Date: 20070219
Docket: A-115-06
Citation: 2007 FCA 74
CORAM: DÉCARY
J.A.
EVANS
J.A.
MALONE
J.A.
BETWEEN:
HER MAJESTY THE QUEEN
Appellant
and
1524994 ONTARIO LIMITED
Respondent
REASONS FOR JUDGMENT
DÉCARY J.A.
[1]
In the
late 1990s, audiology services were insurable in Ontario under very strict guidelines. The respondent
in this case is a health clinic that used an agreement with certain doctors to
get around the requirements of the Ontario Health Insurance Plan (OHIP). By all
indications the contracting parties benefited greatly from the contractual
arrangement. Now, faced with a request by the Minister of National Revenue to
collect and remit GST payable under that agreement, the respondent health
clinic says that the agreement was never intended to be what it said it was. The
clinic asserts that the contract it held out to the provincial government as
valid, and under which OHIP fees were collected, is now unenforceable in these
proceedings involving the Minister. The Tax Court agreed (2006 TCC 87). This
Court does not.
[2]
Counsel
for both sides concede that this Court should allow the appeal if the agreement
is found to be legally binding. Also, it was not suggested by the respondent
that there existed a further agreement between the parties which amended or re-characterized
their contractual relationships.
The Facts
[3]
The respondent
corporation carries on business as an audiology clinic in
Ontario. The controlling
shareholder of the respondent is Brian Field, a licensed audiologist in the Province of Ontario. The clinic employs Mr.
Field as the audiologist and provides services through him to patients, most of
whom were referred by medical practitioners.
[4]
At
all material times, the Ontario Health Insurance Plan provided coverage to
patients for hearing tests and audiological services only if required by and
performed under the supervision of medical doctors. Accordingly, the services
received by patients at the clinic would not be covered by OHIP nor could the respondent
bill OHIP.
[5]
On
November 11, 1989, the respondent clinic and Mr. Field entered into an
agreement with two doctors operating a family practice across the hallway. The
agreement provided that:
1) The respondent
would lease the premises used in connection with the operation of the clinic to
Doctors Campbell and Rooney together with all equipment during the term of the
agreement for the sum of $5,000 per month. This provision was later amended by
changing the monthly fee to $6,000 and allocating the amount agreed to for
these rentals to $1,000 for the premises and $5,000 for the rental of equipment.
2) Brian Field
would be employed by Campbell and Rooney on a
non-exclusive basis to provide the services of an Audiologist to the patients
referred to the Clinic. Field’s salary would be $1,000 per month. Brian Field’s
wage was later increased to $5,000 per month.
3) The respondent
would operate and manage the clinic the Clinic including the maintenance of all
business and patient records, patient scheduling, report preparations and
general conduct of the management of the day to day affairs of the clinic. The respondent
would prepare and submit all billings of the clinic for services covered by
OHIP to Campbell and Rooney for their approval and submission to OHIP.
[6]
The
doctors would keep 10% of the OHIP fees in consideration of the consulting and
administrative services provided by them. They would then deduct from the
remaining 90% of the OHIP fees, Mr. Field’s salary and all employer and
employee deductions, and the monthly rent. They would pay the remainder, if
any, to the respondent as a consulting/management fee. In the event the OHIP
billings in any particular month were not sufficient to pay the respondent’s
rental fee after the deduction by the doctors of 10% of that month’s billings
and of Field’s salary, then the rental agreement would abate by the amount of
the shortfall.
[7]
The
agreement stated the basic criteria set by OHIP with respect to the payment of
fees for audiological services and stipulated that the parties intended that
their agreement comply with those provisions and be interpreted to give effect
to this intention. The OHIP criteria state:
1) The
audiologist performing the services for patients must be an employee of the
physician;
2) The services
performed by the audiologist must be performed in space and on equipment,
either owned or leased by the physician;
3) The physician
must be involved in establishing the criteria for the quality and nature of
service provided to patients and further, must have a direct involvement for
ensuring that the appropriate level of maintenance of equipment is completed on
an ongoing and regular basis and that the record keeping with respect to patients
meets the appropriate professional standard; and
4) The physician
must be involved in the process of interpreting the results of the tests
completed.
