular month were not sufficient to pay the respondent’s rental fee after the deduction by the doctors of 10% of that month’s billings and of Field’s salary, then the rental agreement would abate by the amount of the shortfall.
 The agreement stated the basic criteria set by OHIP with respect to the payment of fees for audiological services and stipulated that the parties intended that their agreement comply with those provisions and be interpreted to give effect to this intention. The OHIP criteria state:
1) The audiologist performing the services for patients must be an employee of the physician;
2) The services performed by the audiologist must be performed in space and on equipment, either owned or leased by the physician;
3) The physician must be involved in establishing the criteria for the quality and nature of service provided to patients and further, must have a direct involvement for ensuring that the appropriate level of maintenance of equipment is completed on an ongoing and regular basis and that the record keeping with respect to patients meets the appropriate professional standard; and
4) The physician must be involved in the process of interpreting the results of the tests completed.
 Dr. Campbell and Dr. Rooney had billing numbers with the Ontario Health Insurance Plan. The trial judgment suggests that while the respondent provides the necessary data, it was Dr. Rooney’s office, and not the respondent clinic, that directly billed OHIP for the services provided by Mr. Field and his corporation. And evidently, Dr. Rooney did not have any concerns about the work the clinic did, the supervision the doctors provided, nor about the legitimacy of the OHIP claims made under his billing number.
 The sole issue before the Tax Court was whether the respondent provided the doctors with “supplies” of building and equipment rentals together with management services. Under the Excise Tax Act, these services are not exempt from GST.
 The Tax Court Judge found, essentially on the basis of the oral evidence tendered before him by the respondent, that the agreement did not reflect the true legal relationship between the parties. He also found that the agreement was not legally binding, the doctors never performed services for patients on the respondent’s premises, the doctors never leased equipment or premises from the respondent, and that Mr. Field was never an employee of the doctors. In the end, he concluded that there was no taxable supply by the respondent.
 To follow the Tax Court decision, one must ignore an agreement acted upon by all parties and from which all parties received considerable benefits; an agreement which was entered into with the clear intention of misrepresenting the true legal relationship between the parties. All of this was done so that they could extract OHIP payments which would not have been made had the true legal relationship been known. I have reached the conclusion that the Tax Court Judge erred in law in basing his decision on after-the-fact evidence of the parties’ intention to re-characterize an agreement, which was clear, complete, and so effective as between the parties that they had acted upon it to obtain substantial monetary benefits from OHIP.
 The Judge referred to Shell Canada Ltd. v. the Queen,  3 S.C.R. 622 and Singleton v. Canada,  2 S.C.R. 1046, for the proposition that the Court should determine the true legal relationship of the parties. It has indeed become trite law that “courts must be sensitive to the economic realities of a particular transaction, rather than being bound to what first appears to be its legal form” (Shell Canada, at paragraph 39). However, in the same decision McLachlin C.J. also recognized that the Supreme Court “…has never held that the economic realities of a situation can be used to recharacterize a taxpayer’s bona fide legal relationship.” and “[t]o the contrary, we have held that, absent…. a finding that they are a sham, the taxpayer’s legal relationship must be respected in tax cases. Recharacterization is only permissible if the label attached by the taxpayer to the particular transaction does not properly reflect its actual legal effect…” (paragraph 39).
 The problem for the respondent is that the agreement, as labelled for OHIP purposes, has actually received legal effect. The “economic realities of the situation” are that the agreement has been acted upon and that the parties have benefited from it. Counsel for the respondent could not refer to any authority to support his proposition that there can be two conflicting “true legal relationships” between parties. Parties cannot elect to have an agreement valid for OHIP purposes and claim its invalidity for GST purposes. The legal “form” having produced its desired effects, the economic realities of the situation are that the parties have been successful in arranging their affairs in such a way as to place themselves within the realm of OHIP and to benefit largely from the structure they have established.
