Executive Summary: Key Legal and Evidentiary Issues

• Dispute centered on whether MedSleep supplied taxable services to Sleep Physicians or jointly delivered exempt medical services to patients.

• CRA argued MedSleep provided administrative, marketing, and other back-end services to Sleep Physicians, requiring GST/HST collection.

• MedSleep claimed a fee-sharing model reflecting joint provision of patient services, not a supplier-recipient arrangement.

• Court found services to be a single compound supply jointly delivered to patients, not separate supplies to Sleep Physicians.

• Fee-sharing agreements were upheld as bona fide and not consideration for taxable services.

• Determination made that MedSleep’s services qualified as exempt institutional health care services under section 2 of Part II of Schedule V of the Excise Tax Act.

Facts and outcome of the case

Background and parties

MedSleep Inc. (“MedSleep”) operates sleep clinics across British Columbia, Alberta, Ontario, Nova Scotia, and New Brunswick. It partners with physicians specializing in sleep disorders (“Sleep Physicians”) to provide diagnostic sleep studies to patients, primarily overnight polysomnographic examinations known as “Level 1 Sleep Studies” or “Sleep Studies.”

Family physicians refer patients to MedSleep for diagnosis. Patients complete intake forms, after which MedSleep assigns a Sleep Physician based on specialization. The Sleep Study is conducted in MedSleep’s facility using its equipment, with on-call Sleep Physicians available during the overnight portion. Post-study data is scored by MedSleep’s technicians and reviewed by the assigned Sleep Physician, who finalizes the report and recommendations, which are then sent to the referring physician.

Fee structure

There are two types of fees:

• Technical fee: Covers the overnight Sleep Study conducted at MedSleep’s facility. MedSleep retains 100% of this fee, which is paid either by the applicable Provincial Health Insurance Plan (in Ontario and British Columbia), by private insurers, or in rare cases, directly by patients.

• Professional fee: Covers services provided by Sleep Physicians, such as initial file review, consultations, and interpretation of study results. This fee is paid by the Provincial Health Insurance Plan and shared between MedSleep and the Sleep Physician.

Under the agreements between MedSleep and Sleep Physicians, this professional fee is typically split 80% to the physician and 20% to MedSleep. Four types of agreements govern the fee-sharing model, with all generally characterizing the parties as jointly entitled to the professional fees.

The CRA’s position

The Minister reassessed MedSleep under subsection 221(1) of the Excise Tax Act for the reporting periods from January 1, 2016 to November 30, 2017 and January 1, 2018 to December 31, 2018 (“Reporting Periods”), asserting that:

• MedSleep made separate taxable supplies to Sleep Physicians in the form of administrative, billing, scheduling, referral, and marketing services.

• MedSleep failed to collect GST/HST on those taxable supplies.

MedSleep’s position

MedSleep contended that:

• It did not supply services to Sleep Physicians but collaborated with them in jointly providing medical services to patients.

• The agreements reflected fee-sharing for jointly delivered services, not fees paid by physicians for separate supplies.

• The patients were MedSleep’s patients, and services provided were part of a single, integrated medical service journey.

The court’s analysis

The Court, applying the three-step test from River Cree Resort Limited Partnership v Her Majesty The Queen, 2022 TCC 45, found:

1. What was supplied: MedSleep provided a comprehensive range of services contributing to the full patient sleep study experience, including use of facilities and equipment, intake coordination, data scoring, and communication with referring physicians. Sleep Physicians contributed by consulting patients and interpreting results.

2. Single or multiple supplies: The services of MedSleep and Sleep Physicians were so interdependent and intertwined they constituted a single compound supply.

3. Exempt or taxable: The predominant element of the compound supply was the delivery of medical sleep services, which the Court found to be exempt under section 2 of Part II of Schedule V to the Excise Tax Act.

The Court emphasized that:

• The agreements described a joint delivery of services, not a supplier-recipient model.

• The fee-sharing language in the agreements and consistent conduct by both MedSleep and Sleep Physicians supported the claim of shared entitlement.

• Precedent case law (R v Campbell, West Windsor Urgent Care Centre Inc, etc.) allows fee-sharing arrangements for tax purposes, even where legislation restricts direct payments to physicians.

The Judge accepted the testimony of MedSleep’s CEO Kosta Tsambourlianos, and physicians Dr. Terrance Paul, Dr. Frank Ritacca, and Dr. David Klein, as credible. The testimony confirmed the shared service model and absence of any deceptive conduct or sham arrangement.

Conclusion

The Tax Court of Canada ruled that:

• MedSleep did not make a separate taxable supply to Sleep Physicians.

• The services constituted a single exempt compound supply of medical services delivered jointly to patients.

• Sleep Physicians were not recipients for GST/HST purposes under subsection 221(1).

• The reassessments were overturned, and the case referred back to the Minister for reassessment.

No monetary award and costs specified in the decision.