If you operate a medical clinic in Canada, share billings with physicians, or work under a fee-sharing or cost-sharing model as said medical doctor, a recent Tax Court of Canada decision should be on your radar. In MedSleep Inc. v. The King (2025 TCC 70)1, the Court delivered a clear and practical ruling on when clinic-physician arrangements remain GST/HST-exempt medical care and when the CRA may attempt to recharacterize them as taxable administrative services. For doctors and clinics navigating shared facilities, diagnostic centres, and integrated care models, this decision provides rare judicial clarity on how fee-sharing structures are viewed for GST/HST purposes, and why careful structuring can make the difference between compliant collaboration and unexpected tax exposure.
Importantly, the dispute in the MedSleep case did not centre solely on whether medical services are exempt under the Excise Tax Act (“ETA”), but rather on whether MedSleep could be viewed as supplying administrative or back-end services to physicians, distinct from the patient-facing medical services. The CRA’s position, if accepted, would have recharacterized a portion of physician billings as consideration for taxable supplies.
The Court ultimately rejected the CRA’s approach, providing significant guidance to physicians and clinics operating under fee-sharing models.
Background and Context
MedSleep Inc. operated sleep disorder clinics across multiple Canadian provinces including Ontario and BC. Its clinics were designed to diagnose and manage sleep disorders through a structured clinical process.
Patients were referred to MedSleep clinics and underwent an evaluation that typically included:
- intake and administrative coordination,
- overnight sleep laboratory testing, and
- consultation, interpretation, and diagnosis by a Sleep Physician (a physician specializing in sleep disorders).
MedSleep entered into written fee-sharing agreements with Sleep Physicians. Under these agreements:
- professional services were billed to the applicable Provincial Health Insurance Plan,
- MedSleep was typically entitled to 20% of the professional fees, and
- the remaining portion was retained by the physician.
The agreements expressly stated that MedSleep and the Sleep Physicians were jointly entitled to the professional fees in agreed proportions. MedSleep’s entitlement was not framed as a chargeback or overhead fee, but rather as a share of professional revenue arising from the provision of patient care.
Position of the Canada Revenue Agency
The CRA reassessed MedSleep under Part IX of the ETA, asserting that:
- MedSleep’s 20% share of professional fees represented consideration for a separate supply of services to the Sleep Physicians, and
- those services included referral intake, marketing, scheduling and rescheduling, billing, and communications support (“Back-end Services”) that allows the Sleep Physicians to spend less time on each patient increasing both their billings and profits.
On this basis, the CRA argued that MedSleep should have charged and collected GST/HST on its share of the professional fees.
A central element of the CRA’s argument relied on provincial health care legislation, under which only physicians are legally entitled to receive payment from Provincial Health Insurance Plans for insured medical services. The CRA maintained that, because MedSleep could not legally receive such payments, its portion of the fees must necessarily represent payment for services supplied to the physicians.
Position of the Taxpayer
MedSleep disputed the reassessment and took the position that:
- it did not supply administrative or support services to physicians as a separate supply, and
- MedSleep and the Sleep Physicians jointly provided medical services directly to patients.
MedSleep emphasized that its role was inseparable from that of the physicians. It provided the physical facilities, diagnostic equipment, staff, intake processes, and sleep testing, while the physicians provided consultations, interpretations, and diagnoses. Together, these services formed a continuous, coordinated course of medical care delivered to patients. MedSleep argued that, under the written agreements, it was entitled to a share of professional fees in connection with the provision of medical services to patients, not as compensation from physicians for administrative support.
Decision of the Tax Court of Canada
The Court rejected the CRA’s assertion that provincial health care legislation prevented MedSleep from being entitled to a portion of the professional fees.
While acknowledging that only physicians are permitted to bill provincial insurance plans for insured services, the Court held that this did not invalidate fee-sharing arrangements for tax purposes. Prior case law, including Campbell v. The Queen (2009 TCC 123), confirmed that such arrangements can be legally effective even where payment flows through physicians.
Fundamentally, the Court found that:
- none of the agreements characterized MedSleep’s share as compensation paid by physicians for services rendered to them, and
- the agreements consistently described MedSleep as being entitled to a portion of professional fees in connection with services rendered to patients.
Respecting Legal Relationships
Relying on Supreme Court of Canada jurisprudence, including Shell Canada Ltd. v. Canada, the Court reaffirmed that:
- the CRA cannot recharacterize bona fide legal relationships based on perceived economic realities,
- unless there is a specific statutory provision permitting recharacterization, or
- the arrangement is a sham.
In the absence of such findings, the legal relationships created by the agreements had to be respected.
Single Compound Supply Analysis
To determine the nature of the services (taxable vs exempt supply), the Court applied the analytical framework articulated in River Cree Resort and Casino (2022 TCC 45).
Under this framework, the Court examined whether the services provided by MedSleep and the Sleep Physicians were:
- multiple distinct supplies, or
- a single, indivisible supply.
The Court concluded that the services constituted a single compound supply. Facility access, diagnostic testing, administrative coordination, and physician consultations were so closely intertwined that they formed a single end-to-end sleep study journey for patients. Justice Bodie concluded that “a patient would not be able to usefully acquire the patient intake and communication services, access to facilities and equipment, data collection and scoring services provided by MedSleep on their own and receive the diagnosis and treatment plans they require to properly treat their sleep issues. Similarly, patients would not be able to obtain the data interpretation and consultative services provided by the Sleep Physicians without the services supplied by MedSleep. Accordingly, together MedSleep and the Sleep Physicians combine to provide one single compound supply to patients.”
Each element was dependent on the others, and none could realistically be acquired in isolation. The Court emphasized that the analysis must be grounded in common sense and assessed from the patient’s perspective, rather than from a contractual or accounting standpoint.
Predominant Element and GST/HST Exemption
Having determined that there was a single compound supply, the Court then identified the predominant element of that supply.
From the patient’s perspective, the dominant purpose of the arrangement was the receipt of medical sleep services, including diagnosis and treatment. Accordingly, the supply qualified as an exempt supply of institutional health care services under section 2 of Part II of Schedule V to the ETA.
While the Court noted that other exemption provisions could potentially apply, it held that only one exemption is required and that section 2 most accurately reflected MedSleep’s role as the operator of a health care facility.
As a result, the entire supply was exempt from GST/HST.
Conclusion
In MedSleep Inc. v. The King, the Tax Court of Canada delivered a thorough and well-reasoned decision addressing:
- the validity of fee-sharing arrangements between clinics and physicians,
- the distinction between single and multiple supplies for GST/HST purposes, and
- the proper application of health care exemptions under the ETA.
The Court confirmed that fee-sharing arrangements do not automatically give rise to taxable supplies of administrative services to physicians, particularly where the parties jointly provide an integrated medical service to patients.
For physicians and medical clinics, the decision provides important clarity and practical guidance on structuring collaborative care models in a manner consistent with GST/HST legislation. It reinforces the principle that properly documented, bona fide arrangements delivering unified patient care should be analyzed based on their legal substance and the patient experience, rather than recharacterized through administrative assumptions.
