DR H Hoyle Campbell v. Her Majesty the Queen, [1974] CTC 783, 74 DTC 6598

Heald, J:—This is an appeal from the reassessment by the Minister of National Revenue of the plaintiff’s income tax returns for the taxation years 1967, 1968 and 1969. The Minister added to the plaintiff’s net income the following amounts as “Professional Fee Income”:

The main issue in the appeal is the propriety of adding such amounts to the plaintiff’s net income for the taxation years in question.

The plaintiff is a medical doctor duly licensed to practise medicine and is a specialist in plastic surgery. He graduated in 1936 from the University of Toronto Medical School. Thereafter, and until 1939, he was engaged in post-graduate work specializing in reconstructive surgery. In 1939 he joined the armed forces, being attached to both the British and Canadian Army as a plastic surgeon. He returned from overseas in 1945 and until 1949 was engaged as a full-time surgeon at the Christie Street Hospital in Toronto. During that period, he was a full-time salaried employee of the Department of Veterans Affairs. During the period from 1949 to 1956 he was in private practice in Toronto, spending a portion of his time as a part-time specialist in plastic surgery at Sunnybrook Veterans Hospital in Toronto. He testified in evidence that, in the early 1950’s, based partly on his wartime experience and partly on his private practice experience in Toronto, he began to realize that many surgical patients were remaining in hospitals for much longer periods of time than was necessary. It was his opinion, based on his own experiences, that by reducing the number of postoperative days in hospital and by substituting therefor post-operative care on an out-patient basis, the escalating costs for health care services could be dramatically reduced. He said that he had discussions with a number of other individuals in the health care field which served to confirm his own views. As a result, he decided to “pioneer” his ideas by establishing his own private hospital where he could put these ideas into practice. Thus it was that in 1954 he consulted his solicitor who advised him to incorporate a company to operate said private hospital. The company was incorporated on March 25, 1954 as Campbell Hospitals Limited (hereafter the Hospital Company). The plaintiff has at all times beneficially owned all the issued shares of said company. The purposes and objects of the company, are, inter alia, as follows:

(a) To establish, equip, maintain, operate and conduct private hospitals and other institutions for the medical and surgical treatment of persons requiring the same who shall be admitted thereto;

(b) To hire, engage or otherwise secure the services of licensed medical and surgical practitioners, scientists, nurses, technologists or other persons for the promotion and carrying out of the objects of the Company; . . .

Finally, in 1956, the Hospital Company was ready to begin operating a private hospital on Victoria Street in Toronto and on August 14, 1956 applied for a licence from the Department of Health of the Province of Ontario. Said licence was duly issued and has been duly issued for each of the years since 1956. Said licences issued by the Ontario Hospital Services Commission empowered the Hospital Company to operate a surgical hospital under the name of “Institute of Traumatic, Plastic and Restorative Surgery” (hereafter called the Institute) in Toronto, said hospital not to accommodate more than four adult patients and to be restricted to traumatic, plastic and restorative surgery. The plaintiff, in describing the hospital operation, said that it has both outpatient and in-patient facilities, a recovery room, laboratory facilities, examining rooms and doctors’ offices. He said the hospital staff approximated 15 to 18 persons through the years, consisting of nurses, nurses aides, secretary, bookkeeper, medical records librarian, various service and repair personnel and doctors. The plaintiff testified that the hospital operation was successful, certainly from the point of view of shortening the length of patient stay in the hospital. In 1959 the plaintiff wrote an article for a publication known as Hospital Administration and Construction. The article was entitled “Can We Reduce the Cost of Patient Illness?” In the article the plaintiff expresses his views thereon and relates the experience of his own hospital in Toronto where the per-patient illness cost was reduced by substantially shortening the duration of the patient’s stay in hospital.

During each of the taxation years here under review, the Hospital Company entered into a contract with the Hospital Services Commission of Ontario whereunder the hospital was an approved carrier for insured services under the Province of Ontario Plan of Hospital Care Insurance. Said contract provides in paragraphs 4 and 6 thereof as follows:

(4) The Corporation and its hospital shall render at the said hospital adequate hospital, nursing and medical care and treatment and shall adhere to such reasonable standards of hospital, nursing and medical care and treatment as may be required by the Commission from time to time.

(6) The Corporation and its hospital shall maintain at the said hospital such staff as may be required by the Commission for the purpose of rendering adequate medical care and treatment to its patients.

