13 March 2000 GST/HST Interpretation 7351/HQR0000957 - Payments Made within a Medical Practice Organization

Dear Sir:

This is in reply to your letter of November 20, 1995, concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the activities of a group consisting of XXXXX physicians (i.e., "medical practitioners"). 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 (i.e., physicians) 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

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

In your letter, you provided us with the following information:

1. A group of XXXXX principal physicians provide emergency physician services at the XXXXX. The group hired a secretary to bill the XXXXX on their behalf. The secretary bills XXXXX on behalf of each physician and when the funds are received pays the full amount to the physician.

2. Each month, the XXXXX principal physicians calculate the operating costs of the medical practice organization and deposit their respective share of the these costs into a common bank account to pay for the secretary and other costs of the practice.

3. The principal physicians contract with several other associate physicians to provide part-time services. The secretary bills XXXXX on behalf of each of the associate physicians and retains XXXXX of the fees received for expenses before paying the XXXXX balance to the associate physician.

Interpretation Requested

You are requesting confirmation that no GST/HST is collectible on the function of the billing secretary nor are there any GST/HST implications with respect to the cost-sharing arrangement among the group of the XXXXX principal physicians.

Interpretation Given

Under the GST/HST legislation, activities from an office or employment are excluded from tax. However, the supply of administrative services by the principal physician, such as the services rendered by the principal physician's billing secretary, is a taxable supply. For instance, where the billing secretary is employed by one of the principal physicians, the supply of the secretary's services by that physician to the other physicians is subject to tax, unless the physician is a small supplier as described in section 148 of the Excise Tax Act (the "ETA"). If the secretary is a self-employed, independent contractor, then his or her services are subject to the GST/HST if the secretary is not a small supplier.

The position of the CCRA with respect to 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 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 principal physicians to the agent for expenses incurred on their behalf. 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.

With respect to the arrangement between the group of XXXXX principal physicians and the associate physicians who provide part-time services, our understanding of this type of arrangement has been as follows: The associate physicians are legally distinct from the principal physicians. The billing arrangement between the group of principal physicians and the associate physicians is simply a redirection to XXXXX to forward the associates' fees to the group. The intervention of the group as the collector and distributor of the XXXXX proceeds merely facilitates the payment of the proceeds to the associate physicians, which is a usual procedure in cases of this kind. Thus, the associate physicians' supplies of insured health care services are exempt pursuant to section 9 of Part II of Schedule V to the ETA. The portion of the associate physicians' XXXXX fees not returned to them by the group of principal physicians is considered to be management fees, i.e., consideration for a taxable supply.

Whether or not the group invoices the associate physicians for management services, the XXXXX fees that remain with the group of principal physicians are consideration for management services. The group of principal physicians have performed a management function and have made a supply to the associate physicians of the facilities, equipment, and administrative services. This supply is a commercial activity for the purposes of the ETA. Where the group is a GST/HST registrant, the group would be required to collect and remit the tax on the value of the consideration paid by the associate physicians for the taxable supply of management services. If the arrangement with the associate physicians 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 value of the consideration paid by the associate physicians 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 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 & Governments Division