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. While the policy has been in effect since November 2000, CCRA has only recently started enforcing it.

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 principal’s 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:
– Is the associate self-employed (independent contractor) or an employee?
– Does the principal provide management, administrative or other services to the associate?
– Should the principal charge GST on the services provided? To the associate?

The CCRA perspective
The above issues have existed for several years. However, CCRA has recently started to investigate these matters more closely. CCRA’s starting point will be to review the associate agreement, which outlines the relationship between principal and associate. The outcome of its investigation falls into three categories.

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 deduction 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.

The CCRA could also levy interest and penalties, in addition to the payroll deductions. Furthermore, the employee dentist would be entitled to at least 4% vacation pay per year, which must be paid by the principal.

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.). Also, where the principal and associate agree to pay for use of the facility and administrative services, CCRA may consider this to be a taxable supply to the associate. Hence, GST will apply in these situations. Specifically, if a principal and associate were involved in a 60/40 split, then CCRA could apply 7% to the 60% (see “Example,” below). Again, CCRA could levy interest and penalties, in addition to the GST owing.

The chart below illustrates how GST could be applied under the CCRA policy.
Production, including lab fees generated by associate
Less: lab fees $16,000
Production, net of lab $200,000
Principal receives 60% for management/admin services
Principal collects 7% GST on management/admin
services $8,400
Associate receives (approx 35.8%) $ 71,600

The third issue raised by CCRA’s policy statement P-238-whether the principal should charge the associate GST-will be addressed in the next issue of the Professional Advisory Newsletter.