14 April 2000 GST/HST Interpretation 7741R - Review of Case HQR0001347 / 7741: Medical Clinic Contracting with Physicians

Dear Sir/Madam:

This is in reply to your facsimile of January 13, 2000, in which you provided us with comments from XXXXX concerning our interpretation letter of December 3, 1999, Case HQR0001347/7741, addressed to XXXXX of your firm. The letter pertained to the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to certain transactions between a corporation that is a medical clinic ("clinic") and several physicians (i.e., medical practitioners) who are self-employed independent contractors. You are requesting that we reconsider our position based on the submission provided by XXXXX[.] In his letter, XXXXX submits that the information we received with respect to billings under the XXXXX is inaccurate. XXXXX. XXXXX position is that the physicians receive their remuneration from the clinic in exchange for seeing the patients of the clinic and as such, the individuals who receive treatment at the clinic are not the patients of the physicians. Furthermore, XXXXX states that the clinic has been sanctioned by the XXXXX XXXXX to have its own billing number for XXXXX purposes under which it, by an administrative arrangement with the physicians' billing numbers, bills its services to the provincial government.

XXXXX view is that the physicians are contracted by the clinic, a separate legal entity, to make supplies of health care services to the clinic. The clinic satisfies the definition of "health care facility" as defined in section 1 of Part II of Schedule V to the Excise Tax Act (the "ETA") as it is a facility which operates for the purpose of providing medical care. The clinic provides medical care to individuals, uses medical equipment and supplies, dispenses drugs and uses case rooms.XXXXX asserts that the operator of the clinic supplies to its patients "institutional health care services" which are exempt supplies pursuant to section 2 of Part II of Schedule V to the ETA since the health care services rendered by the physicians constitute "institutional health care services" as described in paragraph (h) of the definition in section 1 of that Part, i.e., services rendered by persons who receive their remuneration for these services by the operator of the clinic. Consequently, contrary to our interpretation, it is XXXXX opinion that the clinic, rather than the physicians, is supplying institutional health care services to patients and is not making supplies of management services to the physicians.

We have reviewed XXXXX comments; however, we maintain our position as stated in our letter of December 3, 1999, that where a corporation or other company, including a medical clinic, contracts for services and property, including the premises, supplies, staff, etc., that it in turn provides to physicians with respect to their medical practices, and the clinic is entitled under an agreement with the physicians to retain a certain percentage of their XXXXX billings, the clinic is providing management services to the physicians. It is our view that the portion of the physicians' XXXXX income that the clinic retains is a charge to the physicians for the clinic's operating and administrative expenses. This charge is consideration received by the clinic in respect of a taxable supply of management services consisting of property and services such as accounting, payroll, secretarial and reception services, equipment, heat, light, telephone, etc. A clinic that provides management services to physicians is considered to be involved in a commercial activity for the purposes of the ETA. Accordingly, as a registrant, the clinic would have to collect and remit the GST/HST on the consideration paid by the physicians (i.e., the portion of their XXXXX income not returned to them) where its supplies of management services exceed the $30,000 "small supplier" threshold.

The exempting provisions in Part II of Schedule V to the ETA relate to the manner in which health care services are delivered in Canada and the fact that the provinces and territories have constitutional authority for health care delivery. For instance, health care services are delivered by practitioners (natural persons) registered with the appropriate corporate or governing body of a health discipline or group of health disciplines as established for that discipline or group. Thus, in accordance with the ETA, a supply of a health care service is exempt only where it is supplied by a regulated practitioner of the service, such as a "medical practitioner" or other "practitioner" as these terms are defined in the legislation. As the clinic does not satisfy either definition, any medical or other health care service it provides or "resupplies" will not be exempt under any of the provisions of Part II of Schedule V to the ETA.

A supply of a health care service rendered to an individual by a medical practitioner is exempt pursuant to section 5 of Part II of Schedule V to the ETA or, where the health care service is an insured service for the purposes of a provincial or territorial health insurance plan, the supply is exempt under section 9 of this Part.

We have examined XXXXX comments regarding the exemption in section 2 of Part II of Schedule V to the ETA. Please note that we do not dispute XXXXX. XXXXX assertion that the medical clinic satisfies the definition of "health care facility" included in section 1 of this Part. The purpose of section 2 of Part II of Schedule V to the ETA is to exempt those services commonly provided in institutions such as hospitals and nursing homes. A typical medical clinic usually does not provide any of the goods and services enumerated within the definition of "institutional health care service" since generally, the clinic does not have any laboratory or surgical capacity on its premises, nor does it have "case rooms". Health Canada has confirmed that "case room" is the official term for a delivery or birthing room for maternity patients.

In our view, the health care services rendered to individuals by the physicians in the present situation do not constitute supplies made by the operator of the clinic of institutional health care services rendered to a patient or resident of the clinic for the purposes of section 2 of Part II of Schedule V to the ETA. It is our view that the physicians render the services to their patients and do not make supplies of health care services to a clinic which the clinic then "resupplies" to its patients. Paragraph (h) of the definition of "institutional health care service" in section 1 of Part II of Schedule V to the ETA does not apply to the physicians' services because the physicians are not remunerated by the clinic (as further explained below). Since the supplies of the physicians' services are covered by section 9 of Part II of Schedule V to the ETA, section 2 or section 5 of that Part does not apply to these supplies.

The terms of a sample agreement which was provided to us by XXXXX XXXXX recognize the fact that payment for the physician's services is made by XXXXX. By way of this agreement, the physician is directing the clinic to submit his or her fee-for-service billings to XXXXX on his or her behalf. On instructions from the physician, the XXXXX XXXXX will deposit the payment to the clinic's account. The physician has agreed that the clinic will retain a certain portion of these billings and return the remaining portion to the physician. In entering into this agreement with the clinic, the physician is deciding what happens to his or her XXXXX income after it has been earned. As such, the agreement itself demonstrates that the physician does not bill the clinic for the supplies of health care services that he or she has rendered to individuals and is therefore not remunerated by the clinic in respect of these services.

Although the physician receives the XXXXX proceeds indirectly (i.e., through the clinic), the XXXXX proceeds are nevertheless remittances made by XXXXX to the physician. The intervention of the clinic as the collector and distributor of the XXXXX proceeds merely facilitates the payment of the proceeds to the physician, which is a common procedure. This position is supported by the XXXXX XXXXX which has advised us that, for its purposes, the billing arrangement between the physician and the clinic is simply a direction to pay sums owing to the physician via a third party.

Regarding the manner in which the payments to the clinic are structured, it is reasonable to conclude that the gross XXXXX proceeds are "received" by the physician and that the "payment" to the clinic is in essence in respect of the purchase of administrative and operational goods and services, i.e., management services. That is, the allocations to the clinic can be viewed as consideration paid in respect of expenditures related to the operation of the physician's medical practice. Therefore, the portion of the XXXXX proceeds that the clinic returns to the physician remains exempt pursuant to section 9 of Part II of Schedule V to the ETA. However, the portion of the physician's XXXXX income that the clinic retains represents consideration paid to the clinic for a taxable supply of management services.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the ETA, 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 Canada Customs and Revenue Agency 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