24 March 2000 GST/HST Interpretation 8354/HQR0001960 - Professional Services Provided by Medical Practitioners

Dear Sir:

This is in reply to your letter of September 15, 1999 and our telephone conversation of March 14, 2000, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to certain supplies made by medical practitioners who are proposing to incorporate their medical practices.

Please note that as of November 1, 1999, Revenue Canada became the Canada Customs and Revenue Agency (the "CCRA").

Interpretation Requested

In your letter, you presented a scenario involving medical practitioners (as defined in section 1 of Part II of Schedule V to the Excise Tax Act (the "ETA")) who will create a professional corporation in XXXXX for the purpose of carrying on the practice of medicine and they will become employees of the professional corporation. The corporation, i.e., XXXXX," will provide the following services:

1. specialized professional medical services, i.e., health care services, that will be rendered to individuals; and

2. research, teaching, administration, as well as other services that will be supplied to a hospital affiliated with the medical school of a university.

In addition to providing the above-listed services through its employees, XXXXX will also contract with other medical practitioners (i.e., independent contractors) in XXXXX [t]o provide these services. These independent contractors will consist of individuals who are licensed medical practitioners and professional corporations, i.e., licensed medical practitioners who have incorporated their medical practices.

XXXXX and the independent contractors will enter into agreements to establish budgeted target time allocations per year for each of the above-listed services with compensation paid to each independent contractor based on these targets. The number of days allocated to the provision of each service will represent the independent contractor's responsibilities. The various services will be provided concurrently or within the same working day, and it is your opinion that the provision of these various services cannot be separated from one another. The particulars of the independent contractor's practice profile, the per diem compensation rate for services, and the definition of "substantial completion" pursuant to the contract will be negotiated on an individual basis each year of the term of the arrangement. All payments from third parties in respect of services provided by the independent contractor will be made directly to XXXXX.

Remuneration for the health care services rendered to individuals in XXXXX is paid by the XXXXX[.] Although medical practitioners are permitted to incorporate a company for the purpose of carrying on the practice of medicine, the XXXXX does not recognize the corporation for the purposes of remuneration; rather the XXXXX emuneration is made in the name of the individual medical practitioner who rendered the insured health care service. Arrangements may be made with the XXXXX for payment to be made to an employer or to an association or group to which the medical practitioners have assigned the right to collect their XXXXX fees. XXXXX will administer the billings to the XXXXX for its own employees as well as the independent contractors. Although it has a billing number, XXXXX is still required to send these billings to the XXXXX in the names of the individual medical practitioners who rendered the specific health care services. XXXXX will then forward the proceeds of the XXXXX billings to the individual medical practitioners (its own employees and the independent contractors).

You are requesting our opinion on whether section 5 of Part II of Schedule V to the ETA is applicable to the following:

1. supplies made to XXXXX by the independent contractors (i.e., professional corporations) of health care services that they will render to individuals, and research, teaching, administration and other services that they will provide to the hospital and the university medical school affiliated with the hospital;

2. supplies made to XXXXX by the independent contractors (i.e., individual medical practitioners) of health care services that they will render to individuals, and research, teaching, administration and other services that they will provide to the hospital and the university medical school affiliated with the hospital; and

3. supplies made by XXXXX, through its employees, of health care services that it will render to individuals, and research, teaching, administration and other services that it will supply to the hospital and the university medical school affiliated with the hospital.

Interpretation Given

Meaning of the term "medical practitioner"

For the purposes of the ETA, a "medical practitioner," as defined in section 1 of Part II of Schedule V, is a person who is entitled under the laws of a province to practice the profession of medicine or dentistry. Consequently, where a professional corporation is entitled under the laws of a province to practice the profession of medicine or dentistry, that professional corporation will satisfy the definition of "medical practitioner" for the purposes of the ETA.

It is our understanding that in XXXXX XXXXX XXXXX corporation for the purpose of engaging in the practice of medicine, provided that certain criteria contained in the XXXXX. Thus, if XXXXX and the independent contractors are established as professional corporations pursuant to the criteria contained in the XXXXX XXXXX they would satisfy the definition of "medical practitioner" in the ETA.