The plaintiff said that from the outset full-time surgeons and nurses were employed by the Hospital Company. Commencing in 1956 and continuing until the present, the Hospital Company has employed the plaintiff and Dr Charles S Kilgour on staff as full-time surgeons on a salaried basis. The plaintiff’s contract of employment with the Hospital Company is dated March 31, 1956, while Dr Kilgour’s contract is dated June 30, 1956. Other surgeons have also been employed from time to time, on a full-time salaried basis. Another doctor, Dr E Mitchell Tanz, has been associated with the hospital since 1956 but on a different basis from that of the plaintiff and Dr Kilgour. Both the plaintiff and Dr Kilgour receive an annual salary from the Hospital Company payable in monthly instalments. There is, in both employment contracts, provision for payment of annual bonuses as the directors of the Hospital Company may, from time to time, determine. The Hospital Company rented its equipment including automobiles, office equipment and supplies, surgical equipment, etc from a company, also incorporated in 1954 and known as Independent Management and Services Limited (hereafter the Management Company). The shares in the Management Company have, at all relevant times, been beneficially owned 2/3 by the plaintiff and 1/3 by Dr Kilgour. The amount paid by the Hospital Company to the Management Company for management, office and hospital services during each of the years under review was in the order of approximately $54,000. In turn, the Management company paid the plaintiff during each of said years a salary of $5,000 for his efforts in administering the business of the Management Company. The Management Company’s only source of income and only business purpose was the management of the Hospital Company. As of March 31, 1969 the Management Company had retained earnings of some $100,000.

The Hospital Company billed the patients for both hospital services and the medical services performed by its salaried doctor employees. With the advent of provincial government hospital and medical insurance, a large portion of the Hospital Company’s accounts were paid by these plans. Government regulations required that the in-patient hospital services portion be billed for separately to the Ontario Hospital Services Commission whereas the medical or surgical portion covering the doctors’ services had to be billed to OHIP (or its predecessor— Ontario Medical Services Insurance Plan) in the name of the individual doctor who performed the medical services. The Hospital Company received payments directly from the Ontario Hospital Services Commission for the hospital or non-medical component. OHIP paid the medical component directly to the doctor performing the service. Both the plaintiff and Dr Kilgour endorsed all of these cheques over to the Hospital Company. In the case of services performed for non-insured patients, such as transients from outside Ontario and non-insured services (aesthetic plastic surgery, for example) performed for insured patients, one bill was sent covering both medical and non-medical components. All of these receipts of income by the Hospital Company were included for income tax purposes in the income of the Hospital Company. Thus, the Hospital Company was in receipt during the years under review of revenues generated by medical and surgical services performed by the plaintiff and Dr Kilgour. The amounts so generated by the medical services performed by the plaintiff during the years under review are the amounts totalling $86,492 referred to at the outset of these reasons. The defendant takes the position that said moneys should have been included as “Professional Fee Income” to the plaintiff on the plaintiff’s tax returns rather than being included as income to the Hospital Company on its income tax returns.

The defendant asserts that the plaintiff carried on the practice of medicine in the years under review and that all amounts earned by the plaintiff for the practice of medicine and received on his behalf by the Hospital Company should have been included in computing the plaintiff’s profit from carrying on the practice of medicine. In the alternative, the defendant pleads that, if the Hospital Company received any income earned by the plaintiff, that said income constituted a payment or transfer of property made pursuant to the direction of, or with the concurrence of, the plaintiff, within the meaning of subsection 16(1) of the Income Tax Act* [1] and should therefore be included in computing the plaintiff’s income.

In the further alternative, the defendant pleads that if the plaintiff transferred to the Hospital Company (a company with which he was not dealing at arm’s length) the right to any amount, such amount was one that would, if the right thereto had not been transferred, have been included in computing the plaintiff’s income under the provisions of section 23 of the Income Tax Act.t [2]

On the other hand, the plaintiff relying on the contract of employment between the Hospital Company and the plaintiff says that the plaintiff, at no time during the period under review carried on the practice of medicine or rendered medical services or advice on his own behalf or on behalf of anyone else other than the Hospital Company. The plaintiff further submits that the fees and charges added by the Minister to the plaintiff’s net income were for medical services rendered by the Hospital Company to its patients in the normal course of its business as a private specialty surgical hospital and as such, said fees and charges for such services were income of the Hospital Company and not income of the plaintiff.

