Dr. Ronald Lyle Smith v. Minister of National Revenue, [1987] 1 CTC 2183, 87 DTC 132

Goetz, T.C.J.:—The appellant is appealing his reassessment of income tax in respect of his 1976, 1977 and 1978 taxation years whereby the Minister refused the appellant the right to charge certain expenses to Kaylor X- Ray/Management Ltd. out of his gross professional income totalling $73,296.

Facts

The appellant is a duly registered chiropractor in the Province of Alberta and has been practising for 24 years. A diagram of his place of business in Red Deer, Alterta, was filed indicating one table used by the appellant and four tables used by his therapy assistants. The appellant performs the necessary chiropractic manipulation which takes approximately five minutes. Infra-red treatments are rendered prior to manipulation and then this is followed after the chiropractic treatment with diathermy and ultra-sound. The diathermy relaxes the patient’s muscles and the ultra-sound penetrates deeply with its wavelengths. This is especially helpful for arthritic patients. All of this work is performed by employees of Kaylor X-Ray/Management Ltd. (hereinafter referred to as “Kaylor”). In 1976 chiropractor treatment per visit cost $6.50, in 1977 it cost $7.00 and in 1978 it cost $7.45.

Dr. Smith submits his billings directly to the Alberta Health Plan and anyone without health care coverage pays him directly. He says that his fee was inclusive of therapy which is in fact not part of chiropractic treatment and so he made no extra charge for therapy.

He incorporated Kaylor on July 6, 1973 and he owns four of the five issued voting shares, 12 of the 12 non-voting common shares, and four of the five preferred shares. All the other issued shares are owned by his wife. He is president and director of Kaylor. He states that the company was incorporated on the advice of his accountant and lawyer, because chiropractors cannot incorporate and therapy is not included in the health plan. Kaylor carries on the business of farming, the business of owning and operating rental properties and the business of providing certain services in respect of the appellant’s chiropractic clinic. Namely:

(1) provision of staff to perform therapy and clerical services;

(2) keeping accounting and billing, collection and related services;

(3) x-ray facilities and services;

(4) the ordering of supplies and equipment;

(5) provision of certain therapeutic supplies.

The Chiropractic Profession Act does not preclude persons who are not members of the Alberta Chiropractic Association from performing therapeutic and clerical services.

The appellant entered into an agreement with Kaylor and on the following terms for compensation:

Compensation for Management Services

The Doctor agrees to reimburse the Company for all disbursements incurred on his behalf.

The Doctor further agrees to pay the Company a management fee calculated as follows:

(a) 15% of all disbursements paid on the Doctor’s behalf

(b) 6% of the gross revenue of the Doctor for recording, billing and collecting of accounts receivable.

The Company agrees not to include in the “disbursements incurred on the Doctor’s behalf” the cost to the Company of that portion of the time of the Company’s employees spent either administering the affairs of the Company which do not relate to the Doctor or rendering the Doctor’s accounts receivable.

Similarly, the Doctor agrees to lay no claim on earnings of the Company from sale of supplements or the performing of x-ray or therapeutic services to patients of the Doctor.

The Company agrees to maintain separate and proper accounting records for supplement sales and for x-ray services, and to authorise the Doctor to ascertain the appropriate allocation of other billings as being attributable to therapeutic services, such allocation being subject to review and revision on a periodic or other basis deemed necessary by the Doctor.

Therapy treatment is not covered under the Alberta Health Care Insurance Act, R.S.A. 1980, chap. A-24. Nevertheless, out of the fees billed by him to the Alberta Health Plan he paid Kaylor for therapy fees: in 1976 — $2.00; in 1977 — $2.50; and in 1978 — $2.50. This he deducted from fees as billed to the Health Plan. He would receive payments therefor from the Health Plan and then pay over to Kaylor a fee for therapy treatment and in so doing reduced his actual professional income.

It would appear that the appellant has a phenomenal practice treating a minimum of 100 patients a day.

