T-4256-73
Dr. H. Hoyle Campbell (Plaintiff)
v.
The Queen (Defendant)
Trial Division, Heald J.—Toronto, October 28;
Ottawa, November 1, 1974.
Income Tax—Medical doctor incorporating company to
operate hospital—Doctor a salaried employee of company—
Medical fees assigned to company—Corporate practice of
medicine forbidden by provincial statute—Fees assessable to
doctor as income—Income Tax Act, ss. 16(1), 23—The
Medical Act, R.S.O. 1960, c. 234, ss. 19, 42, 51—The
Private Hospitals Act, R.S.O. 1960, c. 361, s. 16.
The plaintiff, a medical doctor specializing in plastic surg
ery, caused the incorporation of a company in which he was
the beneficial owner of all issued shares. The company's
powers included the establishment and operation of private
hospitals and the engagement of medical and surgical practi
tioners to carry out the objects of the company. The plain
tiff and another doctor were engaged under contracts as
full-time surgeons on a salaried basis. The company at first
billed the patients for both its hospital services and the
medical services performed by its doctor employees. With
the advent of provincial medical insurance and government
regulations thereunder, the employed doctors rendered bills
to the patients and endorsed to the company the cheques
,received in payment. The amount of $86,492 was generated
by the medical services of the plaintiff during the taxation
years 1967-69. The Minister re-assessed the plaintiff in this
amount, on the ground that it should have been included as
"professional fee income" to the plaintiff on the latter's
returns, rather than being included in income by the hospital
company.
Held, dismissing the appeal (subject to a further consider
ation of quantum), the fees in question were earned through
the consultation of the plaintiff by the patients. The com
pany was merely the assignee of fees which it could not
earn. The Medical Act (Ontario) made it clear that the
practice of medicine could only be carried on by a natural
person, involving a personal responsibility to the patient and
to the governing body of the profession. The Minister was
right in adding to the plaintiff's income the medical fees
which he earned.
Kindree v. M.N.R. [1965] 1 Ex.C.R. 305, followed.
Sazio v. M.N.R. [1969] 1 Ex.C.R. 373, distinguished.
INCOME tax appeal.
COUNSEL:
P. S. A. Lamek for plaintiff.
M. R. V. Storrow and S. Pustogorodsky for
defendant.
SOLICITORS:
Fraser & Beatty, Toronto, for plaintiff.
Deputy Attorney General of Canada for
defendant.
The following are the reasons for judgment
delivered in English by
HEALD J.: This is an appeal from the re
assessment by the Minister of National Revenue
of the plaintiff's income tax returns for the
taxation years 1967, 1968 and 1969. The Minis
ter added to the plaintiff's net income the fol
lowing amounts as "professional fee income":
For the taxation year 1967 $28,768.00
For the taxation year 1968 $29,574.00
For the taxation year 1969 $28,150.00
Total $86,492.00
The main issue in the appeal is the propriety
of adding such amounts to the plaintiff's net
income for the taxation years in question.
The plaintiff is a medical doctor duly licensed
to practice medicine and is a specialist in plastic
surgery. He graduated in 1936 from the Univer
sity of Toronto Medical School. Thereafter, and
until 1939, he was engaged in post-graduate
work specializing in reconstructive surgery. In
1939, he joined the Armed Forces, being
attached to both the British and Canadian
Armies as a plastic surgeon. He returned from
overseas in 1945 and until 1949 was engaged as
a full-time surgeon at the Christie Street Hospi
tal in Toronto. During that period, he was a
full-time salaried employee of the Department
of Veterans Affairs. During the period from
1949 to 1956, he was in private practice in
Toronto, spending a portion of his time as a
part-time specialist in plastic surgery at Sunny-
brook Veterans Hospital in Toronto. He testi
fied in evidence that, in the early 1950's, based
partly on his war-time experience and partly on
his private practice experience in Toronto, he
began to realize that many surgical patients
were remaining in hospitals for much longer
periods of time than was necessary. It was his
opinion, based on his own experiences, that by
reducing the number of post-operative days in
hospital, and by substituting therefor, post-oper
ative care on an out-patient basis, the escalating
costs for health care services could be dramati
cally reduced. He said that he had discussions
with a number of other individuals in the health
care field which served to confirm his own
views. As a result, he decided to "pioneer" his
ideas by establishing his own private hospital
where he could put these ideas into practice.
