To the untrained eye, a walk-in medical clinic is a convenient portal to health care services. But while safe for patients, walk-in medical clinics put the doctors who work there at risk of catching a financial virus: GST.

Since GST was introduced, most health care services have remained GST exempt. This has always been good news for service users, who haven't seen an additional 7% tacked on to the bill (now 15% in the harmonized provinces of Nova Scotia, New Brunswick, and Newfoundland and Labrador). However, the news has never been as good for service providers, because unlike farmers (who generally do not charge GST on their products due to zero-rated status), most medical practitioners cannot recover the GST they pay.

Management companies and the spread of GST

Before 1991, many medical practitioners used a management company to provide them with space, staff, and equipment. This management company was typically owned by a lower-income spouse andor a family trust and would generally mark up its costs by 15%) providing a useful income-splitting tool to the medical practitioner.

The introduction of GST made management companies a much less useful tool: The amount of non-recoverable GST paid increased because of the management company's mark-up. In addition, GST was added to salaries, insurance, and other previously GST-exempt costs billed to the physician as management fees. This perhaps unintentional manufacturing of GST signalled the end of the management company for most medical practitioners.

Group practice: incurable GST?

Medical clinics are structured in various ways. The clinics may be operated by corporations or partnerships, but it is also common for practitioners to set up cost-or fee-sharing arrangements.

The GST implications of these group practices have been a thorn in the side of the Canadian Medical Association (CMA) and the CCRA since the inception of GST. A 1994 paper at the CICAs Commodity Tax Symposium identified medical practices as a critical GST issue. The CMA began working with the CCRA in 1995 to educate the government on how tax policy should apply to various practice models. The result was the release in 2000 of Policy Statement P-238-Application of the GSTHST to Payments Made Between Parties Within a Medical Practice Organization, which became effective January 1, 2001.

The locum

Policy Statement P-238 provides several examples of when GST might or might not apply in a group practice. For example, in a locum arrangement, where a sole-proprietor contracts with another practitioner to provide services to their patients while they're on vacation or otherwise absent, GST will not apply if the proprietor and locum enter into a bona fide arrangement to share fees earned during that period. On the other hand, if the payments are structured such that the proprietor charges the locum for the use of space and equipment, GST will apply to this supply of tangible and real property.

In stark contrast to the Policy Statement, and most accepted practice, the Tax Court of Canada had occasion in June of 2000 to define the locum arrangement as an employer-employee relationship. This could require the withholding of income tax, CPP, and EI, by the proprietor and result in the disallowance of expenses to the locum.

The clinic

The legal structures of clinics are as varied as the physicians who staff them. An effective GST structure, as set out in the Policy Statement, is for practitioners to share specified common operating costs, such as rent, utilities, and staff, under an agency agreement. One party can make payments through a common bank account to which each participant contributes, and then be reimbursed by the other participants; or each can pay certain expenses, with a settling up at some agreed-upon point.

The CCRA has indicated that where there is an agency relationship among the parties, i.e. the expenses are being incurred by one person on behalf of the group, GST will not apply to the charges between them. However, the concept of agency is complex. The CCRA's policy statement on the subject, which was issued in June of 1995, has yet to be approved and is still labelled as a Draft. Demonstrating that there's an agency relationship could include such steps as each doctor preparing a T4 slip for their proportionate share of staff salaries.

If the agreement is viewed as a supply of goods and services, GST will apply to the charges. This is the case if a doctor (or professional corporation) operates a clinic and allows other physicians to use the facilities in exchange for a portion of the fees they generate.

Diagnosis GST

Treating a patient requires two basic steps: diagnosis and treatment. But as the saying goes, An ounce of prevention is worth a pound of cure. So how do physicians prevent GST? They take precautions to avoid spreading it.

If the intention is to have a genuine cost-sharing agreement, adequate documentation should be prepared in support of this position, and the parties must make sure they follow their agreement. If a physician is entering into an arrangement where they will pay a portion of their fees to an existing practice, all parties involved should make sure to structure their arrangements so as not to inadvertently trigger GST.

As with any potential health problem, professional advice should be sought to prevent a GST infection. Encourage your doctor clients to alert you to any changes in their practice set-up, and consider consulting with a GST specialist.

Be aware, however, that sometimes GST, like death, is inevitable. In such cases, parties should just accept that GST applies and arrange their affairs accordingly.

Endnotes

1 Bruce McLachlin (BDO Dunwoody Ward Mallette, Toronto). Today's Most Critical GST Issues in Real Estate, 1994 CICA Commodity Tax Symposium.

2 Battista v. The Queen, 2000 GTC 847.

3 Policy Statement P-182-Determining the meaning of Agent and Agency

(DRAFT)

By Don Carroll, CA

Don Carroll, CA, specializes in commodity tax with Grant Thornton LLP in New Westminster. He would like to acknowledge the valuable assistance of Mark Singer, MBA, of Grant Thornton LLP in Halifax, NS.

Copyright Institute of Chartered Accountants of British Columbia JunJul 2003
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