Words and Phrases - "bona fide"
7 April 2022 CBA Roundtable, Q.5
P-238 discusses fee sharing in the context of a practice involving a principal practitioner and a locum, and involving a principal practitioner and contract associates, and states:
[Where there is a] bona fide arrangement to share fees, the CCRA will not consider the payment by the associate to be in respect of a supply of administrative services made by the principal. The underlying characteristic of this arrangement is an apportionment of the fee for the health care service rendered to the individual between the parties. Thus, for purposes of the ETA, the amounts apportioned between the two parties are not subject to tax.
This seems to suggest that where one person (A) supplies exempt health care services to patients and engages a medical practitioner (B) to render those services to patients, then A’s supply to patients can be exempted (for example, under Sch. V, Pt. II, s. 5), and B’s supply to A can be exempted under s. 5.
a) What is a “bona fide arrangement to share fees”?
b) What is the statutory basis for exempting the apportionment of the fees under a bona fide arrangement to share fees?
c) Are exempt fee-sharing arrangements not limited to principal practitioner-locum and principal practitioner-contract associate arrangements?
d) To be an exempt fee-sharing arrangement, must the person supplying health care services to patients (A in the above description) be a licensed medical practitioner or medicine professional corporation under the applicable provincial law?
CRA responded:
a) According to law dictionaries and jurisprudence, the expression “bona fide” means “in good faith”, honestly, genuinely, without simulation or pretense.
The CRA considers “a bona fide arrangement to share fees” to be the arrangement that best represents the economic reality of the transaction.
b) There is no section in Part IX that specifically addresses the situation. We could consider the application of section 5 of Part II of Schedule V to the Excise Tax Act as a basis to that position in the case of medical practitioner. Where a physician who has patients hires a locum to fulfill their duties during their absence, it could be considered that the physician has subcontracted the care to the locum. The supply of services of the locum to a patient would be exempt under section 5 of Part II of Schedule V and the supply of services to the physician by the locum would also be exempt under section 5 as it is a supply of a consultative, diagnostic, treatment or other health care service that is rendered by a medical practitioner to an individual.
The same approach could be taken in respect of other professional services that can be exempt in Part II of Schedule V where the exemption refers to services rendered to an individual.
c) The CRA is not aware of arrangements that would be of a similar nature. It would be a question of fact.
Considering that health care services legislation is of provincial jurisdiction, the rules applying in the province would have to be considered. For example, fee sharing might be only allowed between professionals regulated by the same regulatory body.
d) In section 5 of Part II of Schedule V, for an exemption of a health care services to apply, the service has to be rendered by a physician who is entitled under the laws of a province to practise the profession of medicine.
The CRA considers that some exemptions can apply twice to the same service as the requirement is that the service be rendered by a medical practitioner or a practitioner as defined in section 1 of Part II of Schedule V.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Excise Tax Act - Section 123 - Subsection 123(1) - Supply | there can be a double supply of a physician’s services | 172 |
Cassan v. The Queen, 2017 TCC 174
In December 2009, individual taxpayers participated in a tax shelter that involved making both a leveraged investment (the "LP Program") and leveraged donation. In the lP Program, they used money borrowed from a lender trust (FT) (the "Unit Loans") to purchase units in an Ontario LP, which used most of the proceeds to purchase notes of a BVI company (Leeward). The return on the notes was linked to whichever of a stock market index and a notional balanced portfolio performed the better, with Leeward then lending the funds back to FT via a second trust.
Respecting the leveraged donation, they borrowed money from FT (under the TGTFC Loans") at 7.85% p.a. – of which 3.75% of p.a. was required to be paid annually in cash (“cash-pay interest”) and with the balance was capitalized each year (“capitalized interest”). This borrowed cash was then contributed by them to a registered charity ("TGTFC") on condition that TGTFC invest most of such proceeds in a note of Leeward, that matured in 2028, and bore interest of 4.75%, of which 3.75% was cash-pay interest, and the balance capitalized interest of 1% (which would cause the amount owing under the note to accrete by over 1/3 by 2028). These funds also were mostly circled back to FT. The ability of Leeward to be able to repay this note owing to the charity depended on the small portion of the funds received by it from the individuals (via the LP) under the investment component, that it invested in a fully-indexed note rather than on-lending back to FT via the second trust, appreciating at a rate of 10% p.a. over the close to 20 years until 2028.