Thus it was that in 1954 he consulted his solici
tor who advised him to incorporate a company
to operate said private hospital. The company
was incorporated on March 25, 1954 as Camp-
bell Hospitals Limited (hereafter the Hospital
Company). The plaintiff has at all times, benefi
cially owned all the issued shares of said com
pany. The purposes and objects of the com
pany, are, inter alia, as follows:
(a) To establish, equip, maintain, operate and conduct pri
vate hospitals and other institutions for the medical and
surgical treatment of persons requiring the same who shall
be admitted thereto;
(b) To hire, engage or otherwise secure the services of
licensed medical and surgical practitioners, scientists,
nurses, technologists or other persons for the promotion and
carrying out of the objects of the Company; .. .
Finally, in 1956, the Hospital Company was
ready to begin operating a private hospital on
Victoria Street in Toronto and on August 14,
1956, applied for a licence from the Department
of Health of the Province of Ontario. Said
licence was duly issued and has been duly
issued for each of the years since 1956. Said
licences, issued by the Ontario Hospital Ser
vices Commission empowered the Hospital
Company to operate a surgical hospital under
the name of "Institute of Traumatic, Plastic and
Restorative Surgery" (hereafter called The
Institute) in Toronto, said hospital not to accom
modate more than four adult patients and to be
restricted to traumatic, plastic and restorative
surgery. The plaintiff, in describing the hospital
operation said that it has both out-patient and
in-patient facilities, a recovery room, laboratory
facilities, examining rooms and doctors' offices.
He said the hospital staff approximated 15 to 18
persons through the years, consisting of nurses,
nurses aides, secretary, bookkeeper, medical
records librarian, various service and repair per
sonnel and doctors. The plaintiff testified that
the hospital operation was successful, certainly
from the point of view of shortening the length
of patient stay in the hospital. In 1959, the
plaintiff wrote an article for a publication
known as "Hospital Administration and Con
struction". The article was entitled "Can We
Reduce the Cost of Patient Illness?" In the
article, the plaintiff expresses his views, thereon
and relates the experience of his own hospital in
Toronto where the per-patient illness cost was
reduced by substantially shortening the duration
of the patient's stay in hospital.
During each of the taxation years here under
review, the Hospital Company entered into a
contract with The Hospital Services Commis
sion of Ontario whereunder the hospital was an
approved carrier for insured services under the
Province of Ontario plan of hospital care insur
ance. Said contract provides in paragraphs 4
and 6 thereof as follows:
(4) The Corporation and its hospital shall render at the said
hospital adequate hospital, nursing and medical care and
treatment and shall adhere to such reasonable standards of
hospital, nursing and medical care and treatment as may be
required by the Commission from time to time.
(6) The Corporation and its hospital shall maintain at the
said hospital such staff as may be required by the Commis
sion for the purpose of rendering adequate medical care and
treatment to its patients.
The plaintiff said that from the outset, full-
time surgeons and nurses were employed by the
Hospital Company. Commencing in 1956 and
continuing until the present, the Hospital Com
pany has employed the plaintiff and Dr. Charles
S. Kilgour on staff as full-time surgeons on a
salaried basis. The plaintiff's contract of
employment with the Hospital Company is
dated March 31, 1956, while Dr. Kilgour's con
tract is dated June 30, 1956. Other surgeons
have also been employed from time to time, on
a full-time salaried basis. Another doctor, Dr. E.
Mitchell Tanz, has been associated with the
hospital since 1965 but on a different basis than
that of the plaintiff and Dr. Kilgour. Both the
plaintiff and Dr. Kilgour receive an annual
salary from the Hospital Company payable in
monthly instalments. There is, in both employ
ment contracts, provision for payment of annual
bonuses as the directors of the Hospital Com
pany may, from time to time, determine. The
Hospital Company rented its equipment includ
ing automobiles, office equipment and supplies,
surgical equipment, etc., from a company, also
incorporated in 1954 and known as Independent
Management and Services Limited (hereafter
the Management Company). The shares in the
Management Company have, at all relevant
times, been beneficially owned â by the plain
tiff and â by Dr. Kilgour. The amount paid by
the Hospital Company to the Management Com
pany for management, office and hospital ser
vices during each of the years under review was
in the order of approximately $54,000. In turn,
the Management Company paid the plaintiff
during each of said years, a salary of $5,000 for
his efforts in administering the business of the
Management Company. The Management Com-
pany's only source of income and only business
purpose was the management of the Hospital
Company. As of March 31, 1969, the Manage
ment Company had retained earnings of some
$100,000.
The Hospital Company billed the patients for
both hospital services and the medical services
performed by its salaried doctor employees.
