3 November 2003 GST/HST Interpretation 45330 - Fee Sharing and Cost-Sharing Arrangements

Please note that the following documents, although correct at the time of issue, may not represent the current position of the Agency. / Veuillez prendre note que ces documents, bien qu'exacts au moment émis, peuvent ne pas représenter la position actuelle de l'Agence.

Dear XXXXX:

This is in reply to your letters XXXXX. You are requesting our comments with respect to your understanding of the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to fee sharing arrangements between medical practitioners. In addition, you would like our comments on the extent to which the principles of agency would apply to partnerships and corporations involved in a cost-sharing arrangement.

You described a scenario involving a corporation that carries out laboratory and radiological diagnostic services and receives consideration, which you referred to as "technical fees", for these services from the XXXXX. A group of medical practitioners are shareholders of the corporation and these medical practitioners also belong to a partnership. The medical practitioners also receive consideration for the services they provide from XXXXX, which you referred to as "professional fees". You indicated that the corporation and the partnership are considering a cost-sharing arrangement in which each party will act as principal for the other in respect of expenses incurred. You also indicated that the medical practitioners of the partnership would make payments to the corporation from the fees that they receive from XXXXX.

You would like our comments regarding your conclusions. First, it is your understanding that when two or more medical practitioners enter into bona fide arrangements to share fees, the Canada Customs and Revenue Agency (the "CCRA") does not consider the payments they make between themselves in respect of this arrangement to be consideration for a supply. However, if the agreement relates to the provision of administrative services or the use of the facilities provided by one medical practitioner to the other, the CCRA's position is that the payments are consideration for a taxable supply.

Your second conclusion is the principles behind the CCRA's position on agency relationships could apply to partnerships and corporations who enter into cost-sharing arrangements.

The CCRA's position with respect to fee-sharing and cost-sharing arrangements made between medical practitioners is discussed in Policy Statement P-238, Application of the GST/HST to Payments Made Between Parties Within a Medical Practice Organization. Please note that policy statements issued by the CCRA are administrative instruments created to explain how certain provisions in the Excise Tax Act (the "ETA") apply to particular situations, for example, a business practice of a specialized segment of taxpayers. Policy statements are not substitutes for the law nor do they change the application of the law. Rather, policy statements illustrate how the ETA applies in a particular fact situation. As such, policy statements are set within a narrow context and if a person's situation is not described within the selected facts addressed in a policy statement, then the policy statement does not apply to that person.

While a policy statement does not apply to everyone, the basic concepts in the ETA on which the policy statement is based do apply to all taxpayers. For instance, where there is a supply and consideration is payable for that supply, the GST/HST is payable unless, for example, the supply is listed in Schedule V or VI of the ETA.

Fee-sharing arrangements

Policy Statement P-238 addresses a concern raised by medical practitioners who are sole proprietors and who share office space within a single facility in which they practice their professions. The medical practitioners identified a common business practice to share fees or costs with other sole proprietor medical practitioners in the same office. The Policy Statement was created to address questions arising from this business practice. As such, Policy Statement P-238 does not address fee-sharing and cost-sharing arrangements in general. Rather, the context of this Policy Statement is noted in the introduction. This states that it applies to medical practitioners involved in principal/locum or principal/associate relationships where the payment made by a locum or associate to a principal is not for a supply made by the principal.

Therefore, with respect to your understanding of the CCRA's position regarding bona fide arrangements to share fees between two or more medical practitioners, it is important to note that the CCRA's position applies to fact situations involving medical practitioners who are sole proprietors and who enter into arrangements with other sole proprietor medical practitioners who are locums or associates. As set out in Policy Statement P-238, if the fact situation is a bona fide arrangement to share fees between a principal and a locum or a principal and associate, this arrangement would not result in a supply made by the principal of administrative services or real property to the locum or associate.

Whether a bona fide arrangement to share fees exists is a question of fact. We understand that the regulatory bodies of the medical and dental professions set out guidelines and criteria for bona fide fee sharing arrangements. The Policy Statement illustrates the application of the GST/HST to medical practitioners involved in those arrangements. The Policy Statement does not supersede the facts of anyone's situation and the CCRA will not assume a payment is in respect of a bona fide fee sharing arrangement without reviewing the facts.

An arrangement between a principal and a locum or associate that provides for goods and services to be provided to the locum or associate in exchange for a payment made to the principal would be indicative of a taxable supply made by the principal. The payment made by the locum or associate would represent consideration for this supply and the GST/HST would apply on the value of the consideration.

Cost-sharing arrangements involving agency relationships

A cost-sharing arrangement would generally involve situations where two or more persons are operating their respective businesses from a shared facility and are sharing common expenses. In a cost-sharing arrangement, a combination of factors may be present: an agency relationship as well as other factors. In these situations, one of the parties to the cost-sharing arrangement may be delegated authority to act as the agent of the others for the acquisition of goods and services common to each business.

In an agency relationship, the GST/HST does not apply to reimbursements made by principals to their agent for amounts paid as agent on their behalf. As with any transaction, it is a question of a fact as to whether the payments the medical practitioners make between themselves are reimbursements for amounts paid as agent on their behalf for their share of common expenses that they each use in their respective practices or whether the payments represent consideration for a supply made by one medical practitioner to another. The essential qualities of agency are based on fact and the application of principles of law. The CCRA's position on agency relationships is outlined in the enclosed Policy Statement P-182R, Agency. Please note that the essential qualities of agency exist separately and are not superseded by Policy Statement P-238.

In addition to agency, other factors characteristic of a cost-sharing relationship may include, but are not limited to: the extent that each party is involved in major expenditure decisions and staffing matters; the provisions of the arrangement, e.g., the extent of the liability of each party for shared assets and expenses; the extent that each party reports his or her share of expenses for income tax purposes; and the extent that the parties reconcile the costs of shared assets and expenses among themselves. For instance, what evidence demonstrates that the parties are sharing common operating and capital expenses, such as rent, utilities, medical supplies, computer equipment and furniture? Are the payments one party makes to the other based on costs or fees? An arrangement in which the payments are tied to the fees, e.g., an arrangement calling for medical practitioner A to pay a flat rate of 30% of total monthly billings to medical practitioner B with no annual reconciliation to account for actual costs, would not be indicative of cost-sharing because such an arrangement is tied to revenues rather than costs.

Accordingly, with respect to your second conclusion, please note that it will be a question of fact whether a relationship involving principal and agency exists between anyone. The CCRA will not assume a payment is in respect of a cost-sharing arrangement within an agency relationship without reviewing the facts. The terms of a written agreement is one factor that the CCRA will consider in determining whether a payment is in respect of a reimbursement for an amount paid as agent. The process that the CCRA will use to determine whether a person is an agent for a particular transaction is explained in Policy Statement P-182R.

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

Enclosure: Policy Statement P-182R, Agency