MedSleep Inc. v. The King
A Landmark GST/HST Decision in the Healthcare Sector
Introduction
In MedSleep Inc. v. The King (2025 TCC 70), the Tax Court of Canada considered whether MedSleep’s fee-sharing arrangements with Sleep Physicians gave rise to a separate taxable supply to the physicians, as alleged by the CRA, or whether all services together constituted a single exempt supply to patients. The central issue, therefore, was not merely the characterization of an exempt supply, but whether MedSleep could be viewed as providing administrative or back-end services to the physicians in addition to the integrated, patient-facing services.
Background and Context
MedSleep Inc. operates sleep clinics in several provinces, offering a wide range of services intended to diagnose and treat a variety of sleep disorders. Patients undergo an evaluation that includes overnight sleep lab tests and consultation with a Sleep Physician.
MedSleep entered into fee-sharing arrangements with the Sleep Physicians and was typically entitled to 20% of the amounts billed for the professional service rendered. Under these agreements, MedSleep and the applicable Sleep Physician agreed that the parties would be jointly entitled to the professional fees in agreed proportions. Billing was generally made directly to the Provincial Health Insurance Plan.
Position of the Canada Revenue Agency (“CRA”)
The CRA reassessed MedSleep, stating that their 20% share of the professional fees constituted consideration for a separate supply of services provided to the Sleep Physician (including referral intake, scheduling and rescheduling appointments, billings, and communications services) that was subject to GST/HST.
An argument from the CRA was that, under provincial health laws and regulations, only physicians are legally entitled to receive payment from a Provincial Health Insurance Plan for insured medical services, meaning MedSleep could not legally claim any portion of those payments.
Position of the taxpayer
MedSleep disputed the reassessment, asserting that the services were jointly provided to patients by MedSleep and the Sleep Physicians. It emphasized that its role was inseparable from that of the physicians: MedSleep supplied the infrastructure, staff, intake, and testing, while the Sleep Physicians provided consultations, interpretations, and diagnoses. Operating under a written agreement, both parties worked in tandem to deliver a single continuum of care. On this basis, MedSleep argued it was not supplying administrative services to the physicians, but was rather actively participating with them in a unified medical service supplied directly to patients.
Decision of the Tax Court of Canada
The Court rejected the CRA’s argument that, under provincial health laws and regulations, MedSleep had no legal entitlement to any amount paid by a Provincial Health Insurance Plan.
Notwithstanding the provincial health care legislation and regulations regarding payment for services performed by physicians, case law (e.g., Campbell v. The Queen, 2009 TCC 123 (West Windsor)) has upheld the effectiveness of fee-sharing arrangements between a physician and a third party for tax purposes.
Furthermore, none of the agreements characterize the amounts payable to MedSleep as fees paid by Sleep Physicians as compensation for services rendered under the program or any other services. Rather, they all indicate that MedSleep is entitled to a portion of the professional fees in connection with the provision of services to the patient.
Applying principles from previous Supreme Court of Canada Shell[1] case law, the Court held that the economic realities of a situation cannot be used to recharacterize a taxpayer’s bona fide legal relationships. In the absence of a specific provision of the Act to the contrary or a finding that the relationships are a sham, the taxpayer’s legal relationships must be respected.
Single Integrated Supply
Applying the test to determine the nature of supplies articulated in River Cree Resort and Casino (2022 TCC 45), the Court found that the various services provided by MedSleep and the Sleep Physicians formed a single, indivisible supply. The facility access, diagnostic testing, administrative coordination, and physician consultations were so closely intertwined that they constituted a single supply—an “end-to-end sleep study journey” rendered to patients. Each part of the service was so interconnected and dependent on the others that it is impossible to consider them as separate services.
The Court noted that, when considering the nature of supplies, it is necessary to apply common sense[2] and look at the situation from the customer’s perspective.[3]
Predominant Element
Applying the River Cree test, the Court held that, from the patient’s perspective, the predominant element of the supply was medical sleep services. The Court further concluded that the exemption most appropriately applicable was section 2 of Part II of Schedule V to the Excise Tax Act (ETA), which covers institutional health care services supplied by the operator of a health care facility. While other provisions (e.g., section 5.5) could conceivably have applied, the Court emphasized that satisfying a single exemption is sufficient, and section 2 best reflected MedSleep’s role as a clinic operator.
Conclusion
In the MedSleep case, the Tax Court of Canada delivered a well-reasoned decision, supported by several case law decisions, that addressed the important questions of the applicability of fee-sharing arrangements, the distinction between single and multiple supplies, and the qualification of a supply.
This decision is a welcome development for physicians and third parties seeking to enter into fee-sharing arrangements to provide healthcare services, as it offers practical guidance on structuring such arrangements in compliance with GST/HST legislation.
[1] Shell Canada Ltd v Canada, [1999] 3 S.C.R. 622.
[2] Drug Trading Co v Her Majesty The Queen, [2001] G.T.C. 382.
[3] Manship Holdings Ltd. v The Queen, 2009 TCC 75, affirmed by the Federal Court of Appeal at 2010 FCA 58.
