11725-1(sn)
TELEPHONE 954-8585
FACSIMILE 990-1233
XXXXX July 26, 1995
Dear XXXXX
Further to the July 22, 1992, memorandum of XXXXX wherein our comments were requested with respect to an agency agreement for medical practitioners and a subsequent telephone conversation of July 12, 1995, between Sara Nixon and XXXXX , we have now completed our review of the draft agreement provided. We apologize for the delay in our response. Our comments are possible as a result of our completion of our policy proposal on the "meaning of agency". The most recent draft version of that policy statement is now available on the database.
Background
1. The law firm of XXXXX has drafted an Agency Agreement ("the agreement") to be used by 3 doctors who operate independent practices through professional practice corporations out of the same premises and who wish to make arrangements to share some of their common costs. XXXXX has requested an interpretation of the application of GST to the agreement.
2. Since this agreement has been drafted within the laws of the province of XXXXX , the doctors who are parties to the agreement, are parties through their professional corporations rather than as individual practitioners. The three professional practice corporations are consistently referred to as the "Principals" throughout the agreement.
3. The Principals have appointed a limited company as their "Agent" to pay certain costs as set out in the agreement including all payroll and payroll related expenses.
4. The Agent has agreed to establish a joint employee remittance account, to remit all required payroll source deductions on a timely basis and to prepare all T4 Supplementary and Summary forms required.
5. It is a clause of the agreement that in all correspondence, cheques and documents, written disclosure that the Agent is "agent for PC1, PC2 and PC3", these being the three professional corporations owned by the doctors, is to be provided.
6. The Principals agree to reimburse the Agent for costs at the end of each month on the basis of a one-third contribution from each of the Principals except for those costs associated with the maintenance and operation of the operating room and x-ray facilities which costs will be reimbursed by the Principals at the end of each month on the basis of the number of patients treated that month by each Principal.
7. The Agent is required to maintain a separate bank account as agent for the Principals for the purpose of fulfilling its obligations under the agreement.
8. Pursuant to paragraph 5.2 of the agreement, the Agent is required to maintain its own bank account for the receipt of funds and payments of costs which are not covered by the Agreement.
9. The Principals and the Agent agree that the duties and obligations of the Agent will be carried out by the "Staff". The Principals and the Agent agree that the Staff are employed by the Principals and are paid by the Agent for and on behalf of the Principals.
10. The Principals agree to jointly and severally indemnify the Agent against all of the costs to be paid by the Agent, as set out under the agreement as well as all costs paid in relation to the maintenance and operation of the premises, all costs paid with respect to the hiring, employment and firing of the Staff, and all costs for office supplies necessary for the Agent to fulfill its obligations under the agreement.
11. The relationship between the Principals and the Agent is stated as being that of principal and agent only. The relationship among the Principals is that of independent parties who practice independently from the shared premises. The Principals specifically acknowledge in the agreement that they are not partners or joint venturers but are merely associated as independent parties for purposes relating the premises and the Staff.
Questions
1. A question has been raised as to whether the Department will permit an agent to establish a joint remittance account for and on behalf of principals. In connection with this, a question as to who the employer is in this situation, has been raised.
2. The agent is recovering only the cost of payroll and payroll related expenses. A question has been asked as to whether the provisions of sections 128 and 155 of the Excise Tax Act ("the Act") would be invoked such that the agent would be required to account for the GST on the fair market value of the services of agent which are being provided.
3. Our comments have been requested as to the applicability of the anti-avoidance provisions of paragraph 274(3)(a) of the Act to this arrangement.
Discussion
With respect to whether the Department will permit an agent to establish a joint remittance account for and on behalf of principals, this is a matter which is more appropriately taken up with staff on the Taxation side of the Department. To assist in directing XXXXX to an appropriate individual you may wish to provide them with a reference to XXXXX . XXXXX has indicated that the name of an agent could appear on the payroll deduction account of another person. This is quite common when a payroll service is being used. However, in the particular circumstances submitted for our review, each of the three doctors has his own employees. It would therefore be necessary to maintain three separate employee deduction accounts although the Agent could administer all three accounts.
With respect to who the employer is in the particular set of circumstances under review, the policies and jurisprudence which have evolved pursuant to the application of the provisions of the Income Tax Act with respect to employer-employees relations are relevant to the application of the Excise Tax Act. Based on that jurisprudence, a set of factors has developed and may be used when determining whether a person is an employer. These factors include whether the person who is being regarded as the employer can control and supervise the employee or whether such actions can only be carried out by some other party; whether the work being carried out by the employee is an integral part of the employer's business, whether the employer is liable to pay the employee's wages and benefits and whether the person being regarded as the employer has the power to negotiate terms of employment including the power to select, dismiss and promote.
