Riverfront Medical Evaluations Ltd. v. The Queen, docket 1999-4412-GST-G

Date: 20010608

Docket: 1999-4412-GST-G

BETWEEN:

RIVERFRONT MEDICAL EVALUATIONS LIMITED,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Bell, J.T.C.C.

ISSUE:

[1]            Whether the supply of independent medical evaluation reports ("IMEs") to insurance companies and lawyers for the period July 1, 1995 to January 31, 1998 is an exempt supply within the meaning of section 2 ("section 2") or section 5 ("section 5") of Part II of Schedule V of the Excise Tax Act ("Act") respecting Goods and Services Tax ("GST") and whether, if the supply is not exempt, the Appellant is liable for penalties imposed pursuant to section 280 of the Act.

[2]            The tests set forth in section 2 are:

(a)            whether the supply is a supply of an "institutional health care service",

(b)            whether the supply was made by the operator of a "health care facility", and

(c)            whether the supply was made to a patient of the facility.

[3]            The tests under section 5 are:

(a)            whether the supply was made by a "medical practitioner",

(b)            whether the supply was a supply of consultative, diagnostic, treatment or other health care service, and

(c)            whether the supply was rendered to an individual.

LEGISLATION:

[4]            By virtue of subsection 123(1) of the Act, an "exempt supply" is a supply included in Schedule V.

[5]            Section 2 reads as follows:

2.              A supply of an institutional health care service made by the operator of a health care facility to a patient or resident of the facility, but not including a service related to the provision of a surgical or dental service that is performed for cosmetic purposes and not for medical or reconstructive purposes.

[6]            Section 5 reads as follows:

5.              A supply made by a medical practitioner of a consultative, diagnostic, treatment or other health care service rendered to an individual (other than a surgical or dental service that is performed for cosmetic purposes and not for medical or reconstructive purposes).

[7]            The terms "institutional health care service", "health care facility" and "medical practitioner" as they appear in sections 2 and 5 above are defined in section 1 of Part II of Schedule V as follows:

1.              In this Part,

"institutional health care service"means any of the following when provided in a health care facility:

(a)           laboratory, radiological or other diagnostic services,

(b)           drugs, biologicals or related preparations when administered, or a medical or surgical prosthesis when installed, in the facility in conjunction with the supply of a service included in any of paragraphs (a) and (c) to (g),

(c)           the use of operating rooms, case rooms or anaesthetic facilities, including necessary equipment or supplies,

(d)           medical or surgical equipment or supplies

(i)            used by the operator of the facility in providing a service included in any of paragraphs (a) to (c) and (e) to (g), or

(ii)           supplied to a patient or resident of the facility otherwise than by way of sale,

(e)           the use of radiotherapy, physiotherapy or occupational therapy facilities,

(f)            accommodation,

(g)           meals (other than meals served in a restaurant, cafeteria or similar eating establishment), and

(h)           services rendered by persons who receive remuneration therefor from the operator of the facility.

"health care facility" means

(a)            a facility, or a part thereof, operated for the purpose of providing medical or hospital care, including acute, rehabilitative or chronic care,

(b)           a hospital or institution primarily for individuals with a mental health disability, or

(c)           a facility, or a part thereof, operated for the purpose of providing residents of the facility who have limited physical or mental capacity for self-supervision and self-care with

(i)            nursing and personal care under the direction or supervision of qualified medical and nursing care staff or other personal and supervisory care (other than domestic services of an ordinary household nature) according to the individual requirements of the residents,

(ii)           assistance with the activities of daily living and social, recreational and other related services to meet the psycho-social needs of the residents, and

(iii)          meals and accommodation.

"medical practitioner" means a person who is entitled under the laws of a province to practise the profession of medicine or dentistry.

FACTS:

[8]            The first witness, Dr. Harvey Lewis is a medical physician, resident in Toronto but not registered to practise medicine in the Province of Ontario. He was and is the sole shareholder and president of the Appellant. He described the Appellant's business as providing IMEs stating that such evaluation was an examination by a physician consisting of a review of records, careful history, physical examination, review of x-rays and laboratory data and the rendering of the diagnosis and prognosis and assessment of the degree of impairment, if any. He stated that this was performed not simply by a review of documents but by a physical examination of the person in the Appellant's premises.