[8]
Dr.
Campbell and Dr. Rooney had billing numbers with the Ontario Health Insurance
Plan. The trial judgment suggests that while the respondent provides the
necessary data, it was Dr. Rooney’s office, and not the respondent clinic,
that directly billed OHIP for the services provided by Mr. Field and his
corporation. And evidently, Dr. Rooney did not have any concerns about the work
the clinic did, the supervision the doctors provided, nor about the legitimacy
of the OHIP claims made under his billing number.
[9]
The
sole issue before the Tax Court was whether the respondent provided the doctors
with “supplies” of building and equipment rentals together with management
services. Under the Excise Tax Act, these services are not exempt from
GST.
[10]
The
Tax Court Judge found, essentially on the basis of the oral evidence tendered
before him by the respondent, that the agreement did not reflect the true legal
relationship between the parties. He also found that the agreement was not
legally binding, the doctors never performed services for patients on the respondent’s
premises, the doctors never leased equipment or premises from the respondent,
and that Mr. Field was never an employee of the doctors. In the end, he
concluded that there was no taxable supply by the respondent.
Analysis
[11]
To
follow the Tax Court decision, one must ignore an agreement acted upon by all
parties and from which all parties received considerable benefits; an agreement
which was entered into with the clear intention of misrepresenting the true
legal relationship between the parties. All of this was done so that they could
extract OHIP payments which would not have been made had the true legal
relationship been known. I have reached the conclusion that the Tax Court Judge
erred in law in basing his decision on after-the-fact evidence of the parties’
intention to re-characterize an agreement, which was clear, complete, and so
effective as between the parties that they had acted upon it to obtain
substantial monetary benefits from OHIP.
[12]
The
Judge referred to Shell Canada Ltd. v. the Queen, [1999] 3 S.C.R. 622
and Singleton v. Canada, [2001] 2 S.C.R. 1046, for the proposition that
the Court should determine the true legal relationship of the parties. It has
indeed become trite law that “courts must be sensitive to the economic
realities of a particular transaction, rather than being bound to what first appears
to be its legal form” (Shell Canada, at paragraph 39). However, in the
same decision McLachlin C.J. also recognized that the Supreme Court “…has never
held that the economic realities of a situation can be used to recharacterize a
taxpayer’s bona fide legal relationship.” and “[t]o the contrary, we
have held that, absent…. a finding that they are a sham, the taxpayer’s legal
relationship must be respected in tax cases. Recharacterization is only permissible
if the label attached by the taxpayer to the particular transaction does not
properly reflect its actual legal effect…” (paragraph 39).
[13]
The
problem for the respondent is that the agreement, as labelled for OHIP purposes,
has actually received legal effect. The “economic realities of the situation” are
that the agreement has been acted upon and that the parties have benefited from
it. Counsel for the respondent could not refer to any authority to support his
proposition that there can be two conflicting “true legal relationships”
between parties. Parties cannot elect to have an agreement valid for OHIP
purposes and claim its invalidity for GST purposes. The legal “form” having
produced its desired effects, the economic realities of the situation are that
the parties have been successful in arranging their affairs in such a way as to
place themselves within the realm of OHIP and to benefit largely from the
structure they have established.
[14]
This
is not a case of a taxpayer saying to the Minister: “this agreement says
something it does not mean in reality”. It is a case of parties saying to the Minister:
“this agreement says what it means in reality for a given purpose and at the
same time says what it does not mean in reality for a different purpose”. In
response to the taxpayer, the words of my colleague Linden J.A. in Friedberg
v. Canada (1991), 92 DTC 6031 at 6032 (F.C.A.) are appropriate:
In tax law, form
matters. A mere subjective intention, here as elsewhere in the tax field, is
not by itself sufficient to alter the characterization of a transaction for tax
purposes. If a taxpayer arranges his affairs in certain formal ways, enormous
tax advantages can be obtained, even though the main reason for these
arrangements may be to save tax (see The Queen v. Irving Oil 91 DTC 5106, per
Mahoney, J.A.). If a taxpayer fails to take the correct formal steps, however,
tax may have to be paid. If this were not so, Revenue Canada and the
courts would be engaged in endless exercises to determine the true intentions
behind certain transactions. Taxpayers and the Crown would seek to restructure
dealings after the fact so as to take advantage of the tax law or to make
taxpayers pay tax that they might otherwise not have to pay. While evidence of
intention may be used by the Courts on occasion to clarify dealings, it is
rarely determinative. In sum, evidence of subjective intention cannot be used
to 'correct' documents which clearly point in a particular direction.
