GST Alert

The federal government is collecting more money in the form of GST from dentists and doctors these days, thanks to Canada Customs and Revenue Agency (CCRA) enforcement of policy statement P-238.

The policy affects dentists and doctors who are in a principal-associate relationship, where the principal (owner of the practice) contracts for the services of one or more associates. Unless these relationships are clearly understood and documented, dentists and doctors could find themselves facing unexpected GST bills.

Alternatively, the principal could be responsible for payroll deductions in respect of services provided by the associate. Many dentists and doctors assume or take for granted that they are associates providing services to the principals patients.

In many instances, dentists and doctors cannot receive refunds for the GST paid. This policy statement, titled Application of the GST/HST to payments made between parties within a Medical Practice Organization includes dentists in its definition of a medical practice organization.

Key Issues
The policy raises three main issues:

1. Is the associate self-employed (independent contractor) or an employee?
2. Does the principal provide management, administrative, or other services to the associate?
3. Should the principal charge GST on the services provided? To the associate?

The CCRA perspective
CCRA's starting point will be to review the associate agreement, which outlines the relationship between principal and associate.

1. Associate as employee. CCRA deems the associate dentist to be an employee, whereby payroll deductions (CPP, EIP, and income taxes) are payable in respect of such deemed salaries or wages. Additionally, the employee dentist is restricted in the tax deductions available, thereby yielding a higher tax bill for the associate/employee. The principal, meanwhile, may be responsible for paying the payroll deductions that should have been deducted by the employee dentist, if an audit reveals that the associate dentist is deemed to be an employee.

2. Associate pays for management/administrative services. In the absence of a fee-sharing or fee-splitting arrangement, CCRA deems the principal to be rendering taxable management and administrative services (provision of office space, supplies, administrative support, etc.) Specifically, if a principal and associate were involved in a 60/40 split, then CCRA could apply 7% to the 60% (see œExample,” below). Again, CCRA could levy interest and penalties, in addition to the GST owing.

Example
The chart below illustrates how C35T could be applied under the CCRA policy.

3. Fee sharing arrangement. Where the principal and associate(s) have entered into an arrangement to share fees, CCRA will not consider this to be a payment for the supply of services made by the principal to the associate.

Hence, no GST will apply in situations involving a fee sharing or splitting arrangement. Alternatively if the principal bills and collects 100% of the fees in respect of services rendered by the associate and the associate and principal have an agreement (preferably a written agreement) providing for the collection of fees on behalf on the associate, then CCRA may consider this to be a fee sharing arrangement. In this situation CCRA deems this arrangement to be an agency relationship.

CCRA would look at their tests as a whole, as well as related circumstances, to determine if the dentist is an employee or an independent contractor.