Introduction: MedSleep's Processes & the Minister's Assessments
MedSleep Inc v The King, 2025 TCC 70 was a case before the Tax Court of Canada that dealt with Part IX of the Excise Tax Act. The appellant, MedSleep Inc., operated a business in multiple provinces that related to sleep studies. MedSleep would receive patients through 3rd party medical doctors' referrals. These patients would then complete the intake process and MedSleep employees would review the information and allocate the patients to an appropriate Sleep Physician.
A Sleep Physician determined an initial course of treatment, and subsequent sleep studies were conducted at MedSleep clinics. The Sleep Physician reviewed, edited and revised the reports that arose from the sleep study and sent the information back to the referring physician.
There are two fees associated with the sleep studies:
- A technical fee that is related to the sleep study. 100% of the fee is retained by MedSleep, and
- A professional fee that is related to the work that the Sleep Physician does.
All the relevant Provincial Health Insurance Plans, for example OHIP in Ontario, covered the professional fee component. The Sleep Physicians and MedSleep entered into fee-sharing arrangements whereby a portion of the professional fee that was paid by the Provincial Health Insurance Plan was retained by the Sleep Physicians and the other portion was kept by MedSleep.
CRA assessed MedSleep for GST/HST under s.221(1) of the Excise Tax Act. The reason for the assessment was that MedSleep made a taxable supply (sale) of services to the Sleep Physicians and no GST/HST was collected.
There were two issues at trial:
- Whether MedSleep makes taxable supplies; and
- Whether, for the purposes of s.221(1), the Sleep Physicians could be considered to be recipients of the back-end services that MedSleep allegedly provided.
Ultimately, the Court found that MedSleep did not provide any services to the Sleep Physicians, nor was MedSleep making taxable supplies. Also, it was determined that the Sleep Physicians were not recipients.
CRA's Position – MedSleep Provides a Taxable Supply
CRA's position was based on the premise that MedSleep was providing back-end services to the Sleep Physicians. Specifically, these services were administrative in nature, such as intake, scheduling, billing, marketing and communications. Consideration was in the form of the Sleep Physicians agreeing to pay MedSleep a portion of the professional fees they earned, in exchange for these back-end services.
If the services that MedSleep provided to the Sleep Physicians were a taxable supply, then MedSleep would have been obligated to collect GST/HST paid on the consideration paid for those services.
Further to this point, CRA argued that the back-end services provided by MedSleep to the Sleep Physicians were a separate supply from the technical services that MedSleep provided to its patients.
The Taxpayer's Position – Only Exempt Supplies are Made
MedSleep argued that the services it provided were to its patients, which are exempt medical services. The administrative services that MedSleep provides are not provided to any doctors or Sleep Physicians. Thus, the taxpayer would not have made any taxable supplies to the Sleep Physicians. This means no GST/HST would need to be collected for providing those services.
The Relevant Excise Tax Act Provisions and Jurisprudence Considered by the Court
Subsections 165(1) and (2) of the Excise Tax Act require every recipient of a taxable supply to pay GST or HST on the amount that was paid for the good or service. Subsection 221(1) places an obligation on the supplier of a taxable supply to collect the GST/HST that was payable.
Thus, the primary question to be answered was whether MedSleep was making a taxable supply. If MedSleep were not making a taxable supply and only making exempt supplies, then there would be no GST/HST applicable, and there would be no subsequent requirement to collect the tax as well.
One of the issues stemming from this question is whether MedSleep made a single supply or multiple supplies. In O.A. Brown Ltd v Her Majesty the Queen, [1995] G.S.T.C 40, Justice Rip stated that if the alleged separate supply could be realistically separated from the overall supply and it was possible to purchase each individual element of the supply and end up with something useful, then it may be considered multiple supplies. In other words, if the alleged supply is intertwined and interconnected with other supplies, then multiple supplies can be considered to be a single compound supply.
River Cree Resort Limited Partnership v Her Majesty the Queen, 2022 TCC 45 (River Cree) established that how a single compound supply should be treated depends on the predominant element of the supply.
In Great-West Life Assurance Company v Her Majesty The Queen, 2016 FCA 316, the Federal Court of Appeal stated that the test is to determine which element of the supply results in payment. The supply will be taxed in the same way as the predominant element. For example, if the predominant element of the supply is an exempt supply, it will be taxed as an exempt supply at 0%.
Court's Analysis – Application of the Different Services Test from River Cree
The service in this case is comprised of many different services. In River Cree Resort Limited Partnership v Her Majesty the Queen, 2022 TCC 45, the TCC compiled various tests from previous case law on how to determine the nature of a supply where a service is composed of more than one element. The three applicable steps are:
- Determine what goods or services the supplier provided for the consideration received,
- Determine whether the goods or services provided should be characterized as a single supply comprised of a number of constituent elements or multiple supplies of separate goods or services,
- Determine whether that supply was taxable or exempt.
On the first and second steps, the Court found that the CRA's argument that the services that MedSleep provided to the Sleep Physicians should be isolated from the other services provided is inconsistent with the case law. In particular, the services provided by MedSleep and the Sleep Physicians were the use of MedSleep's premises, clerical and support services performed by MedSleep staff, and medical sleep services provided by the Sleep Physicians.
The Court determined that these should be treated as a single compound supply rather than multiple supplies of separate services. The evidence of MedSleep's processes showed that patients would not be able to access either service without the other. For example, patients referred to MedSleep by their family doctor would not be able to see a Sleep Physician without the intake services by MedSleep. The services provided by MedSleep were sufficiently intertwined to consider them a single supply. Thus, the Minister's argument failed.
The predominant element of the supply was found to be the provision of medical services, which qualifies as an exempt supply under Part II of Schedule V of the Excise Tax Act. The Court came to this conclusion because the payment was a result of the medical sleep consultative services, not the back-end services provided by MedSleep.
Furthermore, the Court held that the Sleep Physicians were not recipients for the purpose of section 165(1).
In conclusion, the Court did not agree with the CRA's contentions. Ultimately, the Court allowed the appeal and referred the issue back to the CRA for reassessment with the consideration that MedSleep did not make a taxable supply.
PRO TAX TIPS – Determine Whether You Are Making Exempt or Taxable Supplies Fee Sharing Agreements between Clinics and Doctors, and Careful Drafting
It is essential to determine whether the supply being made is taxable, exempt, or zero-rated under the Excise Tax Act. When operating a business that provides goods or services, this affects the amounts of ITCs that one can claim and the amount of tax that must be collected and remitted.
It may be the case that a business provides a mixture of services or goods. It is advantageous to determine on the outset what type of supply is made to avoid uncertainty. Engage with a Canadian tax lawyer to discuss the types of supplies you are making and the obligations that are attached to making those supplies.
FAQ
What is a GST taxable supply?
A taxable supply is defined in section 123(1) of the Excise Tax Act. It is a supply that is made in the course of a commercial activity. A commercial activity is essentially a business, an adventure or concern in the nature of trade or the supply of real property. Commercial activities do not include the making of exempt supplies. Therefore, if someone makes an exempt supply, they are not making a taxable supply.
Who is considered a recipient?
It is important to determine who a "recipient" is for the purposes of GST/HST because he or she is responsible for paying the tax. "Recipient" is defined in s.123(1) of the Excise Tax Act, and there are different possibilities as to who can be a recipient of a service. These are generally the person who is liable to pay for the good or service. If there is no amount payable, then the person who receives the delivery of the property or the person who is in possession or has the right to use the property will be the recipient. If it is a service that is provided, then the recipient is the person to whom the service is rendered.