[15]
The
respondent’s position is on its face offensive. Counsel for the respondent conceded
that the agreement was created for no other reason than to avoid provincial
laws designed to regulate who receives health care fees. And now the respondent
asks this Court to endorse that scheme by allowing it to repudiate a contract
executed according to its terms, an agreement which was meant to circumvent—and
did circumvent—the applicable law. To allow the respondent to defend itself in
such a manner would allow a misrepresenting party to profit twice from its
misdeed.
[16]
It
seems fairly clear that the law will not permit a party to defend a tax claim
by asserting that it made an intentional misrepresentation to another (OHIP)
from which it derived a benefit (OHIP fees). I agree with the Tax Court Judge
who commented that the arrangement between the doctors and the respondent was
“not praiseworthy”. Their agreement furthered a misrepresentation made to the
province’s health insurance plan. I think it goes without saying that courts
cannot be seen to promote these types of schemes.
[17]
It
is of interest to note that not only did the respondent act upon the agreement
in its relations with OHIP, it also acted upon it in its relations with the Minister.
Records and books were kept by the respondent’s bookkeepers who attempted to
reflect the terms of the agreement. T4s were issued by the two doctors in
respect of Mr. Field’s wages.
[18]
The
Tax Court also erred in finding, at paragraph 10, that the “doctors were in
fact acting as the Appellant’s agents with respect to its dealings with OHIP”.
An agent cannot have a legal capacity that exceeds that of the principal. A
principal can only appoint an agent to make a contract which the principal
himself has the capacity to make (see Haggstrom v. Dey (1965), 54 D.L.R.
(2d) 29 (B.C.C.A.)). As the respondent clinic was not legally authorized to collect
fees from OHIP, neither were its “agents”. There was in any event no evidence
to support an agency agreement between the parties.
[19]
Even
though the argument was not raised before him, the Judge determined at
paragraph 23 that there was no sham as all parties had made a disclosure to
officers of OHIP before entering into the agreement. Perhaps this is true with
respect to OHIP, but it can hardly be true as far as the Minister is concerned.
However, whether the agreement might be a sham as described by Lord Diplock in Snook
v. London & West Riding Investments, Ltd., [1967] 1 All E.R. 518 at
528, or an “inverse sham”, to use the words of Robertson J.A. in Paxton v.
Canada, [1996] F.C.J. No. 1634 at para. 26, (1996), 97 D.T.C. 5012 (F.C.A.),
is an issue which I do not need to decide. It was not argued below and it would
at best support the conclusion I have reached through another route.
[20]
In
the end, I have reached the view that a person who creates a contractual fiction
designed intentionally to misrepresent a legal relationship, and who takes
advantage of it, cannot later invoke the true economic reality to avoid the tax
disadvantages flowing from it. When a fairytale becomes the real world with
respect to third parties for one purpose (OHIP), it remains the real world with
respect to third parties for other purposes (the Minister). The Supreme Court
of Canada has invited us to look at the real economic world when
examining a transaction in the context of a tax assessment. Where a taxpayer
has created a fiction and has lived by it, his fiction has become its real
economic world, for better and for worse, plus GST.
Disposition
[21]
I
would allow the appeal with costs here and below, set aside the decision of the
Tax Court of Canada and affirm the assessment made under the Excise Tax Act.
“Robert
Décary”
“I agree.
John M. Evans J.A.”
“I agree.
B. Malone J.A.”
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