Tax Court of Canada MedSleep decision may be applicable to medical professionals in multi-clinician practices

MedSleep Inc. v. The King, 2025 TCC 70 (MedSleep) is an important decision from the Tax Court of Canada (TCC) that may have application to medical professionals and those involved in multi-clinician practices.

This is the first decision in recent memory to consider whether a medical clinic is structured so as to be exempt from the Goods and Services Tax/Harmonized Sales Tax (GST/HST), or whether it is providing taxable administrative or management services to its physicians. Fee arrangements and the presence of administrative services are always a concern in planning medical practices.

Under the Excise Tax Act (Canada) (ETA), GST/HST is payable by the recipient of a taxable supply of goods or services made in Canada. In most instances, suppliers of such goods or services are required to register for, collect and remit the applicable sales tax to the Canada Revenue Agency (CRA). There are carve-outs in the ETA for what are known as zero-rated supplies and exempt supplies. Most health, medical, and dental services performed by licensed physicians or dentists for medical reasons are exempt supplies under section 2 of Part II of Schedule V of the ETA.

MedSleep Case Overview

MedSleep operated sleep clinics where, alongside physicians specializing in sleep disorders (sleep physicians), it provided diagnostic sleep studies to patients. In addition to contracting with sleep physicians, MedSleep hired administrative staff, registered practical nurses, registered polysomnographic technicians, scoring technicians, a director of education and medical directors.  While MedSleep offered a range of services, including sleep education, corporate fatigue management and clinical research trials, it was the diagnostic sleep studies conducted by sleep physicians that were relevant to the issue before the TCC.

The question before the TCC was whether (a) MedSleep and the sleep physicians worked together to provide patients with integrated medical sleep services constituting exempt medical services under the ETA, or (b) MedSleep provided a separate taxable supply of administrative services to Sleep Physicians in respect of which MedSleep was required to collect and remit GST/HST from the Sleep Physicians on that taxable supply.

Most patients at MedSleep were referred by family physicians in order to diagnose sleep health issues. Thereafter, patients would be assigned to a sleep physician based on the physician’s specialty. The sleep physician would review the file, meet with the patient, and begin a treatment plan that would include an overnight sleep study at a MedSleep clinic.

During the overnight sleep study, a registered polysomnographic technician would prepare the patient and collect data. There would be between three and five patients at overnight sleep studies. While a sleep physician was “on-call” each night for the overnight data collection, the “on-call” sleep physician on any given night was not necessarily the sleep physician for any particular patient who happened to be there that night.

After the overnight sleep study, a MedSleep employee arranged for the patient to complete a post-sleep study questionnaire. A scoring technician employed by MedSleep would then review the pre- and post-sleep questionnaires and evaluate the overnight data. A report would be prepared for the assigned sleep physician, who would make any revisions. MedSleep would then report the results back to the referring family physician.

MedSleep's Fees

One aspect of the invoiced fees was professional fees, related to the portion of the sleep study performed by the sleep physicians. In the provinces where MedSleep operated during the time in question, the applicable Provincial Health Insurance Plan fully paid the professional fees component. The second aspect of the invoiced fees was technical fees.

MedSleep and the sleep physicians entered into various agreements regarding the services in which the sleep physicians were involved. The agreements entered into between MedSleep and any individual sleep physician varied, depending on factors such as how long the sleep physician had worked for MedSleep and which province they practiced in. Although 100% of the technical fees were retained by MedSleep, the agreements generally allocated the professional fees to be retained 80% by the sleep physician and 20% by MedSleep.

MedSleep was reassessed by the CRA on the basis that the 20% of the Professional Fees it retained was a taxable supply of administrative services provided to the sleep physicians in respect of which MedSleep was required to collect and remit GST/HST on that supply.

Findings

The TCC judge undertook an analysis that considered whether MedSleep made a separate taxable supply to sleep physicians. MedSleep took the position that the services it provides to patients are exempt medical services.

The judge undertook an analysis of whether there was a separate supply of administrative services. In part of that analysis, the judge took issue with the Respondent’s (The Minister of National Revenue (CRA) as represented by the Department of Justice) position that MedSleep was providing back-end services to the sleep physicians, when the various agreements and contracts did not state that.

It was noted at paragraph 51 that:

None of the Agreements characterizes the amounts payable to MedSleep under the Agreements as a fee payable by the Sleep Physicians to MedSleep as consideration for the Back-end Services or any other services. Rather they all indicate that MedSleep is entitled to a portion of the professional fees received by or payable in connection with the provision of clinical services payable to the Physician. The evidence shows that both MedSleep and the three Sleep Physicians who testified at trial, all characterized this arrangement as a fee sharing arrangement.

The judge also found at paragraph 64 that “case law makes it clear that when individual components of an overall supply are interdependent and intertwined to such an extent that they cannot be sensibly separated, for GST purposes, such components should be considered a single compound supply. In this case, the medical sleep services provided by MedSleep, in tandem with the Sleep Physicians, should be considered a single compound supply made to patients.”

The judge also commented on the medical services industry, and how a single supply with a number of individual components should be treated. When individual components are intertwined for GST purposes, the predominant element of the transaction must be considered.

The judge agreed with MedSleep that, in this case, the predominant element of the single-compound supply was the exempt supply of medical sleep services rather than the taxable administrative services.

Future Outlook for Multi-Clinician Medical Practices 

The decision in MedSleep provides much-needed guidance on the GST/HST treatment of multi-clinician medical practices. This decision confirms that fee-sharing arrangements, when properly structured and supported by evidence, do not automatically give rise to a separate taxable supply of administrative services. The TCC’s analysis of the single vs. multiple supplies question demonstrates that where clinical and non-clinical components are highly integrated and interdependent, the predominant element of the supply will govern its GST/HST treatment.

Although this tax case does not eliminate all GST/HST risk in physician-clinic arrangements, it highlights the importance of careful drafting of agreements and alignment between contractual terms and economic reality. The CRA may continue to scrutinize arrangements resembling management services provided to healthcare professionals.

Fillmore Riley LLP’s Taxation Practice

Given the complexity of tax laws and particulars of individual circumstances, seeking professional tax advice is essential to ensure compliance with the tax laws and to ensure that tax-planning opportunities are maximized. For personalized guidance on structuring multi-clinician medical clinics and other tax-related matters, we encourage you to contact a member of Fillmore Riley LLP's Taxation Practice.

We offer tax advice to both individual and business clients on a wide range of matters, including corporate and commercial transactions, estate planning, and tax dispute resolution and litigation. For more information, or if you have any questions, please contact a member of the Fillmore Riley Taxation practice.