With the advent of provincial government hos
pital and medical insurance, a large portion of
the Hospital Company's accounts were paid by
these plans. Government regulations required
that the in-patient hospital services portion be
billed for separately to the Ontario Hospital
Services Commission whereas the medical or
surgical portion covering the doctors' services
had to be billed to O.H.I.P. (or its predecessor—
Ontario Medical Services Insurance Plan) in the
name of the individual doctor who performed
the medical services. The Hospital Company
received payments directly from the Ontario
Hospital Services Commission for the hospital
or non-medical component. O.H.I.P. paid the
medical component directly to the doctor per
forming the service. Both the plaintiff and Dr.
Kilgour endorsed all of these cheques over to
the Hospital Company. In the case of services
performed for non-insured patients, such as
transients from outside Ontario, and non-
insured services (aesthetic plastic surgery, for
example) performed for insured patients, one
bill was sent covering both medical and non-
medical components. All of these receipts of
income by the Hospital Company were included
for income tax purposes in the income of the
Hospital Company. Thus, the Hospital Com
pany was in receipt during the years under
review, of revenues generated by medical and
surgical services performed by the plaintiff and
Dr. Kilgour. The amounts so generated by the
medical services performed by the plaintiff
during the years under review are the amounts
totalling $86,492 referred to at the outset of
these Reasons. The defendant takes the position
that said moneys should have been included as
"professional fee income" to the plaintiff on the
plaintiff's tax returns rather than being included
as income to the Hospital Company on its
income tax returns.
The defendant asserts that the plaintiff car
ried on the practice of medicine in the years
under review and that all amounts earned by the
plaintiff for the practice of medicine and
received on his behalf by the Hospital Company
should have been included in computing the
plaintiff's profit from carrying on the practice of
medicine. In the alternative, the defendant
pleads that if the Hospital Company received
any income earned by the plaintiff, that said
income constituted a payment or transfer of
property made pursuant to the direction of, or
with the concurrence of, the plaintiff, within the
meaning of section 16(1) of the Income Tax
Act' and should therefore be included in com
puting the plaintiff's income.
In the further alternative, the defendant
pleads that if the plaintiff transferred to the
Hospital Company (a company with which he
was not dealing at arm's length) the right to any
amount, such amount was one that would, if the
right thereto had not been transferred, have
been included in computing the plaintiff's
income under the provisions of section 23 of the
Income Tax Act 2 .
On the other hand, the plaintiff relying on the
contract of employment between the Hospital
Company and the plaintiff says that the plain
tiff, at no time during the period under review,
carried on the practice of medicine or rendered
medical services or advice on his own behalf or
on behalf of anyone else other than the Hospital
Company. The plaintiff further submits that the
fees and charges added by the Minister to the
plaintiff's net income were medical services ren
dered by the Hospital Company to its patients in
the normal course of its business as a private
specialty surgical hospital and as such, said fees
and charges for such services were income of
the Hospital Company and not income of the
plaintiff.
In his submissions, plaintiff's counsel relied
on the decision of Cattanach J. in Sazio v.
' 16. (1) A payment or transfer of property made pursu
ant to the direction of, or with the concurrence of, a
taxpayer to some other person for the benefit of the taxpay
er or as a benefit that the taxpayer desired to have conferred
on the other person shall be included in computing the
taxpayer's income to the extent that it would be if the
payment or transfer had been made to him.
2 23. Where a taxpayer has, at any time before the end of
a taxation year (whether before or after the commencement
of this Act), transferred or assigned to a person with whom
he was not dealing at arm's length the right to an amount
that would, if the right thereto had not been so transferred
or assigned, be included in computing his income for the
taxation year because the amount would have been received
or receivable by him in or in respect of the year, the amount
shall be included in computing the taxpayer's income for the
taxation year unless the income is from property and the
taxpayer has also transferred or assigned the property.
M.N.R. 3 . In that case, the appellant, a coach of
a football club formed a corporation to carry
out said coaching duties along with other activi
ties in which he was engaged. The football club
entered into a contract with the corporation for
coaching services and the appellant, in turn,
undertook to make his coaching services avail
able exclusively to the corporation to enable it
to carry out its contract with the club. The
amount paid by the club to the corporation for
coaching services was $22,000 annually where
as the appellant drew a salary from the corpora
tion of only $6,000 annually. The Minister
sought to disregard the existence of the corpora
tion and to consider the appellant as an
employee of the club and to be taxable on the
entire $22,000. The Minister, in that case, as in
the case at bar, relied on sections 16 and 23 of
the Income Tax Act (supra). Mr. Justice Cat-
tanach, in allowing the appellant's appeal, held,
on the facts in that case, that the corporation
was not a "mere sham, simulacrum or cloak"
and was fully competent to engage in football
coaching activities in the manner it did; that the
agreements between the appellant, the corpora
tion and the club were bona fide commercial
transactions and in fact governed and deter
mined the relationship between the parties.