Also as a result of the jurisprudence, it has been accepted that it is possible for an individual to be an employee of more than one person at the same time. This is particularly relevant when determining the application of GST to payroll and payroll related costs which are being paid by an agent. In most principal-agent situations, one of the two parties can clearly be identified as an employer. If it is the principal who is identified as the employer of a particular individual, it is not necessary that the agent also be an employer of that individual in order for the agent to pay the payroll and the payroll related costs of that individual. However, if it is determined that a particular individual is an employee of a person acting as agent it is not possible for the agent to incur payroll and payroll related costs and to recover those costs from its principal without charging GST unless the principal can also be regarded as the employer of the particular individual.
Regardless of whether it is necessary to determine that both the principal and the agent are employers or whether it is only necessary to determine that the principal is the sole employer, it is not possible to definitively make such a determination based on the wording of the agreement alone. The actions of the parties must also be assessed. Given the wording of the agreement, it would appear that before the limited company was appointed as agent, the three Principals were the employers of the employees who will now be paid by the Agent and that the Principals will continue to be the employers of the employees once the agreement is implemented. If this is the case, it is not necessary to establish the agent as an employer. It is however, necessary to determine that the Principals will continue in their roles of employers and that the terms of the agreement do not jeopardize that role. This can only be done by assessing the actions of the three Principals and the Agent in light of the factors established by the jurisprudence for determining who is an employer in a particular situation. A discussion of the factors to be considered and the references to the relevant jurisprudence is contained in the previously noted policy statement.
A question has been asked with respect to the potential application of sections 128 and 155 of the Act to the reimbursements covered by the agreement. In particular, the issue that arises is the apparent lack of consideration payable by the Principals for the services of the Agent. The provisions of subsection 128(1) set out the conditions under which two corporations are closely related to each other. The details of the share ownership have not been provided, however there is the possibility that the corporation which is acting as agent is not closely related to any one of the professional practice corporations. The closely related provisions require both corporations to be registrants. Putting aside for the moment, the details of share ownership, the professional practice corporations must be engaged in commercial activities in order to be registered for GST. Most such corporations do not make any supplies and if they do make some supplies, those supplies are often exempt. It is therefore not immediately obvious why those corporations would be registered for purposes of GST. If the professional practice corporations are not registered for GST, it is not possible for any of them to be closely related to another corporation.
The provisions of section 155 will act in certain situations where two parties are not dealing at arm's length, and are not dependent on the two parties being closely related. Whether or not two persons are dealing with each other at arm's length is a question of fact although related persons are deemed not to deal with each other at arm's length pursuant to subsection 126(1). As a consequence, even if the parties to the agreement are not closely related, the provisions of section 155 could still apply.
From the information provided, it would appear that the Agent, is invoicing the Principals for the actual amounts paid out as payroll and payroll related costs. The fact that the Agent is not charging an additional amount for its services as agent does not automatically invoke the provisions of section 155. We note that paragraph 5.2 of the agreement requires the Agent to maintain its own bank account for the receipt and payment of funds excluding the payment of the costs incurred and paid as agent. If the Agent is receiving funds into that bank account, it would appear that they are being received as a result of activities of the Agent which may or may not be covered by the agreement and which could be subject to tax. It may be that the services of agent are being invoiced separately from the recovery of payroll expenditures or that a markup is being attached to other charges being made by the Agent to the Principals. All of the charges being made by the Agent to Principals would need to be examined before the application of section 155 could be considered.
With regard to your final question as to the applicability of paragraph 274(3)(a) of the Act and the possibility that the transactions occurring as a result of the entering into of the agreement could be construed as avoidance transactions, it is not possible for us to definitively comment on the application of the provision given the information provided. The Act clearly contemplates that agency relationships legitimately can and will occur. Medical practitioners have been allowed to use management companies for purposes of income tax planning for some time. The actual actions of all parties to the agreement would need to be reviewed to determine that the agreement was not entered into for any other purpose other than to obtain a tax (GST) benefit. What the parties to the agreement were doing before the implementation of GST would be useful in such an assessment.
You have not specifically asked for our comments as to whether or not an agency relationship actually exists between the Agent and the Principals. You may wish to review the recently released policy statement on agency before further discussion of this particular issue. We will be pleased to address any further concerns you might have at that time.
Should you require any further assistance in this matter, contact one of the members of the Application Team in the Tax Provisions Unit. They are Ken Mathews (613) 952-9585, Suzanne Leclaire (613) 954-7931, and Sara Nixon (613) 954-4397.
Yours truly,
H.L. Jones
Director
General Applications Division
GST Rulings & Interpretations - XXXXX
Mitch Bloom (signoff)
c.c.: Application Team
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