Tax status of the various services in question: single and multiple supplies

Health care services provided by regulated health care practitioners are exempt of the GST/HST when the services are rendered to an individual (i.e., a natural person). For the purposes of the ETA, health care services are those that maintain health, prevent disease, or diagnose or treat an injury, illness, or disability of an individual. For instance, a supply made by a medical practitioner of a consultative, diagnostic, treatment or other health care service rendered to an individual (excluding services performed for cosmetic purposes) is exempt from tax in accordance with section 5 of Part II of Schedule V to the ETA. Where the supply is paid for or reimbursed by a provincial health insurance plan, the supply of a health care service is exempt pursuant to section 9 of this Part.

Other professional services provided by medical practitioners such as research, teaching, and administrative services, are not exempt under the provisions of Part II of Schedule V to the ETA. These other professional services are commercial activities and as such, are taxable supplies for the purposes of the ETA. For instance, a supply made to a hospital by a medical practitioner of a service of overseeing the delivery of clinical, academic, and research support services is not an exempt activity for the purposes of section 5 of Part II of Schedule V to the ETA. Rather, this is an administrative service which is a taxable supply. Where the "small supplier" rules in section 148 of the ETA are not applicable, the medical practitioner is required to register for GST/HST purposes and collect and remit the tax on the consideration he or she receives for taxable supplies.

Professional services such as research, teaching, and administrative services are not elements of a single supply of an exempt health care service rendered to an individual by a medical practitioner, nor are they "inputs" used or consumed by a medical practitioner in order to render health care services to individuals. Rather, these other professional services are separate and distinct supplies made by medical practitioners.

Medical practitioners engaged in both exempt and taxable activities must make a reasonable allocation of the portion of their activities related to making exempt supplies and the portion related to making taxable supplies and collect and remit the tax accordingly. Such an allocation is required irrespective of whether the medical practitioners are separately compensated by the recipients for providing the mix of taxable and exempt supplies. As GST/HST registrants, these medical practitioners would be entitled to claim input tax credits for the GST/HST payable on the purchases they use, consume, or supply in the course of making taxable supplies for consideration.

Please note that where a variety of services are combined together as a single "package" for a single consideration, this "package" would constitute a new composite supply where the sum is different from the individual parts. Thus, the character of this new supply could not be labeled as any one of the particular services that comprise it, rather the new supply would have its own distinct identity. The result would be that the various services supplied by the independent contractors, e.g., health care services rendered to individuals, and research and teaching services supplied to a hospital, would constitute elements of a single composite supply which is neither health care, research, or teaching services but a single taxable supply of professional services. However, because there are specific exempting provisions in the ETA for health care services, those services for which these exemptions apply would be considered to be separate supplies and retain their exempt status.

Supplies made by the independent contractors

The context within which the services are supplied demonstrates that the independent contractors are making multiple supplies that consist of rendering insured health care services to individuals for which they receive remuneration from the XXXXX and providing research and teaching services to a hospital and university for which they receive remuneration from XXXXX.

The supplies of insured health care services by the independent contractors are exempt pursuant to section 9 of Part II of Schedule V to the ETA. Where XXXXX collects the XXXXX payable in respect of these services, the amount XXXXX remits to the independent contractors remains exempt pursuant to this provision.

The supplies by the independent contractors of the other services, e.g., research, teaching, and administrative services, are taxable and if they are GST/HST registrants, the tax is collectible on the value of the consideration payable by XXXXX that pertains to these supplies.

We do not agree with your conclusions regarding Policy Statement P-077R, Single and Multiple Supplies. The manner in which the services are provided and the description of the arrangements between XXXXX and the independent contractors clearly indicate that the independent contractors are making multiple supplies, and that the research, teaching, and administrative services are not "inputs" used by the independent contractors in order to supply health care services. The application of the guidelines contained in Policy Statement P-077R demonstrates that the various services supplied by the independent contractors do not constitute a single supply of a health care service as described in section 5 of Part II of Schedule V to the ETA. As noted above and further discussed below, it is our view that there are two recipients of the supplies made by the independent contractors and section 9, rather than section 5, applies to the insured health care services being rendered in the scenario you have described.