However, on page 381 of his judgment in the
Sazio case, (supra), Mr. Justice Cattanach had
this to say:
There is no doubt whatsoever that the company is a
properly constituted legal entity and that the company could
legitimately carry on the objects for which it was incorpo
rated. Any person rendering services may incorporate a
company to render those services provided there is no
prohibition of those services being performed by a corpora
tion rather than a natural person.
An example of such a prohibition occurred in Kindree v.
M.N.R., [[1965] 1 Ex. C.R. 305; [1964] C.T.C. 386,] where I
expressed the view that the practice of medicine could only
be carried on by a natural person which conclusion followed
from the general tenor of the Medical Act and the code of
ethics of the medical profession. I also intimated that a
clause in the objects of the company insofar as it purported
3 [1969] 1 Ex. C.R. 373.
to authorize the company to conduct the practice of medi
cine must be ineffective.
In this case there is no such prohibition as was present in
the Kindree case.
It is thus instructive to consider the Kindree
case, since it deals also with the income of a
doctor. In that case, the appellant incorporated
a company which employed the appellant as a
doctor and appellant's wife as a nurse. The
company also employed other doctors who
assisted the appellant in the practice of medi
cine. The evidence established that there was no
real change in the manner in which the appel
lant's practice was conducted after' the incorpo
ration of the company from the manner in
which it was conducted prior thereto in so far as
the supplying of medical attention to patients
was concerned. The Minister added to the
appellant's personal income, that portion of the
income credited to the company which exceed
ed the amount paid to the doctors by the com
pany by way of salary on the ground that such
revenue represented income of the appellant
and not of the company. Cattanach J. upheld the
Minister's assessment and dismissed the appeal.
The ratio of the judgment is contained on pages
311 and 312 of the report and reads as follows:
In my view there is no doubt whatsoever that the practice
of medicine can only be carried on by a natural person
involving a personal responsibility to the patient and to the
governing body of the profession, such conclusion being
obvious from the general tenor of the Medical Act (supra)
and the code of ethics of the medical profession to which
the appellant subscribed: In so far as clause (b) of the
objects of the Company purports to authorize the Company
to conduct the practice of medicine it must be ineffective.
As indicated by the evidence, the incorporation of the
Company did not alter in substance the conduct of the
business. In my opinion the crucial test is whom the patients
thought they were consulting and were in fact consulting.
They had no knowledge, or any means of knowledge, of the
Company until accounts were rendered to them in the name
of the Company after treatment.
In my opinion, the appellant is precluded in fact and in
law and as a matter of public policy from practising the
profession of medicine in any of its forms as agent of a body
corporate and the document purporting to be a contract of
employment between the appellant and the Company, did
not establish an employer-employee relationship. Similarly
so the documents purporting to be contracts of employment
between the other doctors and the Company did not estab-
lish an employer-employee relationship as between them
and the Company, but rather such relationship subsisted
between them and the appellant.
It is, therefore, my understanding of the facts that the
monies received by the Company for services rendered by
the appellant and the other doctors were fees already earned
by him either personally or through the doctors employed by
him and the Company was merely the assignee of these fees
which the Company did not and could not earn and to which
it had no right other than as assignee of the appellant's
earnings.
In my view, the essential facts in the case at
bar are indistinguishable from those in the Kin-
dree case (supra). Here also, the general tenor
of The Medical Act 4 makes it clear that the
practice of medicine can only be carried on by a
natural person involving a personal responsibili
ty to the patient and to the governing body of
the profession. Mr. Justice Cattanach said that
. the crucial test is whom the patients
thought they were consulting and were in fact
consulting." In the Kindree case (supra), the
corporation rendered the accounts for medical
services. In the case at bar, the bills for the
medical component of the total account were
sent out on the letterhead of the plaintiff or Dr.
Kilgour. This factual difference makes it even
clearer than in Kindree (supra) that the patients
were consulting the plaintiff and not the Hospi
tal Company and that the payments for such
services were in fact payments to the plaintiff
and not to the Hospital Company. This is con
firmed by the fact that O.H.I.P. and The Ontario
Workmen's Compensation Board, in making
payment for medical services rendered by the
plaintiff, made the cheques payable to the plain
tiff who, in turn, endorsed them over to the
Hospital Company. Here, as in Kindree (supra),
the Hospital Company is merely the assignee of
the fees which the Hospital Company did not
and could not earn and to which it had no right
other than as assignee of the plaintiff's earnings.
