HST on IMEs: Case Closed?

The most recent federal budget in March 2013 included an amendment to remove the HST-exempt status from various types of supplies by a provider of independent medical evaluations (IMEs) or independent assessments, as well as corresponding reports made to its clients where they are provided solely for non-health care purposes.

This budget amendment was in response to the 2001 decision of the Tax Court of Canada and the 2002 ruling by the Federal Court of Appeal in Riverfront Medical Evaluations Ltd. v. R., which, in the view of the Department of Finance, expanded the scope of the exemption for medical and health care services beyond the policy intent. However, the proposed legislation may still leave room for creative interpretation should an insurer or other IME client decide to challenge it.

Under Canada’s Excise Tax Act, HST is generally payable on a “taxable supply” made in Canada. However, subsection 123(1) of the act notes that HST does not apply to an “exempt supply.” In addition, medical and health care services are generally included as “exempt supplies” under Part II of Schedule V.

THE RIVERFRONT LITIGATION 

Prior to the Riverfront litigation in 2001, the Canada Revenue Agency’s (CRA) administrative policy was to deny an HST exemption to IMEs that were related to claims, such as those provided to an insurer or lawyer for use in connection with insurance claims or litigation. This was perhaps based on the misguided view that an IME was in the nature of a medico-legal report and that what was being supplied was a “service of providing an opinion on a legal issue of a medical nature” – as described in then Policy Statement P-080, replaced by P-248 in 2006 – rather than a professional medical opinion.

At issue in Riverfront was whether, as a factual matter, IMEs supplied by Riverfront Medical Evaluations Ltd. to insurance companies and lawyers constituted an exempt supply of “institutional health care services” rendered by the operator of a “health care facility” to a “patient” of the facility.

The Tax Court determined the supply was an “institutional health care service” on the basis that it involved several elements of its definition, such as diagnostic services, use of case rooms including necessary equipment or supplies, and physicians who received remuneration for the services from the operator of the facility.

Further, the supply was made by the operator of a “health care facility,” because “medical care” was provided in the facility and the purpose of the facility was to provide such medical care. In this regard, the Tax Court relied on the 1999 ruling, d’Abrumenil v. Commissioners of Customs & Excise, in the United Kingdom, in which the U.K. authority stated that:

…It is particularly hard to see an invasive procedure

requiring to be carried out by a doctor (or someone with appropriate medical qualifications) as not being the provision of care because of the reason why the procedure is undergone (emphasis added).

The Tax Court also determined that the institutional health care service was provided to a patient of the health care facility since in usage, a patient of a physician practising in a clinic is regarded as a patient of the clinic and such usage extended to a health care facility such as Riverfront.

The Tax Court of Canada found the supply of IMEs by Riverfront was an exempt supply. The Federal Court of Appeal affirmed the Tax Court judgment.

POST-RIVERFRONT LITIGATION

On September 21, 2006, CRA issued Policy Statement P-248, effective June 8, 2001 (the date of the Tax Court decision in Riverfront), and reversed its prior policy. This confirmed the supply of an IME to an insurer generally will be HST-exempt, subject to certain important exceptions. CRA agreed that IMEs provided to IME clients in the following situations were exempt supplies:

(i) A facility specializes in the examination of injured individuals and subcontracts solely with physicians for the services. An insurance company sends an individual, who becomes registered as a patient of the facility. A physician examines the individual in the facility and prepares an IME. The operator of the facility remunerates the physician and supplies the IME to the insurance company.

(ii) A facility specializes in the examination of injured individuals and subcontracts solely with physicians for the services. An insurance company contacts the operator of the facility for the supply of an IME and the operator contacts the individual, who becomes registered as a patient of the facility. The operator acquires and pays for the services of physician A, an independent contractor, to examine the individual and prepare the IME at a location that is not the facility. Physician B “reviews” the IME prepared by physician A in the facility. The operator remunerates physician B and supplies the IME to the insurance company.

(iii) A multi-disciplinary facility supplies IMEs and independent assessments of injured individuals by subcontracting physicians and other health care professionals. An insurance company sends an individual for a psychological assessment. The operator of the facility acquires the services of a psychologist, an independent contractor, for interview and assessment of the individual and preparation of a report. The independent assessment of the psychologist is provided to an independent contractor physician for a review. Both the psychologist’s and the physician’s services take place in the facility. The operator remunerates them and supplies the independent assessment to the insurance company.

It is interesting to note that CRA would have challenged the exempt supply treatment of all of the IMEs or independent assessments provided in the above situations under its prior policy because they were provided to insurance companies.

2013 budget

In the 2013 budget, the federal government introduced draft legislation that has been interpreted to exclude IMEs from the medical and health care services exemption. In particular, the budget proposes to add a new section 1.2 in Part II of Schedule V as follows:

For the purposes of this Part, other than sections 9 and 11 to 14, a supply that is not a qualifying health care supply is deemed not to be included in this Part.

The term “qualifying health care supply,” in turn, is proposed to be defined as the following: a supply of property or a service that is made for the purpose of

(a) maintaining health;

(b) preventing disease;

(c) treating, relieving or remediating an injury, illness, disaster or disability;

(d) assisting (other than financially) an individual in coping with an injury, illness, disorder or disability; or

(e) providing palliative health care.

Although the government’s restrictive intention is clear from the supplementary information accompanying the 2013 budget, the language of the proposed legislation is sufficiently broad to allow reasonable arguments that IMEs supplied in the foregoing circumstances are not excluded from the exemption due to the proposed section 1.2 because they are qualifying health care supplies. In particular, for example, the words “treating” or “remediating” noted in (c) above are not limited in their application to conventional doctor/patient relationships.

Indeed, some of the key factual findings in Riverfront (based, in part, on testimony of the deputy registrar of the College of Physicians and Surgeons of Ontario) were that a doctor/patient relationship did exist in the course of an IME and that medical care, including diagnosis and treatment recommendations, were undertaken.

A plucky insurer could well find a basis to challenge the budget amendments at Tax Court again.