For instance, with respect to the supplies of insured health care services, we note that medical practitioners in Canada are generally paid on a fee-for-service basis under a fee schedule established by the provincial and territorial governments. As previously stated, although medical practitioners in XXXXX can create professional corporations for the purpose of carrying on the practice of medicine as well as assign the right to collect their XXXXX to an employer, association, or group, the payments by the XXXXX under the XXXXX made in the name of the individual medical practitioner who rendered the service. Consequently, for the purposes of the ETA, the "recipient" of the independent contractors' supplies of insured health care services is not XXXXX, rather the "recipient" is the XXXXX[.] It is our view that the billing arrangement between the independent contractors and XXXXX is simply a direction to the XXXXX to pay sums owing to the independent contractor to XXXXX. The intervention of XXXXX as the collector and distributor of the XXXXX proceeds merely facilitates the payment of the proceeds to the independent contractors. Thus, the supplies by the independent contractors of insured health care services are exempt pursuant to section 9 of Part II of Schedule V to the ETA.

A further indication that the research, teaching, and administrative services are separate and distinct supplies is the manner in which the independent contractors receive consideration from XXXXX for these supplies. For instance, the independent contractor's practice profile, the per diem compensation rate for services, and the definition of "substantial completion" pursuant to the contract are negotiated on an individual basis each year of the term, and the independent contractors are remunerated on the basis of budgeted time allocations per year for each service. Whether or not the various services are provided concurrently or within the same working day is not relevant in determining the character of the supply (i.e., single or multiple supplies).

We do not agree with your conclusion that since XXXXX would not be able to fulfill its obligation to the hospital if it did not receive the research and teaching services from the independent contractors, the independent contractors are therefore making a single supply to XXXXX. It is our view that the obligations of XXXXX to the hospital have no bearing on the character of the supplies made by the independent contractors to XXXXX, i.e., XXXXX obligations to another party are not indicative of whether or not the independent contractors are making single or multiple supplies to XXXXX. The transactions between XXXXX and the independent contracts are separate activities from XXXXX transactions with the hospital.

Supplies made by XXXXX

The situation you described indicates that XXXXX would be making multiple supplies: supplies to the provincial XXXXX of exempt health care services rendered to an individual for which it receives remuneration from the XXXXX for insured services; and supplies of taxable professional services to the hospital and university medical school. Consequently, XXXXX supplies are not exempt pursuant to section 5 of Part II of Schedule V to the ETA.

XXXXX supplies of insured health care services for which it receives remuneration from the XXXXX are exempt of GST/HST in accordance with section 9 of Part II of Schedule V to the ETA.

With respect to the insured health care services rendered by the independent contractors for which XXXXX collects the XXXXX [f]ees, as previously explained, the collection by XXXXX of these fees is not in respect of a supply made by XXXXX either to the XXXXX XXXXX is merely facilitating the payment of the XXXXX fees to the independent contractors. However, where XXXXX withholds a portion of those fees, the amount withheld is a payment made by the independent contractors to XXXXX for a taxable supply of administrative services. Please note that the application of the GST/HST to various payments made by medical practitioners within a medical practice organization has been under an extensive review by the CCRA. We are in the process of finalizing our position on this matter and anticipate issuing a policy statement in the near future. Once approved, the policy statement will be available on our Internet site at the following address: http://www.ccra-adrc.gc.ca/menu/EmenuKPA.html

XXXXX supplies to the hospital and affiliated university medical school of research, administrative, and teaching services are not exempt under any of the provisions of Part II of Schedule V to the ETA. The same rationale used for such supplies made by the independent contractors also applies to XXXXX, i.e., these supplies are not health care services rendered to individuals nor are they elements or "inputs" of such a supply. Rather, the insured health care services and the other professional services are separate and distinct supplies for which there are two recipients, i.e., XXXXX supplies to the hospital of the other professional services are taxable and if it is a GST/HST registrant, the tax is collectible on the value of the consideration payable by the hospital that pertains to these supplies. The consideration payable by the hospital in exchange for these supplies consists of the use of physical space, clerical and administrative staff, medical residents, and equipment. Where the consideration for a supply is other than money, subsection 153(1) of the ETA deems the value of that consideration to be equal to the fair market value of the consideration at the time the supply was made. In accordance with this provision, the value of the consideration received by XXXXX from the hospital is equal to the fair market value of the use of the physical space, clerical and administrative staff, medical residents, and equipment. Thus, if a GST/HST registrant, XXXXX would be required to collect and remit the HST at the rate of 15% payable by the hospital calculated on the fair market value of the use of the physical space, clerical and administrative staff, medical residents, and equipment that XXXXX receives in exchange for its supplies of taxable professional 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 CCRA 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