 This is not a case of a taxpayer saying to the Minister: “this agreement says something it does not mean in reality”. It is a case of parties saying to the Minister: “this agreement says what it means in reality for a given purpose and at the same time says what it does not mean in reality for a different purpose”. In response to the taxpayer, the words of my colleague Linden J.A. in Friedberg v. Canada (1991), 92 DTC 6031 at 6032 (F.C.A.) are appropriate:
In tax law, form matters. A mere subjective intention, here as elsewhere in the tax field, is not by itself sufficient to alter the characterization of a transaction for tax purposes. If a taxpayer arranges his affairs in certain formal ways, enormous tax advantages can be obtained, even though the main reason for these arrangements may be to save tax (see The Queen v. Irving Oil 91 DTC 5106, per Mahoney, J.A.). If a taxpayer fails to take the correct formal steps, however, tax may have to be paid. If this were not so, Revenue Canada and the courts would be engaged in endless exercises to determine the true intentions behind certain transactions. Taxpayers and the Crown would seek to restructure dealings after the fact so as to take advantage of the tax law or to make taxpayers pay tax that they might otherwise not have to pay. While evidence of intention may be used by the Courts on occasion to clarify dealings, it is rarely determinative. In sum, evidence of subjective intention cannot be used to 'correct' documents which clearly point in a particular direction.
 The respondent’s position is on its face offensive. Counsel for the respondent conceded that the agreement was created for no other reason than to avoid provincial laws designed to regulate who receives health care fees. And now the respondent asks this Court to endorse that scheme by allowing it to repudiate a contract executed according to its terms, an agreement which was meant to circumvent—and did circumvent—the applicable law. To allow the respondent to defend itself in such a manner would allow a misrepresenting party to profit twice from its misdeed.
 It seems fairly clear that the law will not permit a party to defend a tax claim by asserting that it made an intentional misrepresentation to another (OHIP) from which it derived a benefit (OHIP fees). I agree with the Tax Court Judge who commented that the arrangement between the doctors and the respondent was “not praiseworthy”. Their agreement furthered a misrepresentation made to the province’s health insurance plan. I think it goes without saying that courts cannot be seen to promote these types of schemes.
 It is of interest to note that not only did the respondent act upon the agreement in its relations with OHIP, it also acted upon it in its relations with the Minister. Records and books were kept by the respondent’s bookkeepers who attempted to reflect the terms of the agreement. T4s were issued by the two doctors in respect of Mr. Field’s wages.
 The Tax Court also erred in finding, at paragraph 10, that the “doctors were in fact acting as the Appellant’s agents with respect to its dealings with OHIP”. An agent cannot have a legal capacity that exceeds that of the principal. A principal can only appoint an agent to make a contract which the principal himself has the capacity to make (see Haggstrom v. Dey (1965), 54 D.L.R. (2d) 29 (B.C.C.A.)). As the respondent clinic was not legally authorized to collect fees from OHIP, neither were its “agents”. There was in any event no evidence to support an agency agreement between the parties.
 Even though the argument was not raised before him, the Judge determined at paragraph 23 that there was no sham as all parties had made a disclosure to officers of OHIP before entering into the agreement. Perhaps this is true with respect to OHIP, but it can hardly be true as far as the Minister is concerned. However, whether the agreement might be a sham as described by Lord Diplock in Snook v. London & West Riding Investments, Ltd.,  1 All E.R. 518 at 528, or an “inverse sham”, to use the words of Robertson J.A. in Paxton v. Canada,  F.C.J. No. 1634 at para. 26, (1996), 97 D.T.C. 5012 (F.C.A.), is an issue which I do not need to decide. It was not argued below and it would at best support the conclusion I have reached through another route.
 In the end, I have reached the view that a person who creates a contractual fiction designed intentionally to misrepresent a legal relationship, and who takes advantage of it, cannot later invoke the true economic reality to avoid the tax disadvantages flowing from it. When a fairytale becomes the real world with respect to third parties for one purpose (OHIP), it remains the real world with respect to third parties for other purposes (the Minister). The Supreme Court of Canada has invited us to look at the real economic world when examining a transaction in the context of a tax assessment. Where a taxpayer has created a fiction and has lived by it, his fiction has become its real economic world, for better and for worse, plus GST.
 I would allow the appeal with costs here and below, set aside the decision of the Tax Court of Canada and affirm the assessment made under the Excise Tax Act.
John M. Evans J.A.”
B. Malone J.A.”