DOCKET: 2594 (GEN)
NAME: XXXXX
OFFICER: Garry L. Ryhorchuk
TELEPHONE: 954-8585
FACSIMILE: 990-1233
11725-1(sn)
Dear Mr. XXXXX
In reference to your letters of December 7, 1992 and March 12, 1993 wherein you request our comments as to the application of GST to certain transactions carried out by a corporation ("the Provider") with a doctor ("the Doctor") who carries on the professional practice of medicine, we have now reviewed the documentation which you have provided and our comments follow a summary of our understanding of the transactions submitted for our review. Please excuse the delay in our response.
Background
1. The Doctor carries on the professional practice of medicine and, in that regard, provides professional consultative, diagnostic and treatment services to his patients.
2. The Provider carries on the business of providing radiological and other diagnostic services which constitute institutional health care services for the purposes of Part 2 of Schedule IV of the Excise Tax Act ("the Act").
3. The Doctor and the Provider operate their respective undertakings in the same premises and, in that regard, have arranged to separately pay and incur their respective expenses incurred in carrying on their respective undertakings.
4. For this purpose, the Doctor and the Provider have agreed to jointly make arrangements for the separate employment of all office staff. In this regard, they have made the following arrangements:
(a) Each office staff member will execute an employment agreement between the office staff member and each of the Doctor and the Provider. A sample of this tripartite agreement has been provided for our review.
(b) A Revenue Canada Employment Number will be established in the name of the Doctor and the Provider, and
(c) As a matter of fact, each employee will act and function as an employee of the Doctor from time to time and an employee of the Provider from time to time. For example, the receptionist will, from time to time call patients for the purpose of booking a radiological examination. This radiological examination will be undertaken and performed by the Provider by its technicians and with the use of its x-ray machines. Subsequently, the receptionist may call the patient for a professional consultation after the x-ray has been reviewed by the Doctor. This activity was undertaken by the receptionist at the Doctor's request and would constitute a function undertaken within the scope of the employment between the receptionist and the Doctor.
5. The Provider, for its own account and as agent for the Doctor, will issue all payroll cheques and make all related payments.
6. All employment expenses will be allocated as between the Provider and the Doctor as they are paid and incurred. The allocation of expenses will be based upon the best estimates of the Doctor and the Provider as to the portion of time spent by the employee in the service of the Doctor and in the service of the Provider.
7. A copy of the relevant provisions of the agreement to be made between the Doctor and the Provider is attached.
Question
"We request your opinion to the effect that the employment expenses pertaining to the receptionist, and other employees who operate in the same manner, are properly allocated between the Doctor and the Provider without there being any deemed supply in respect of employment services either by the Provider to the Doctor or by the Doctor to the Provider."
Discussion
Your inquiry requires two levels of decisions, each of which is as much dependent on how the parties are actually carrying on their activities as on the written agreements which you have submitted for our review. It is not possible for us to definitively state that a particular relationship is an employer-employee relationship or whether a particular relationship is a principal-agent relationship solely from a review of written documentation. If the parties are acting differently from what the written documentation would want us to believe, it is the actual actions of the parties which will define their relationship with each other and therefore, the application of tax. As a consequence, in providing our comments to you, we can indicate to what is required if the desired result of the transaction is to not have GST apply to charges made by the Provider to the Doctor, however, the onus will be with you to establish that such requirements have been met.
In the circumstances which you have described, if the Provider is paying the payroll of the Doctor and being reimbursed by the Doctor for such payments, GST will apply to such payments unless the Provider is the agent of the Doctor and is acting in his capacity as agent for the Doctor when paying the payroll and the Doctor is the employer of the person to whom the payroll payments are being made. It must be determined that an employee-employer relationship exists between the Doctor and person to whom the Provider is paying payroll to before the question of agency between the Doctor and the Provider is addressed.
The background information you have provided indicates that it is your intention that the particular person who is an employee, be employed by both the Doctor and the Provider simultaneously. To document this, each office staff member will execute an employment agreement with each of the Doctor and the Provider. Your correspondence of March 12, 1993 to us provided examples of cases where a person was found to be an employee of two employers at the same time. We will accept, in principle, that a person can have two employers simultaneously. It therefore only remains to prove in practice, that such a relationship exists.
The issue of whether a person is an employer may be resolved by determining whether the person possesses the characteristics normally attributed to an employer under common law principles. Here, the policies and jurisprudence from income tax are relevant, and based on the case law in the area it has been accepted that some of the factors which may be considered in assessing whether a person is an employer include:
(a) control and supervision: depending upon the nature of the work, an employer normally has the power to direct the work to be done and the manner in which it is done;
(b) relationship of person's business with the nature of the employee's work: the work of an employee is an integral part of the employer's business;
(c) wages and benefits: an employer is liable to pay the employee's wages and benefits as well as responsible for making source deductions, pension plan contributions, etc.;
(d) power to negotiate terms of employments; and
(e) power to select, dismiss, and promote.
It is these factors which must first be considered when, for GST purposes, one seeks to establish an employer-employee relationship.
With respect to establishing the existence of a principal-agent relationship, you have submitted for our review an Agreement Concerning Costs Incurred and the Provision of Agency Services by Agent ("the agreement"). That agreement documents extensively, the role to be played by the Provider with respect to the hiring, supervision and where required firing, of employees which are purported to be both the Doctor's and the Provider's. It is important to establish that the Doctor has the ability to carry out all of these employment related tasks in his own right and that he has merely assigned those tasks to the Provider. It is not enough that the agreement call the Doctor an employer if in fact he does not have the power to carry out that role.
If the Doctor was paying the employees directly, no tax would be exigible on that payment. By definition at subsection 123(1) of the Act, anything that is supplied to an employer by a person who is or agrees to become an employee of the employer in the course of or in relation to the office or employment of that person is neither the supply of property or a service and therefore to the extent that monetary consideration is paid by the employer to the employee for that supply, the monetary consideration is not subject to tax. Section 178 of the Act states that where in making supply of a service a person incurs an expense for which the person is reimbursed by the recipient of the supply, the reimbursement shall be deemed to be part of the consideration for the supply of the service, except to the extent that the expense was incurred by the person as an agent of the recipient. Given these two provisions, once it is determined that the Doctor is the employer of the persons who are being paid by the Provider, if it can then be established that a principal-agent relationship exists between the Doctor and the Provider and that the Provider is acting in his role as agent when he is paying the employees of the Doctor, no tax will apply to any reimbursement of those payments by the Doctor to the Provider.
Attached is a copy of Policy Statement 182 - "Determining the meaning of "Agent" and "Agency"["]. You will note that it is the Department's position that a person will be considered and treated for GST purposes as an agent based on fact and the principle of law. The Department will not provide a ruling on the existence of agency between two particular persons. The Department will provide a ruling or interpretation on the application of the GST legislation after accepting or rejecting the existence of agency. The Essential Qualities of Agency and the Indicators of Agency, as developed and discussed in the Policy Statement 182, are factors which the Department will apply in accepting or rejecting the existence of agency. You may wish to complete an analysis of the relationship and the transactions between the Doctor and the Provider, using the essential qualitites and indicator as a starting point. We would be pleased to provide any assistance which you might require while completing that analysis.
Should you require any further assistance, please 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 3260(GEN)
Mitch Bloom (signoff)
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