Supreme Court of Canada

R. v. Campbell, [1980] 2 S.C.R. 256

Date: 1980-06-17

Her Majesty The Queen Appellant;

and

Dr. H. Hoyle Campbell Respondent.

1980: May 26; 1980: June 17.

Present: Laskin C.J. and Beetz, Estey, Mclntyre and Chouinard JJ.

ON APPEAL FROM THE FEDERAL COURT OF APPEAL

Taxation—Whether fees for surgical services of doctor under contract of employment with hospital are income properly assessable to doctor rather than to hospital to which fees were assigned—Whether hospital practicing medicine—The Medical Act, R.S.O. 1970, c. 268—The Private Hospitals Act, R.S.O. 1970, c. 361—The Attorney General Statutes Amendment Act, 1975 (No. 2), 1975 (Alta), c. 44, Part 6.

The respondent is a plastic surgeon licensed to practise in Ontario. In the early 1950’s the respondent decided to establish his own hospital and caused an Hospital Corporation to be incorporated all the shares of which he beneficially owned. Pursuant to an employment contract with the Corporation, which provided that he would serve the Corporation as a medical doctor and practise medicine for the account and benefit of the Corporation, he assigned his fees for surgical services performed for the Corporation to the Corporation and he endorsed the cheques received by him from the Ontario Hospital Insurance Plan over to the Corporation. The Minister of National Revenue, in assessing the income of the respondent, added in computing his net income, the fees assigned to the Corporation. The respondent appealed from these assessments to the Federal Court, Trial Division, contending that the fees were assessable to the Corporation. The Court dismissed his appeal, holding that here the Corporation was endeavouring to practise medicine which was in violation of The Medical Act of Ontario. The Federal Court of Appeal, by a majority, was of the view that the respondent was entitled to succeed in his challenge of the tax assessments. It was not argued that the respondent was engaged in an improper scheme of tax avoidance nor that the incorporation was a sham.

Held: The appeal should be dismissed.

It was the Crown’s submission that the hospital was practising medicine, which was a prohibited activity under The Medical Act of Ontario and, consequently, that the respondent’s contract of employment was in-

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valid, with the result that the respondent was properly assessable for tax on fees which were generated by his surgical services. This submission cannot stand. While it is not in dispute that in Ontario only an individual can be licensed to practise medicine, the employment contract, here, did no more than provide that the benefit of the respondent’s professional services in the form of fees should go to the hospital that should be construed as stipulating that it was the hospital that should be considered as the medical practitioner. Moreover, that did not inevitably require the conclusion that, in assigning his fees to the hospital, the respondent was assigning his own money rather than carrying out an arrangement under which the fees belonged to the hospital. The billing procedure was required by provincial regulations and cannot be the controlling element in determining to whom the fees belong when there was a valid arrangement for the provision of a salary to the respondent and for the accounting of fees to the hospital as employer.

Kindree v. Minister of National Revenue, [1965] 1 Ex. C.R. 305; No. 594 v. Minister of National Revenue (1959), 21 Tax A.B.C. 212; Carruthers Clinic Ltd. v. Herdman, 1956 CanLII 146 (ON SC), [1956] O.R. 770, referred to.

APPEAL from a judgment of the Federal Court of Appeal[^1], allowing an appeal by the respondent from a judgment of the Federal Court, Trial Division[^2]. Appeal dismissed.

John R. Power, Q.C., and Been Olsen, for the appellant.

P.S.A. Lamek, Q.C., and R.C. Heintzman, for the respondent.

The judgment of the Court was delivered by

THE CHIEF JUSTICE—The issue in this appeal, which is here by leave of this Court, is whether fees for surgical services performed by the respondent are income properly assessable to him rather than to the licensed private hospital to which he assigned those fees pursuant to an employment contract with the hospital. The Crown appellant conceded that, although all the shares of the incorporated hospital were beneficially owned by the respondent, it was not arguing that the

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incorporation was a sham or that the respondent was engaged in an improper scheme of tax avoidance. The good faith of the respondent in establishing the hospital to support his conviction, born of experience, that post-operative days in hospital could be considerably reduced by providing for post-operative care on an out-patient basis was not questioned.