[9]            He testified that he sought the most eminent and qualified practising specialists in the community. He stated that the notes that the physicians wrote for Riverfront after examining a patient were exactly what the physician would do when practising as a specialist in his own office. He said further that in the normal course of arriving at a medical opinion, a physician must go through various steps. He described those steps as being the same whether they were for the purpose of an IME for the Appellant or whether they were assessing a consultation or referral in their own private office. He said that they must review the health care records, take a careful history from the patient, perform a careful physical examination, review all appropriate laboratory and x-ray studies and arrive at a considered opinion followed by writing a report on their findings.

[10]          Dr. Lewis described them as "contract physicians" paid by the Appellant on an individual case basis.

[11]          He also described the premises where all such physicians performed IMEs. Those premises are contained in offices where the Appellant provides consultation rooms, examining rooms, transcription services, and all necessary equipment and paraphernalia to enable the examinations to be made. He described the premises as being larger than most doctors' offices. He stated that the premises also contained a waiting room, an administrative area, et cetera. He said further that prior to the physician seeing a patient, the physician normally obtained a copy of all of the medical records pertaining to that patient's health. The Appellant's administrative personnel prepared the patients' medical files. Dr. Lewis described a typical examination procedure. He said that after obtaining all of the various demographic information, the patient's height, weight, blood pressure, pulse and temperature were determined. The patient was then taken to a consultation room where the evaluation physician reviewed the previous medical information and took a careful history from the patient. The patient was then taken to the examining room and examined.

[12]          Dr. Lewis testified that the physicians were all "speciality" physicians who were able to "delve more in depth" into a particular problem than perhaps their family physician had done. He stated also that there was an x-ray department and a laboratory department in the building housing the Appellant's premises and that the Appellant's physicians would prepare requisitions for any additional testing required.

[13]          Dr. Lewis also said that the doctor/patient relationship was paramount and that it was normal for a specialist physician to make recommendations as to treatment. He said that the Appellant had its in-house transcriptionists typing medical reports which, when reviewed by the attending physician for errors or omissions, were sent to the insurance company requesting same. He said that the doctors' recommendations for treatment were usually discussed by the physician with the patient. He also said that this is normally the first time a patient has been seen by a speciality physician with the result that his advice frequently was of value in determining the subsequent course of treatment. He stated that the fact that the insurance company paid for the report had no effect on the primacy of the doctor/patient relationship. He also said that patients would have the normal right to file complaints, if any, with the College of Physicians and Surgeons.

[14]          In direct response to a question as to whether the doctors were employees, Dr. Lewis said:

No, they are independent contractors.

[15]          An exchange between Respondent's counsel and Dr. Lewis, on cross-examination, follows:

Q.             It was your view that Riverfront, which is a limited company, is a medical practitioner?

A.             No. It's the medical practitioners that work in our facility to examine patients, et cetera, et cetera and do a report.

[16]          Dr. Lewis was examined and cross-examined respecting a letter of January 23, 1991 from Coopers & Lybrand to the Appellant. That letter is produced in its entirety as follows:

January 23, 1991

Ms. Karen Lewis

Riverfront Medical Services Ltd.

123 Edward St.

Suite 808

Toronto, Ontario

M5G 1E2

Dear Ms. Lewis:

We have been asked to clarify the status of the following supplies with respect to Bill C-62 (the Goods and Services Tax);

i)               Services provided by doctors contracted by Riverfront Medical Services Ltd. in the rendering of diagnostic examinations to individual patients of the Riverfront Medical Clinic.

Analysis

Because these services are rendered to individuals, (regardless of who pays for them) they are exempt from G.S.T. under Schedule V, Part II, Section 5 of the legislation.

As a result, no G.S.T. will be payable to the practitioner of these services.

ii)              Services provided by Riverfront Medical Services Ltd. to insurance companies which are described as the procurement of the doctors services referred to in item i) including the administrative services to set up appointments, provide premises, contract doctors, remunerate doctors and provide required documentation of examination results.

Analysis

Technically, this service is not exempt from G.S.T. This is because the provision which could provide exemption (Schedule V, Part II, Section 2) applies only to institutional health care services supplied by the operator of a health care facility to patients of the facility. In your case, the service is supplied to insurance companies, even though patients are examined by the doctors.

However, Revenue Canada Excise has indicated to us verbally that they have adopted the administrative position that this supply would be exempted from GST under the second of the legislation referred to above. This interpretation was provided to us by both local Revenue Canada officials and senior officials in Ottawa. If this interpretation stands, the supply is exempt and Riverfront Medical Services Ltd. will not have to collect G.S.T. on its supplies of diagnostic medical services to insurance companies.

