17 March 2000 GST/HST Interpretation 7354/HQR0000960 - Cost-Sharing Arrangement Among Physicians Operating a Medical Clinic

Dear Sir:

This is further to XXXXX previous letter concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to XXXXX XXXXX as well as our telephone conversation of May 7, 1999. I apologize for the delay in replying.

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

More specifically, your questions relate to how the tax applies to the cost-sharing arrangement among a group of physicians (i.e., "medical practitioners") operating a medical clinic. The subject of your enquiry has been under an extensive review and we are in the process of finalizing our position on the application of the GST/HST to various payments made by medical practitioners within a medical practice organization. We anticipate our position to be finalized 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

Interpretation Requested

You are requesting our comments on the GST/HST implications with respect to two situations:

•   A cost-sharing arrangement among XXXXX principal physicians who operate their respective practice at a medical clinic. Each physician contributes an amount, based on a formula, toward the clinic's operating expenses.

•   A written agreement signed between the XXXXX principal physicians of the clinic and a fifth "associate" physician covering a specific period and which provided that the associate physician contribute XXXXX of her gross billings generated at the medical clinic in respect of her medical practice for her share of the clinic's expenses.

In particular, you are enquiring as to whether the GST is collectible on the payments made by the XXXXX principal physicians for the clinic's operating expenses, as well as on the payments made by the "associate" physician under the written agreement.

Interpretation Given

With respect to the arrangement whereby the XXXXX principal physicians contribute an amount toward the operating expenses of the medical practice organization, this is a cost-sharing arrangement and our position on cost-sharing arrangements is that the GST/HST is not applicable where an agency relationship is established between the parties to the arrangement and there are reimbursements by principals to agents for expenses incurred on their behalf. The common law principle of agency recognizes that the agent is acting in the capacity of the other party, the principal. The existence of an agency relationship is subject to verification based on the principles set out in draft Policy Statement P-182: Determining the meaning of the terms "agent" and "agency" as used in relevant section of the Excise Tax Act and identifying those factors that may be used to determine the likelihood of agency.

Accordingly, if the XXXXX principal physicians operating the medical clinic have established a cost-sharing arrangement with an agency relationship where one of the physicians is acting as agent, the GST/HST will not apply to reimbursements of amounts paid by the physicians to the agent for expenses incurred on their behalf. Thus, where a physician incurs an expense in the capacity of agent for the other parties to the cost-sharing arrangement, there is no supply in respect of this transaction by the agent to the other physicians.

Please note that the CCRA does not rule on whether an agency relationship exists where the relationship in question is already established or ongoing. It is our 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.

With respect to the written agreement between the XXXXX principal physicians and the XXXXX "associate" physician, our understanding of these types of arrangements has been as follows: The associate physician is legally distinct from the principal physicians who operate the medical facility. In exchange for the monthly payment from the associate physician, the principal physicians are making a taxable supply to the associate physician which consists of the use of the facility and equipment, staff, utilities, overhead, etc. In effect, the principal physicians are making a taxable supply of management services to the associate physician for the purposes of the Excise Tax Act and the associate physician is paying consideration in respect of this taxable supply. Where the group consisting of the XXXXX principal physicians is a separate legal entity and the group is a GST/HST registrant, the group would be required to collect and remit the tax on the consideration paid by the associate physician for the taxable supply of management services. If the agreement with the associate physician is between one of the group members, then that principal physician, if a GST/HST registrant, would be required to collect and remit the tax on the consideration paid by the associate physician for the 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 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 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