At the time of the incorporation the appellant transferred all physical chiropractic assets to Kaylor for which he received shares in that company. He says Kaylor had all the employees and that he had none. His gross income for 1976 was $304,726.20 from which he deducted the sum of $129,538.10 which he paid to Kaylor leaving him a net personal income of $175,188.10. In 1977 his total gross income was $327,068.36 from which he deducted the sum of $146,661.16 paid to Kaylor leaving him a net gross income of $180,407.30. Likewise in 1978 his total charges were $367,199.69 from which were deducted Kaylor's charges for x-rays and therapy, etc. which were $180,482.50.

Kaylor was run by the appellant’s wife who is a registered nurse and she did the hiring of staff for Kaylor to perform therapy treatment. The appellant would take x-rays and send the cassette to Kaylor for development with a card covering instructions for what type of therapy treatment Dr. Smith wanted to be performed for the patient. The card for each patient had the patient’s name, the date of visit, the charge and the code for the Health Plan. All billing was done by Dr. Smith and the x-ray machine owned by Kaylor was used by Dr. Smith and the therapists were under his direction and control.

The actual transaction would be that Dr. Smith would receive from the Health Plan moneys covering his fees charged and these would be deposited into his own account and then he would issue a cheque to Kaylor about twice a month for the services rendered by Kaylor. Although the amount of work performed by the appellant appears extraordinary, he was, nonetheless, checked over a period of three months by the-Chiropractic Association as well as by Examiners from the Alberta Health Plan.

Kaylor, at all relevant times, employed six employees, and these employees provided therapy treatment to the appellant's patients. The allocation of $2.00 to $2.50, per chiropractic treatment, to Kaylor is what the Minister says is in fact the income of the appellant.

A picture of how the appellant conducted his practice is made clear from the income recapitulation statements for 1976, 1977 and 1978. For instance, in 1976 Dr. Smith treated 39,876 persons and received total billing of $304,726.20. In 1976 he paid Kaylor $2.00 per therapy treatment which totalled $79,752.00 added to this sum is $41,621.15 for x-rays and $8,164.95 for supplements totalling $129,538.10 leaving to the appellant net gross billings of $175,188.10. Dr. Smith's accountant gave evidence stating that all expenses were paid in the first instance by Kaylor but that in preparing the appellant’s financial statements he allocated two-thirds of the expenses to Dr. Smith and this was determined from the income ratio. It must be remembered that Kaylor, in 1976, had assets of $706,702.85 which assets included a substantial amount of real estate. In 1977 Kaylor had assets in the sum of $1,221,801.63 and in 1978 Kaylor had assets in the amount of $2,487,768.20. Each year Kaylor charged Dr. Smith with management's fees.

Under the Chiropractic Profession Act section 1(a), chiropractic is described as follows:

(e) “chiropractic” means the philosophy, science and art of analyzing and the adjustment or manipulation of the human spinal column and other structures incidental thereto, and includes the use of X-ray and analytical instruments in relation thereto;

A simple description of Dr. Smith’s practice is this: a patient comes in for chiropractic treatment which apparently takes about five minutes and at the same time receives infra-red treatment preparatory to chiropractic manipulation and subsequent to the chiropractic treatment the patient may receive diatherm or ultra-sound treatment which therapy is performed by the employees of Kaylor. The therapy treatment is not recognized by the Chiropractic Profession Act and it is a treatment included in Dr. Smith's billing to the Health Plan for his chiropractic treatment. Fees for all services were billed by Dr. Smith and collected by him which he deposited in his personal chequing account and from these gross billings Dr. Smith would pay in 1978 for instance, $2.50 per patient to Kaylor for the therapy treatment and this was done by way of issuing cheques on his personal chequing account and this was done bi-monthly. The revenue to Kaylor was declared by it as income and the mere fact that there was no handling of money back and forth and the embodiment of the relationship consisted only of book entries, it is still the equivalent of payment and receipt of money (see The Queen v. Canadian-American Loan and Investment Corp. Ltd., [1974] C.T.C. 101; 74 D.T.C. 6104).