The hospital was incorporated in 1954 under the name Campbell Hospitals Ltd. with, inter alia, the following objects:

(a) to establish, equip, maintain, operate and conduct private 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;

In August 1956, when it was ready to operate, it applied for a licence from the Ontario Department of Health. The licence was issued by the Ontario Hospital Services Commission and has been renewed annually. Under the licence, the hospital was authorized to operate a surgical hospital in the name of The Institute of Traumatic, Plastic and Restorative Surgery and was restricted to such surgery. Accommodation was to be provided for no more than four in-hospital patients but it could have out-patients and, indeed, it had facilities for both kinds of patients. It also had a supporting staff of nurses and other employees, as well as two full-time surgeons, the respondent and another doctor. Other surgeons were employed from time to time on a salaried basis. A third surgeon has been associated with the hospital since 1965 although on a different compensation basis from the respondent and the second surgeon who were on an annual salary payable in monthly instalments. There is no doubt that the respondent, by agreeing to a salary that was much less than his earning capacity as a plastic surgeon, was able to provide funds from his assigned fees to build up the financial position of the hospital. It was clear that the hospital could not establish a pool of working capital from its hospital functions since the rates for in-patient care were fixed under the

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government insurance plan so as to cover only operating costs.

Although the hospital had been licensed in 1956 and the respondent’s employment contract was first entered into shortly before that time, the taxation years with which the assessments in issue here are concerned are 1967, 1968 and 1969. (There is no explanation for the choice of these years rather than earlier years.) During those years, the hospital had a contract with the Ontario Hospital Services Commission constituting it an approved carrier for insured services pursuant to the Ontario Plan for Hospital Care Insurance under, inter alia, the following terms:

(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 Commission for the purpose of rendering adequate medical care and treatment to its patients.

Originally, the hospital billed its patients both for hospital care and for medical services by its salaried doctors but with the establishment of the provincial hospital and medical care insurance plan (which figured greatly in the hospital’s revenues), it became necessary, in obedience to governing regulations, that the fees for medical services be billed separately to the Ontario Medical Services Insurance Plan (as it was then called, now the Ontario Hospital Insurance Plan) in the name of the individual doctor who performed the services. The billings under the insurance plan for hospital care were in the name of the hospital and submitted to the Ontario Hospital Services Commission from which the hospital received payments directly. The cheques received by the respondent and his associate from O.M.S.I.P. were endorsed by them over to the hospital. Non-insured patients, or patients receiving non‑insured services (such as

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cosmetic plastic surgery) were billed by the hospital for both hospital and surgical services and the receipts were included as its income. So too were the fees for insured medical services assigned by the respondent and his associate or other doctors who were employed on salary from time to time. I should say at this point that, in my opinion, nothing in this case turns on the fact that billings for insured medical services were in the names of the doctors performing them when this was done to comply with government regulations.

The respondent’s contract of employment with the hospital, dated March 31, 1956, provided by clause 1 that he would serve the [hospital] Company as a medical doctor and particularly in the practice of plastic and/or restorative surgery and while so employed Campbell would:

(a) observe and conform to all the laws and customs of the medical profession;

(b) subject to the above mentioned laws and customs and as herein otherwise provided fulfill and obey all lawful directions of the board of directors of the Company;

(c) keep a true record and account of all professional visits paid, 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;

(d) not, except as in clause 2 hereof set out, carry on or be engaged in the practice of medicine or give medical advice on his own account.

The respondent also agreed in clause 5 that “during the continuance of his employment hereunder he will, subject to the provisions of clause 2 hereof, practise medicine for the account and benefit of the Company”. Clause 2 of the employment contract provided that “nothing herein contained shall prevent Campbell from giving medical advice for or acting as a consultant or surgeon for the Department of Veterans’ Affairs or any organization or hospital operated or supported by such Department or any successor thereto”.

In this Court, as apparently in the Courts below, the Crown contended that there were two ques-

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tions to be considered, as follows: (1) on the facts of this case, was the hospital practising medicine (or more precisely, surgery)? (2) If so, was it a prohibited activity under The Medical Act of Ontario, now R.S.O. 1970, c. 268? It was the Crown’s submission that both questions should be answered in the affirmative and, consequently, the respondent’s contract of employment was invalid, with the result that the respondent, a qualified and licensed medical practitioner, was properly assessable for tax on fees which were generated by his surgical services. It is not in dispute that in Ontario, where there is no legislation such as exists in Alberta for the issue of a permit to enable a professional medical corporation to practise medicine in its own name (see 1975 (Alta), c. 44, s. 5, adding Part 6 to The Medical Profession Act, 1975 (Alta), c. 26), only an individual can be licensed and registered to practise medicine. (It is also not in dispute that hospitals and other organizations may have qualified physicians and surgeons as full-time salaried employees.) This, in itself, does not assist the Crown’s position as to taxability of the respondent on the fees he assigned to his wholly-owned hospital. It was, of course, the respondent personally who performed the particular surgical services and if he is to be assessed for tax in respect of the fees for those services, fees which he assigned to the hospital, it would be because under the taxing statute the fees are properly part of his income and not the income of the hospital to which they were assigned pursuant to his contract with the hospital.

