5 July 1999 GST/HST Interpretation HQR0001676 - Cost-Sharing Arrangement Among Medical Practitioners

Dear XXXXX

Thank you for your letter of February 26, 1999, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to cost-sharing arrangements among medical practitioners.

Interpretation Requested

You are requesting our comments with respect to the GST/HST implications of a cost-sharing arrangement among four family physicians. The physicians are planning to operate distinct individual primary care practices, and to enter in a cost-sharing agreement for clerical and nursing staff, office and medical supplies, and other common operating costs such as advertising, promotion, telephone, cleaning, and insurance. Each physician will complete his or her own billing submissions to XXXXX and supply his or her own pager, licences, and professional association fees XXXXX coverage, vehicle and related expenses. A separate bank account will be opened to accommodate the receipt of funds from the physicians and the disbursement of funds for the payment of invoices and payroll.

Interpretation Given

Under a typical cost-sharing arrangement, the parties are not carrying on business together with a view to profit; they are sharing expenses. It is our understanding that the characteristics of a cost-sharing arrangement would generally include:

1. Each of the cost-sharing principals operate their individual practices from a shared facility which may be owned or leased.

2. Certain moveable assets such as reception area furniture, computer, and shared medical equipment are generally owned in one of the following ways:

a) one of the cost-sharing principals owns the assets and the other cost-sharing principals pay a fee for the use of these assets;

b) all of the cost-sharing principals jointly own the assets and contribute financially to the original purchase, maintenance or replacement cost on an agreed-upon basis;

c) certain of the assets which are for shared use are owned jointly by the cost-sharing principals.

3. Common costs for the operating of the respective practices of the cost-sharing principals are shared equally or on some proportionately agreed-upon basis. Shared costs would generally include office rent, utilities, insurance, telephone, office supplies, stationary, medical supplies, and office maintenance. Operating costs paid directly by the individual cost-sharing principals would generally include professional fees and dues, automobile, travel, and convention expenses, promotion, entertainment, and professional services. The cost of employees' wages is in some cases shared by all of the cost-sharing principals and in other cases only a portion of the wages of certain employees is shared.

The allocation of joint costs under a cost-sharing arrangement may result in the imposition of the GST/HST when one party is reimbursed by another. The application of the GST/HST to charges for administrative, overhead, and other common operating costs supplied by one party to the other principals in a cost-sharing arrangement, and the reimbursement by the other principals, will depend on whether one party is acting as the agent of the cost-sharing principals in respect of a particular supply. Where there is no agent relationship, there is generally a "resupply" by one party to the others.

Principal and agent relationship

The legal principle of agency recognizes that an agent may act in the capacity of the principal. The agency principle may be applicable in the context of a cost-sharing arrangement. If a principal and agent relationship exists and a particular property or service has been acquired by a person in the capacity of an agent, then there is no resupply in respect of this transaction by the agent to the principal. As such, no GST/HST is applicable on the reimbursement by the principal.

Please note that the Department does not rule on whether an agency relationship exists where the relationship in question is already established or ongoing. It is the Department's position that whether an agency relationship exists between two or more persons will depend on the relevant facts of the situation and the principles of law. Moreover, the fact that a person may act as an agent for some matters does not necessarily mean that the person is acting as an agent in all matters.

The characteristics associated with a principal and agent relationship are described in the enclosed Policy Paper P-182, Determining the meaning of the terms "Agent" and "Agency" (Draft). For instance, in a principal and agent relationship, an agent is normally able to represent the principal and enter into contracts on the principal's behalf or otherwise legally obligate the principal. Any transactions undertaken by the person in the capacity as "agent" will be clearly done under the authorization of its principal.

Thus, in a relationship of agency, it should be clear that the principal has a degree of power over the actions of the agent, the agent would be acting as an extension of the principal and, therefore, would be under the principal's general direction and control. This is sometimes evidenced by requiring the principal's approval for certain expenditures or simply by requiring ongoing reports by the agent to the principal.

Resupplies

If, with respect to any particular purchase, it is established that a principal and agency relationship does not exist between the parties, the agreement between that person and the third party from whom the purchase is made should be examined to determine who is the recipient of the supply. It may be that in certain situations, all of the cost-sharing principals are parties to an agreement for a particular purchase and all are recipients. In this case, each would be considered to have paid GST on their respective portion of the purchase, notwithstanding that one party makes the actual payment.

If one party alone enters into an agreement for the purchase, then it alone is the recipient (i.e., the person who is liable to pay the consideration for the supply) of the initial supply from the third party. As the recipient of the supply, that party will incur the liability for any GST/HST on the purchase. Any allocations to the parties in respect of apportioning usage would be a separate resupply of the property or service in question, even if the resupply is in accordance with a cost-sharing arrangement. The tax status of that resupply will depend on the nature of the property or service being resupplied and whether there are provisions in the ETA to exempt the resupply. If the resupply is taxable (i.e., no exempting or zero-rating provision applies), then the GST/HST is applicable on the "reimbursements" by the other cost-sharing principals and collectible by the first party (i.e., the recipient of the supply).

For example, where party "A" incurs overhead expenses on its own account, i.e., otherwise then in the capacity of an agent, and then resupplies these services to the other principals in a cost-sharing agreement, such supplies would be taxable and if a registrant, party "A" would be required to charge the GST on these supplies. Party "A" would also be entitled to claim input tax credits for the GST it paid on purchases related to the resupply of the taxable services.

With respect to salaries, services that are provided by employees to their employers are not subject to GST, and so costs related to salaries will have no tax consequences under the GST. However, if one party provides the services of its employees to another party, this will be a taxable supply of administrative services.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the Excise Tax Act, if enacted, could have an effect on the interpretation provided herein. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST/HST Memoranda Series, do not bind the Department with respect to a particular situation.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-6761.

Yours truly,

Susan Eastman
Municipalities and Health Care Services Unit
Public Service Bodies and Governments Division