In his submissions plaintiff’s counsel relied on the decision of Cat- tanach, J in Sazio v MNR, [1968] CTC 579; 69 DTC 5001. In that case, the appellant, a coach of a football club, formed a corporation to carry out said coaching duties along with other activities in which he was engaged. The football club entered into a contract with the corporation for coaching services and the appellant, in turn, undertook to make his coaching services available exclusively to the corporation to enable it to carry out its contract with the club. The amount paid by the club to the corporation for coaching services was $22,000 annually whereas the appellant drew a salary from the corporation of only $6,000 annually. The Minister sought to disregard the existence of the corporation and to consider the appellant as an employee of the club and to be taxable on the entire $22,000. The Minister in that case, as in the case at bar, relied on sections 16 and 23 of the Income Tax Act (supra). Mr Justice Cattanach, in allowing the appellant’s appeal, held, on the facts in that case, that the corporation was not a “mere sham, simulacrum or cloak” and was fully competent to engage in football coaching activities in the manner it did; that the agreements between the appellant, the corporation and the club were bona fide commercial transactions and in fact governed and determined the relationship between the parties.

However, on page 587 [5006] of his judgment in the Sazio case (supra) Mr Justice Cattanach had this to say:

There is no doubt whatsoever that the Company is a properly constituted legal entity and that the Company could legitimately carry on the objects for which it was incorporated. Any person rendering services may incorporate a company to render those services provided there is no prohibition of those services being performed by a corporation rather than a natural person.

An example of such a prohibition occurred in Kindree v MNR, [1965] 1 Ex CR 305; [1964] CTC 386, where I expressed the view that the practice of medicine could only be carried on by a natural person which conclusion followed from the general tenor of the Medical Act and the code of ethics of the medical profession. I also intimated that a clause in the objects of the company insofar as it purported to authorize the company to conduct the practice of medicine must be ineffective.

In this case there is no such prohibition as was present i the Kindree case.

It is thus instructive to consider the case of Kindree v MNR, [1965] 1 Ex CR 305; [1964] CTC 386; 64 DTC 5248, since it deals also with the income of a doctor. In that case, the appellant incorporated a company which employed the appellant as a doctor and appellant’s wife as a nurse. The company also employed other doctors who assisted the appellant in the practice of medicine.. The evidence established that there was no real change in the manner in which the appellant’s practice was conducted after the incorporation of the company from the manner in which it was conducted prior thereto insofar as the supplying of medical attention to patients was concerned. The Minister added to the appellant’s personal income, that portion of the income credited to the company which exceeded the amount paid to the doctors by the company by way of salary on the ground that such revenue represented income of the appellant and not of the company. Cattanach, J upheld the Minister’s assessment and dismissed the appeal. The ratio of the judgment is contained on pages 311 and 312 [390-1, 5251] and reads as follows:

In my view there is no- doubt whatsoever that the practice of medicine can only be carried on by a natural person involving a personal responsibility to the patient and to the governing body of the profession, such conclusion being obvious from the general tenor of the Medical Act (supra) and the code of ethics of the medical profession to which the appellant subscribed. In so far as clause (b) of the objects of the Company purports to authorize the Company to conduct the practice of medicine it must be ineffective.

As indicated by the evidence, the incorporation of the Company did not alter in substance the conduct of the business. In my opinion the crucial test is whom the patients thought they were consulting and were in fact consulting. They had no knowledge, or any means of knowledge, of the Company until accounts were rendered to them in the name of the Company after treatment.

In my opinion, the appellant is precluded in fact and in law and as a matter of public policy from practising the profession of medicine in any of its forms as agent of a body corporate and the document purporting to be a contract of employment between the appellant and the Company, did not establish an employer-employee relationship. Similarly so the documents purporting to be contracts of employment between the other doctors and the Company did not establish an employer-employee relationship as between them and the Company, but rather such relationship subsisted between them and the appellant.

It is, therefore, my understanding of the facts that the monies received by the Company for services rendered by the appellant and the other doctors were fees already earned by him either personally or through the doctors employed by him and the Company was merely the assignee of these fees which the Company did not and could not earn and to which it had no right other than as assignee of the appellant’s earnings.

In my view, the essential facts in the case at bar are indistinguishable from those in the Kindree case (supra). Here also, the general tenor of The Medical Act* [1] makes it clear that the practice of medicine can only be carried on by a natural person involving a personal responsibility to the patient and to the governing body of the profession. Mr Justice Cattanach said that “... the crucial test is whom the patients thought they were consulting and were in fact consulting”. In the Kindree case (supra) the corporation rendered the accounts for medical services. In the case at bar the bills for the medical component of the total account were sent out on the letterhead of the plaintiff or Dr Kilgour. This factual difference makes it even clearer than in Kindree (supra) that the patients were consulting the plaintiff and not the Hospital Company and that the payments for such services were in fact payments to the plaintiff and not to the Hospital Company. This is confirmed by the fact that OHIP and the Ontario Workmen’s Compensation Board, in making payment for medical services rendered by the plaintiff, made the cheques payable to the plaintiff who, in turn, endorsed them over to the Hospital Company. Here, as in Kindree (supra), the Hospital Company is merely the assignee of the fees which the Hospital Company did not and could not earn and to which it had no right other than as assignee of the plaintiff’s earnings.