You should be aware that Revenue Canada has reversed verbal rulings in the past and the risk does exist that Riverfront Medical Services Ltd. could be held liable for G.S.T. on these supplies which may not be collectible from clients after the fact. This risk would be mitigated to some degree by the input tax credits which would become available on taxable inputs in the event that the law was retroactively applied in the strictest sense at a later date.

For further certainty, we have requested that Revenue Canada provide us with a written advance ruling regarding this issue to lend further comfort to the verbal interpretation which we have received.

Yours very truly,

"Coopers & Lybrand"

I.H. Mida

/bs/jbo

[17]          Respondent's counsel, on cross-examination of Dr. Lewis, asked a number of questions about his reliance on the Coopers & Lybrand letter. He said:

Well, I think in my mind the significance of the letter was clarified by the conclusion. It answered the question that I had asked, to me, quite clearly.

[18]          Dr. Lewis testified that, with respect to i) no GST was paid with respect to any payments made to the practitioners by the Appellant.

[19]          With respect to ii) the following exchange occurred.

Q.             And the first sentence under "analysis" states:

                "Technically, this service is not exempt from GST"

A.             Correct.

Q.             And at the time were you aware that it was their opinion that technically, whatever that means, this service was not exempt from GST?

A.             That's what it says.

Q.             That's what it says, but were you aware of that?

A.             Yes.

Q.             Yes.

[20]          Respondent's counsel then referred to the first full paragraph on the second page of the letter. In response to a question as to whether there was a possibility that that particular interpretation might not "stand", Dr. Lewis said that he was aware of that and

... it seemed quite clear to me and I accepted the fact that they were telling me that we were not liable for GST.

[21]          With respect to the third paragraph, Dr. Lewis said that he read and understood it. He also said that he understood the risk to be the possibility that Revenue Canada would reverse its rulings and make the evaluations subject to GST. The following exchange concluded the cross-examination on the Coopers & Lybrand letter:

Q.             And that you may not be able to collect the GST from clients after the fact?

A.             That's what it says.

Q.             That's right.

And it says;

"This risk would be mitigated to some degree by the input tax credits which would become available on taxable inputs ..."

Are you familiar with the concept of input tax credits?

A.             No.

Q.             And then the last paragraph says:

"For further certainty, we have requested that Revenue Canada provide us with a written advance ruling regarding this issue to lend further comfort to the verbal interpretation which we have received."

And were you aware of that when you received this letter?

A.             Yes sir.

Q.             And did Riverfront ever receive such a ruling?

A.             No sir.

Q.             Did you ever enquire of these accountants as to what happened to that request for a ruling?

A.             I don't believe that I did.

Q.             Did the accountants ever come to you and tell you what happened about this request for a ruling?

A.             No, they didn't.

Q.             For how long was Cooper & Lybrand the accountants for Riverfront?

A.             Probably several years after this.

Q.             And this subject just never came up again?

A.             No sir.

Q.             So you never discussed the subject of GST with them after this time?

A.             That is correct.

Q.             And I take it then that you were then willing to run the risk of Revenue's position being other than what you were advised; would that be correct?

A.             I did not consider it to be a risk.

Q.             Even though you were advised by Coopers & Lybrand that there might be a risk?

A.             There's usually a disclaimer in most letters from accountants and/or attorneys.

Q.             And you simply discounted the risk to Riverfront.

A.             Yes.

[22]          Dr. John Russell Carlisle, a physician and lawyer, the deputy registrar of the College of Physician and Surgeons of Ontario was produced by Appellant's counsel as a witness. He was qualified as an expert witness to assist the Court with respect to some of the issues that arise regarding independent medical evaluations in the area of the practice of medicine and the rights, duties and responsibilities of physicians performing IMEs in Ontario. He explained the physician/patient relationship saying that the patient's choice of doctor was irrelevant and that the existence of a contract with a third party was irrelevant, that the kind of facility the examination was being conducted in was irrelevant and that the physician owed paramount duty to the patient.