4 R.S.O. 1960, c. 234—see for example sections 19, 42
and 51.
Plaintiff's counsel endeavoured to distinguish
the Kindree decision on the basis that in Kindree
(supra), there was no other legitimate purpose
for the incorporation and that the incorporation
was only a transparent, albeit somewhat ingeni
ous device to divert a portion of the medical
income to a corporation. Counsel submits that
in the case at bar, the Hospital Company was
incorporated for the express and primary pur
pose of operating a private hospital and has
done so for some 18 years and that this feature
of the present case distinguishes it from the
Kindree case (supra). It is true that the Hospital
Company was in the business of operating a
private hospital, which it was perfectly entitled
to do. However, it also engaged in other activi
ties which it was not entitled to do—i.e., engage
in the practice of the profession of medicine
through its agents, the plaintiff and Dr. Kilgour.
In paragraph 1(c) of the plaintiff's contract of
employment with the Hospital Company, the
plaintiff agreed to:
1. ...
(c) keep a true record and account of all professional
visits made, all patients attended and all other business
done by him on behalf of the Company and shall account
for and pay to the Company all moneys received by him
for work done by the Company. [Underlining mine.]
From this clause (which also appears in Dr.
Kilgour's contract) it is clear that the "work
done by the Company" refers to the medical
services performed by the plaintiff and that the
Hospital Company is, in reality, endeavouring to
practice medicine. Then, paragraph 5 of the said
agreement contains the following:
5. Campbell agrees that during the continuance of his
employment hereunder he will ... practice medicine for the
account and benefit of the Company.
(Dr. Kilgour's contract also contains this
provision).
Plaintiff's counsel submitted that the Hospital
Company, in hiring doctors, was only doing so
in order to comply with the provisions of para
graphs 4 and 6 of its agreement with the Hospi-
tal Services Commission (Exhibit 1, Tab 5),
which clauses required it to maintain adequate
medical staff at the hospital. I do not read said
paragraphs 4 and 6 to mean that the Hospital
Company must have salaried medical
employees. The requirement of said paragraphs
is simply that adequate medical care must be
available for the hospital's patients. The hospital
might have chosen other ways by which to
comply with those requirements, e.g., an
arrangement whereby qualified doctors in pri
vate practice would make themselves available.
It was not necessary for the Hospital Company
to attempt to engage in the practice of medicine
itself to fulfill the contractual obligations above
mentioned.
Plaintiff's counsel also submitted that the
arrangement here was not any different than
that commonly adopted by other hospitals,
public and private, where there are full-time
salaried medical doctors such as radiologists,
anaesthetists, resident interns, etc., and that
there is nothing illegal or improper about such a
practice. Counsel submits that such a practice is
permissible under The Private Hospitals Act of
Ontario 5 and in particular, section 16 thereof
which states:
16. No person shall be employed as an intern in a private
hospital unless he is registered under The Medical Act.
It is counsel's submission that since said section
16 contemplates employment of an intern by a
private hospital, that such employment is thus
permissible under said Act. I agree with his
submission to the extent that, in my view, it is
perfectly proper and legal for hospitals to
engage salaried doctors to perform medical ser
vices in said hospitals so long as it is the doc
tors, and not the hospitals, that are practising
medicine.
For the reasons above stated, on the particu
lar facts of this case, it is my view that the
Hospital Company was endeavouring to prac
tice medicine which is prohibited under The
Medical Act of Ontario.
3 R.S.O. 1970, c. 361.
I have accordingly concluded that the Minis
ter was correct in adding to the plaintiff's net
income the medical fees earned by the plaintiff
and previously added to the Hospital Compa-
ny's income.
I have reached this conclusion, cognizant of
the fact, that in so finding, I am denying to this
plaintiff, because he is a professional man
whose professional Act prohibits a corporation
from practising medicine, the tax advantage
available, through incorporation, to most busi
nessmen and to members of some other profes
sions. I am aware of the views of some editorial
writers and tax experts to the effect that taxa
tion should be neutral, as between different
forms of doing business and making profits.
However, as has been said many times, it is the
function of the Court to interpret the law as it
is, and not as it might or should be.
At the commencement of the trial, both coun
sel agreed that if the plaintiff's appeal was dis
missed on the question of principle, the assess
ments herein should be referred back to the
Minister for re-consideration and final determi
nation on the question of quantum of the
amounts to be finally added to the plaintiff's
income for the taxation years under review. I so
direct.
After such re-consideration, the matter may
be spoken to further.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.