Heald J. of the Federal Court, who heard the respondent’s appeal from the assessment for the years 1967, 1968 and 1969, concluded that, on the particular facts of this case, the hospital was endeavouring to practise medicine, which was in violation of The Medical Act of Ontario. He relied especially on two clauses of the respondent’s employment contract, clause 1(c) which required the respondent “to account for and pay to the Company all moneys received by him for work done by the Company” and clause 5 which expressed the respondent’s agreement “[to] practise medicine for the account and benefit of the

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Company”. Dealing with a submission of respondent’s counsel that qualified doctors such as interns, anaesthetists and radiologists were often on salary in hospitals, he said this:

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 services in said hospitals to long as it is the doctors, and not the hospitals, that are practising medicine.

A prime consideration for Heald J. was the judgment of Cattanach J. in Kindree v. Minister of National Revenue[^3], which he found to be indistinguishable from the present case. It is my view that the Kindree case is readily distinguishable. Although there, as here, a doctor incorporated a company of which be became a salaried employee and there, as here, the relevant provincial legislation did not envisage the practice of medicine by a corporation, the finding in the Kindree case was that there was no real change in the manner in which the doctor conducted his practice after incorporation from the manner in which it was previously conducted. In short, I take the finding to amount to a conclusion that the incorporation of the company was a mere façade. (See also No. 594 v. Minister of National Revenue[^4].) That is not so in this case. Cattanach J. construed one of the objects of the incorporated company as purporting to authorize it to practise medicine, which was a construction placed by Heald J. not on the objects of the incorporated hospital but rather on the terms of employment of the respondent. I am of the opinion that the employment contract did no more than provide that the benefit of the respondent’s professional services in the form of fees should go to the hospital. I would not construe those terms as stipulating that it was the hospital that should be considered as the medical practitioner.

The Federal Court of Appeal, by a majority, with Ryan J. dissenting, was of the view that the respondent was entitled to succeed in his challenge of the tax assessments. LeDain J. distinguished the Kindree case and also Carruthers Clinic Ltd. v.

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Herdman[^5] on the ground “that here there is a genuine hospital operation governed by and licensed under The Private Hospitals Act of Ontario, with a charter approved pursuant to that Act empowering the hospital corporation to engage qualified medical practitioners for the provision of medical services”. He continued: “I agree with my brother MacKay that this makes the agreement between the appellant and the hospital corporation a lawful one”. He also held that its lawfulness was not affected by the provisions that the services of the respondent to patients were to be performed as an employee of the hospital and that the income from such services was to go to the hospital. MacKay D.J., the other member of the majority, was of the view that it was the respondent and not the hospital who was practising medicine. Although in my view, the Carruthers case has only marginal relevance here, dealing as it does with a restrictive covenant, I do not see that the apprehension raised in that case about unqualified persons or entities becoming parties to the doctor-patient relationship exists here. There are no third parties to the doctor-patient relationship in this case, and this means that the danger perceived in the Carruthers case is not present here. Moreover, there is no question of the liability of the respondent to the discipline and control of the Ontario College of Physicians and Surgeons.

Ryan J., in dissent, after a lengthy review of the facts, concluded that Heald J. was right in holding that the hospital was endeavouring to practise medicine, as well as carrying on its hospital services. He recognized that it was not easy to draw the line between providing authorized hospital services and engaging in the prohibited practice of medicine and he expressed the view that a corporation, licensed to carry on a hospital, may employ doctors under contracts of service to provide medical services incidental to its undertaking. If this be the test, I am of the opinion that it has been met in this case.

I cannot agree that the particular facts of this case, when considered in the light of the Crown’s concession of the good faith of the respondent in

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incorporating a company to operate a private hospital and the eschewing by the Crown of any suggestion of sham, provide a basis upon which to uphold the assessments against the respondent. In my view, the Federal Court of Appeal correctly held, on the particular facts here, that it was the respondent and not the hospital who was practising or endeavouring to practise medicine. Moreover, that did not inevitably require the conclusion that, in assigning his fees to the hospital, the respondent was assigning his own money rather than carrying out an arrangement under which the fees belonged to the hospital. The billing procedure was required by provincial regulations and cannot be the controlling element in determining to whom the fees belong when there was a valid arrangement for the provision of a salary to the respondent and for the accounting of fees to the hospital as employer.

I would dismiss the appeal with costs.

Appeal dismissed with costs.

Solicitor for the appellant: R. Tassé, Ottawa.

Solicitors for the respondent: Fraser & Beatty, Toronto.

[^1]: 1979 CanLII 4074 (FCA), [1979] 2 F.C. 786.

[^2]: 1974 CanLII 2445 (FC), [1974] 2 F.C. 658.

[^3]: [1965] 1 Ex. C.R. 305.

[^4]: (1959), 21 Tax A.B.C. 212.

[^5]: 1956 CanLII 146 (ON SC), [1956] O.R. 770.