[23]          Dr. Carlisle agreed with the evidence that the commencement of a doctor's examination of an individual creates a physician/patient relationship and in all such circumstances the same professional and ethical considerations apply. He also stated that the steps taken in performing an IME would be very much the same as those performed in a normal examination by a specialist. He also said that the examining physician's standard of skill required was not affected by a third party request for an examination, that his ethical standards were not thereby affected and that his obligation of fully, thoroughly and accurately diagnosing and making recommendations of treatment was not so affected. He also said that doctors have a responsibility to record the opinions or conclusions that they arrive at with respect to patients.

[24]          Excerpts from the examination for discovery of Mr. G.S. Dobson ("Dobson"), an Agency representative confirmed that the Agency had no dispute about the services provided by the medical practitioners involving the use of case rooms, including necessary equipment and supplies. The following are extracts from that examination for discovery:

Q.             And my question is: is there any dispute that if diagnosis and recommendations for treatment are, in fact, being provided, that that, in the view of the Agency, would constitute medical care?

A.             Just in terms of that question I would suppose, yes, there would be some medical care provided, yes.

Dobson also agreed that the Appellant had six doctors' offices and six case and examining rooms.

SUBMISSIONS BY APPELLANT AND RESPONDENT:

[25]          The Respondent, in support of its assessment, took the position that the Appellant provided no "institutional health care service" and did not operate a health care facility. The Respondent says, on the contrary, the Appellant supplied reports to the insurer or lawyer requesting same and provided nothing "to a patient ... of the facility".

[26]          The Appellant submitted that the persons attending the facility for examination and assessment had a physician/patient relationship and were supplied with an "institutional health care service" made, in effect, by the Appellant through the physicians which it engaged as independent contractors for the purposes of such examination and assessment. The Appellant says further that the Appellant operated a "health care facility" providing an institutional health care service to a patient of that facility.

ANALYSIS AND CONCLUSION:

[27]          Firstly, I must determine whether the person being examined by a physician on the Appellant's premises was a "patient" of that facility. There can be no doubt about that person being a patient within the description by Dr. Carlisle of the paramountcy of a physician/patient relationship. The patient is obviously a patient of the examining physician. The words in section 2, namely "a patient or resident of the facility" are puzzling. There is little, if any, difficulty comprehending the phrase "resident of the facility". It connotes someone living in an institution where care is provided. But what of the phrase "patient ... of the facility"? In usage, a patient of a physician practising in a clinic is regarded as a patient of that clinic. It is possible that both that physician and that clinic could be liable in a negligence action commenced by a patient. Such usage obviously extends to the Appellant. The phrase would have been clearer had it read:

A patient at or resident of the facility.

[28]          I now turn to whether there was a supply of an "institutional health care service". The evidence is clear that the following components of "institutional health care service" existed in the Appellant's case, namely:

                from paragraph (a), diagnostic services were provided;

from paragraph (c), the use of case rooms including necessary equipment or supplies was provided;

from paragraph (h) services were rendered by physicians who received remuneration therefor from the operator of the facility, namely, the Appellant.

[29]          Any one of those components would constitute an institutional health care service if it was "provided" in a health care facility. The question of whether the Appellant is a health care facility involves a determination of the meaning of "medical ... care" as found in paragraph (a) of the definition of "health care facility". Assistance in this regard is found in d'Abrumenil v. Commissioners of Customs & Excise (16 March 1999), VAT and Duties Tribunals (U.K.), Lexis: England and Wales Reported and Unreported Tax Cases Online. A discussion of the nature of medical care reads as follows:

... in my judgment the core meaning is the provision of services in a doctor/patient relationship directed in general to the physical and mental health of that person ...

...

To equate care with treatment would be to restrict its meaning and in a way for which no justification is to be found in the wording of the provision. In my opinion, a doctor is obviously providing care, for example, whether with his advice he prescribes some antibiotic or other medicine, which one would suppose is the result of most visits to a GP's surgery, or does no more than give health advice. A doctor is clearly providing care, in my view, to the person who comes to him for a health check including where it is arranged and paid for by his employer. Who arranges and pays for it is in this context immaterial.

[30]          The issue in the d'Abrumenil case was the extent to which the supplies made by the Appellant were exempt supplies of "medical care". Dr. d'Abrumenil, a qualified general medical practitioner, formed a limited company to carry on the business of providing medico-legal services. Two of the main types of services provided by the limited company were conducting medical examinations for insurers and preparing expert medical reports for personal injury cases.

[31]          The relevant VAT exemption provision read:

... the provision of medical care in the exercise of the medical and paramedical professions ...