After finding that their donation did not qualify as a “gift” under common law principles given that the interest rate of 7.85% that was charged to them by FT was less than a reasonable rate of interest, Owen J went on to find that bona fide arrangements had not been made for repayment of the loan from FT (which had a term of 9.3 years) as required by ss. 248(32)(b) and 143.2(7)(a). He stated (at para. 345):
[T]he phrase bona fide speaks to the fundamental character of the arrangements and requires that the arrangements reflect what one would reasonably expect arm’s length commercial relations to look like in the circumstances. …
After noting that the taxpayers had not disclosed their debts incurred from their previous participation in tax shelters, he stated (at paras. 352-4):
In my view, a borrower’s unilateral determination that a significant liability need not be disclosed on a loan application coupled with the failure of FT to insist on full disclosure is strong evidence of an absence of the sort of good faith and genuineness contemplated by paragraph 143.2(7).
I have already commented on the shortcomings of the ULAA Forms, the generalized information provided to FT by those forms, the failure of FT to require documentation to support the information provided on the forms and the failure of FT to perform thorough credit checks on all the Participants prior to closing and at the time of each additional advance. All of these factors point away from the arrangements regarding the Program Loans being bona fide arrangements… .
I also draw a negative inference … from ... no one from FT testif[ying] regarding the borrowing arrangements with the Participants.
In finding that the Unit Loans were not also limited-recourse debt reasonably "relating to" the gifts by the taxpayers to TGTFC, Own J stated (at para. 359):
It is true that the existence of the LP Program may indirectly support the TGTFC Program by ostensibly placing more assets in Leeward than would be the case if only the TGTFC Program existed and by allowing the LP Units to be given as security for the TGTFC Loans. However, in my view, that remote a connection is not sufficient for one to conclude that the Unit Loans can reasonably be considered to relate to the gifts made by the Appellants to TGTFC.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 118.1 - Subsection 118.1(1) - Total Charitable Gifts | common law gift was vitiated by loan to donor at unreasonably low rate | 793 |
| Tax Topics - Income Tax Act - Section 143.2 - Subsection 143.2(12) | although borrowing by taxpayers had a term of 9.3 years, they had a reasonable expectation of refinancing with the promoter’s assistance | 478 |
| Tax Topics - Income Tax Regulations - Regulation 7000 - Subsection 7000(2) - Paragraph 7000(2)(d) | no requirement to accrue interest on index-linked note in a year when the return thereon was not determinable | 605 |
| Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) - Subparagraph 20(1)(c)(i) | interest on loan to acquire LP units was deductible as there was a prospect of gross income being allocated by LP in 19 years’ time | 619 |
| Tax Topics - Statutory Interpretation - Realization Principle | amount should not be recognized until ascertainable | 73 |
| Tax Topics - Income Tax Act - Section 69 - Subsection 69(1) - Paragraph 69(1)(c) | gratuitous transfer is gift irresepctive of absence of benevolent intent | 56 |
Extendicare Health Services Inc. v. MNR, 87 DTC 5404, [1987] 2CTC 179 (FCTD)
"[T]he term 'bona fide', when used as an adjective, is generally taken to mean 'honestly', 'genuinely' or 'in good faith'."
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Statutory Interpretation - Redundancy/reading in words | 43 |
Tolhoek v. The Queen, 2007 DTC 247, 2006 TCC 681 (Informal Procedure)
A partnership ("ICON") of which the taxpayer became a limited partner purchased software from a subsidiary ("Trafalgar Capital") of the developer of the software in consideration for cash (as to 30% of the purchase price) and a promissory note (for the balance), with the taxpayer then assuming a portion of the promissory note as part consideration for his units in ICON. ICON licensed the program to a Bermuda limited partnership ("ICAP") of which Trafalgar Capital was the general partner. An agreement between ICON and Trafalgar Capital guaranteed an average annual revenue of no less than 12% on leveraged trading funds used by ICAP over the ten-year term of the promissory note and provided that in the event the software did not generate this return, ICON could replace the board of directors of Trafalgar Capital. Campbell J. found that there were no bona fide arrangements for repayment of the promissory note given that (i) an acceleration clause under the promissory note likely would never be triggered because of the ability to ICON to replace the board of directors of Trafalgar Capital, (ii) limited partners who resided outside Canada were not required to provide any security or collateral, (iii) there was no genuine risk of loss because the limited partners as debtors under the promissory note had the benefit of the revenue guarantee of Trafalgar Capital which they could invoke in the event that they were called upon to pay the note, and (iv) the nature of the legal arrangements was quite unclear, whereas a bona fide "arrangement should readily be seen to be binding upon the parties; it should be prima facie obvious" (p. 254).
Furthermore, an alleged implicit set-off arrangement did not establish that interest was paid on the promissory notes within the 60-day period stipulated by subsection 143.2(7) given that Trafalgar Capital (in its own capacity rather than as general partner) did not owe money to either ICON or to each partner, and there was a failure to produce documentation as required under s. 143.2(13).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 143.2 - Subsection 143.2(615) | 62 |