Plaintiff’s counsel endeavoured to distinguish the Kindree decision on the basis that in Kindree (supra) there was no other legitimate purpose for the incorporation and that the incorporation was only a transparent, albeit somewhat ingenious, device to divert a portion of the medical income to a corporation. Counsel submits that in the case at bar the Hospital Company was incorporated for the express and primary purpose of operating a private hospital and has done so for some 18 years and that this feature of the present case distinguishes it from the Kindree case (supra). It is true that the Hospital Company was in the business of operating a private hospital, which it was perfectly entitled to do. However, it also engaged -in other activities which it was not entitled to do—ie engage in the practice of the profession of medicine through its agents, the plaintiff and Dr Kilgour. In paragraph 1(c) of the plaintiff’s contract of employment with the Hospital Company, the plaintiff agreed to:

1. . . .

(c) keep a true record and account of all professional visits made, all patients attended and all other business done by him on. behalf of the Company and shall account for and pay to the Company all moneys received by him for work done by the Company. (Italics mine.)

From this clause (which also appears in Dr Kilgour’s contract) it is clear that the “work done by the Company” refers to the medical services performed by the plaintiff and that the Hospital Company is, in reality, endeavouring to practise medicine. Then, paragraph 5 of the said agreement contains the following:

5. Campbell agrees that during the continuance of his employment hereunder he will . . . practice medicine for the account and benefit of the Company.

(Dr Kilgour’s contract also contains this provision.)

Plaintiff’s counsel submitted that the Hospital Company, in hiring doctors, was only doing so in order to comply with the provisions of paragraphs 4 and 6 of its agreement with the Hospital Services Commission (Exhibit 1, Tab 5), which clauses required it to maintain adequate medical staff at the hospital. I do not read said paragraphs 4 and 6 to mean that the Hospital Company must have salaried medical employees. The requirement of said paragraphs is simply that adequate medical care must be available for the hospital’s patients. The hospital might have chosen other ways by which to comply with those requirements, eg, an arrangement whereby qualified doctors in private practice would make themselves available. It was not necessary for the Hospital Company to attempt to engage in the practice of medicine itself to fulfil the contractual obligations above mentioned.

Plaintiff’s counsel also submitted that the arrangement here was not any different than that commonly adopted by other hospitals, public and private, where there are full-time salaried medical doctors such as radiologists, anaesthetists, resident interns, etc, and that there is nothing illegal or improper about such a practice. Counsel submits that such a practice is permissible under The Private Hospitals Act of Ontario, RSO 1970, c 361, and in particular section 16 thereof which states:

16. No person shall be employed as an intern in a private hospital unless he is registered under The Medical Act.

It is counsel’s submission that, since said section 16 contemplates employment of an intern by a private hospital, such employment is thus permissible under said Act. I agree with his submission to the extent that, in my view, it is perfectly proper and legal for hospitals to engage salaried doctors to perform medical services in said hospitals so long as it is the doctors, and not the hospitals, that are practising medicine.

For the reasons above stated, on the particular facts of this case, it is my view that the Hospital Company was endeavouring to practise medicine which is prohibited under The Medical Act of Ontario.

I have accordingly concluded that the Minister was correct in adding to the plaintiff's net income the medical fees earned by the plaintiff and previously added to the Hospital Company’s income.

I have reached this conclusion cognizant of the fact that, in so finding, I am denying to this plaintiff, because he is a professional man whose professional Act prohibits a corporation from practising medicine, the tax advantage available, through incorporation, to most businessmen and to members of some other professions. I am aware of the views of some editorial writers and tax experts to the effect that taxation should be neutral as between different forms of doing business and making profits. However, as has been said many times, it is the function of the court to interpret the law as it is, and not as it might or should be.

At the commencement of the trial, both counsel agreed that if the plaintiff’s appeal was dismissed on the question of principle, the assessments herein should be referred back to the Minister for reconsideration and final determination on the question of quantum of the amounts to be finally added to the plaintiff’s income for the taxation years under review. I so direct.

After such reconsideration the matter may be spoken to further.