[32]          It was conceded by the Commissioners of Customs and Excise that the services of preparing expert medical reports for a personal injury cases were exempt. Although the Chairman found that the services of conducting medical examinations for insurers did not involve care or treatment of the medical conditions of the person examined, he found that these types of services, provided by the limited company, are medical care for the following reasons:

... it does not really make sense to say that when a person submits to an examination by a doctor and/or a consultation by a doctor for advice to be given as to his physical or mental health that is not a provision of medical care in the exercise of the doctor's profession and within the broad meaning of that expression. It is particularly hard to see an invasive procedure requiring to be carried out by a doctor (or someone with appropriate medical qualifications) as not being the provision of care because of the reason why the procedure is undergone. If one views the nature of what is happening objectively, as in my judgment one must, it is not material that the direct beneficiary of the advice may not be the individual examined but a prospective employer or insurer.

[33]          Dr. Carlisle, in describing the physicians giving reports for determining whether patients were eligible for government assistance or insurance benefits or for employment said:

And the examination and the process which takes place to form and give that opinion is the same process if they came with an illness and we had to find out why they were not feeling well, what was wrong with them and what needed to be done about it.

[34]          He also responded affirmatively to the following question:

And in terms of the purpose of the physician in conducting the examination of the patient, is the purpose of the physician the same, to diagnose, evaluate, etc.?

[35]          Accordingly, I conclude that medical care is provided at the facility.

[36]          I must now determine whether the Appellant operated a "health care facility" for the purpose of providing medical care. Performing IMEs was the Appellant's only source of income. Having established that performing IMEs was medical care, it follows that the Appellant operated its facility for the purpose of providing medical care. I conclude, therefore, that it operated a "health care facility". The Appellant operated that facility, inter alia, through the physicians which it contracted to perform medical care services on its behalf.

[37]          Therefore, I conclude that the Appellant falls within the exemption outlined in Schedule V, Part II, section 2 which, repeated for ease of reference, reads as follows:

2.              A supply of an institutional health care service made by the operator of a health care facility to a patient or resident of the facility, ...[1]

[38]          The Appellant's counsel also submitted that the Appellant would qualify for exemption under section 5. Having concluded that the Appellant is exempt under section 2, there is no need to analyze those submissions.

[39]          Finally, although I have set forth facts in respect of the Appellant's potential liability for penalties as assessed, I need not consider that issue in view of my finding of exemption from tax. Obviously, the penalty will be deleted.

[40]          The appeal will be allowed with costs to the Appellant.

Signed at Ottawa, Canada this 8^th day of June, 2001.

"R.D. Bell"

J.T.C.C.

COURT FILE NO.:                                                 1999-4412(GST)G

STYLE OF CAUSE:                                               Riverfront Medical Evaluations Limited

                                                                                                v. Her Majesty the Queen

PLACE OF HEARING:                                         Toronto, Ontario

DATE OF HEARING:                                           March 21, 2001

REASONS FOR JUDGMENT BY:      The Honourable Judge R.D. Bell

DATE OF JUDGMENT:                                       June 8, 2001

APPEARANCES:

Counsel for the Appellant: Susan L. Van Der Hout

                                                                                Sean Aylward

Counsel for the Respondent:              Harry Erlichman

                                                                                Michael Ezri

COUNSEL OF RECORD:

For the Appellant:                

Name:                      Susan L. Van Der Hout

Firm:                        Osler, Hoskin & Harcourt

                                                                                                Toronto, Ontario

For the Respondent:                             Morris Rosenberg

                                                                                Deputy Attorney General of Canada

                                                                                                Ottawa, Canada

1999-4412(GST)G

BETWEEN:

RIVERFRONT MEDICAL EVALUATIONS LIMITED,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Appeal heard on March 21, 2001 at Toronto, Ontario by

the Honourable Judge R.D. Bell

Appearances

Counsel for the Appellant:                    Susan L. Van Der Hout

                                                          Sean Aylward

Counsel for the Respondent:                Harry Erlichman

JUDGMENT

          The appeal from the assessment made under the Excise Tax Act, notice of which is dated June 10, 1999 and bears number 05B 6418 is allowed, and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached Reasons for Judgment.

          Costs are awarded to the Appellant.

Signed at Ottawa, Canada this 8^th day of June, 2001.

"R.D. Bell"

J.T.C.C.

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