The Minister says that the therapy under these circumstances was not being provided by Kaylor but the facts seem to indicate otherwise. Kaylor provided management and therapeutic services. Dr. Smith's accountant at the end of the year made an arbitrary allocation of expenses between the therapy business and the management business. This accounts for the “payroll" entry in Dr. Smith's profit and loss statement and in fact the payroll entry as such was incorrect and that it related to payment for management services.

There was no attempt on the appellant's part to deceive the third parties, much less the Minister of National Revenue. The facts disclose a complete and open picture of the dealings between the appellant and Kaylor and on the face of these facts they were all valid transactions.

Bonner, J. in Raoul Engel v. M.N.R., [1982] C.T.C. 2422 at 2427; 82 D.T.C. 1403 at 1407:

It might not be amiss to observe that the Income Tax Act imposes an obligation to pay tax on taxable income. It does not impose any obligation to earn income or to continue to earn income in the same way as in the past. Thus the appellant was entirely at liberty to decide to work for his company, Reasoned, and to cease to work directly for Global. In Atinco Paper Products Limited v. The Queen, [1978] C.T.C. 566; 78 D.T.C. 6387, Urie, J. stated at 577 [6395]:

It is trite law to say that every taxpayer is entitled to so arrange his affairs as to minimize his tax liability. No one has ever suggested that this is contrary to public policy. It is equally true that this Court is not the watchdog of the Minister of National Revenue. Nonetheless, it is the duty of the Court to carefully scrutinize everything that a taxpayer has done to ensure that everything which appears to have been done, in fact, has been done in accordance with applicable law. It is not sufficient to employ devices to achieve a desired result without ensuring that those devices are not simply cosmetically correct, that is correct in form, but, in fact, are in all respects legally correct, real transactions. If this Court, or any other Court, were to fail to carry, out its elementary duty to examine with care all aspects of the transactions in issue, it would not only pe derelict in carrying out its judicial duties, but in its duty to the public at large.

The Minister disagrees with the payroll allocation as between Kaylor and the appellant and therefore contends that Kaylor did not provide therapeutic services; but it is clear from the facts that Kaylor did indeed provide therapeutic services as well as administrative services and these services were paid for by the appellant and deducted from his gross billings. Dr. Smith's patients received both chiropractic and therapy treatments and the therapy portion was not chargeable under the Alberta Health Care Insurance Plan. Instead Dr. Smith billed the usual chiropractic fee and deducted therefrom the cost of services provided by Kaylor. Though he billed directly to the Health Care Plan, as a chiropractor this does not preclude him from operating in the way that he did.

In the case of The Queen v. Dr. Hoyle Campbell, [1980] C.T.C. 319; 80 D.T.C. 6239, it was held that the billing procedure required by provincial regulations was not the critical factor in determining to whom the fees belonged to when there was a valid arrangement for the provision of a salary to the respondent and for the accounting of fees to the hospital as employer. This arose from a situation where a plastic surgeon operated under contract of employment with a private hospital in which he held all the shares in the hospital corporation. Other doctors were employed by the corporation and fees for hospital services in those medical services which were not covered by the Ontario Medical Insurance Plan were billed by the hospital, but to comply with regulations governing the provincial medical plan fees for insured medical services were billed by the doctors and were assigned to the corporation under the terms of the employment contract. This arrangement is analogous to the manner in which the appellant operated.

In summation, the appellant provided all the chiropractic services; therapeutic services and administration work was provided by Kaylor. The appellant billed his total chiropractic fee to the Health Care Plan and from his gross receipt the appellant would deduct the sum of $2.00 to $2.50 from each billing and paid this to Kaylor for services rendered. Kaylor paid taxes on this income as did the appellant on his. There is no attempt in any way to becloud the dealings between the appellant and Kaylor and all the transactions between them were valid and open to scrutiny.

The appeal is allowed with party and party costs awarded to the appellant.

Appeal allowed.