Dental associates: employee or contractor, and the GST/HST question that costs more

Summary

An associate is a dentist, physician or other licensed practitioner who treats patients at a clinic someone else owns. Rather than a wage, they take a share of what their patients are billed, commonly 60% to the clinic and 40% to the associate. That split raises two tax questions, and the sales tax one usually costs more than the payroll one.

1. Is the associate an employee or self-employed? The answer decides income tax withholding, Canada Pension Plan (CPP) contributions and Employment Insurance (EI) premiums. An associate who should have been an employee costs the clinic up to about $6,200 per associate per year outside Quebec, being the employer’s own share of CPP and EI. The $6,200 is a ceiling rather than a flat cost, reached only once the associate is paid roughly $85,000 or more, with penalties on top.¹
2. Does sales tax apply to the share the clinic keeps? Dental and medical care is exempt from GST/HST, the federal goods and services tax that several provinces charge as a single harmonized sales tax (HST). Exempt means no tax is charged on the care, and that the practitioner can’t reclaim tax charged to them. So where the clinic’s 60% is written up and run as the associate paying for premises, staff and administration, the clinic has to charge sales tax on it once it’s registered for GST/HST, and an associate whose own billings are all exempt can’t get that money back. On $300,000 of billings kept in a year, at Ontario’s 13% rate on top, that’s about $39,000 of tax the associate carries.²

In our view, settle the employment question honestly on the facts first, then write the payment terms to match. Where the associate genuinely is independent, we’d write the split as a sharing of the fees patients are billed for care, put the clinic owner’s own practice corporation on the agreement rather than a separate company holding the premises and staff, and ask the Canada Revenue Agency (CRA) for a written decision on the associate’s status by June 29 of the year after the year worked. Our recommendation flips where the clinic sets the schedule, guarantees the money and owns the patients, and there payroll costs less than fighting the CRA later.

Who decides the employment question

The two sides don’t decide it between them, whatever the agreement says. The CRA’s guidance is that a worker and a payer can set their affairs up as they choose. However, the status they choose has to reflect the real working relationship, and the facts decide it, not the intention.³ The two-step approach the CRA applies outside Quebec is in our guide to the test from the payer’s side. Quebec uses a different test under its Civil Code, so ask us first there. What the CRA weighs, in clinic terms:

• Control. Who sets the associate’s days, who decides which patients are booked in with them, and can they work elsewhere without permission?
• Tools and equipment. Who bought the chair and the imaging equipment, and who pays for materials used on patients?
• Chance of profit and risk of loss. If a patient’s account is never collected, is that the associate’s loss? A guaranteed daily minimum means it isn’t.
• Integration. Whose patients are they, who owns the records, and who keeps them when the associate leaves?

One factor is worth pulling out because it looks decisive and isn’t. “She chooses the treatment plan, so she’s a contractor” proves very little. Independent clinical judgement is owed to the patient and doesn’t change with how the practitioner is paid, so it separates nothing. The CRA’s own guidance warns that control is hard to read for professionals, whose expertise means they need little direction either way. The same answer decides whether an associate billing through their own corporation is running a personal services business, which the CRA taxes at a far higher rate than an ordinary small business.

GST/HST on the share the clinic keeps

An exempt sale is one no GST/HST is charged on, and the seller gets nothing back for the GST/HST it paid on its own rent, equipment and supplies.⁴ A practitioner whose work is all exempt usually can’t even register, so tax charged to them is a permanent cost.⁵ An employee sells nothing to their employer, so an employment answer makes the sales tax question disappear.

Two clinics with identical economics can get opposite answers, and what separates them is what the payment is genuinely for. The agreement is the main evidence, tested against how the practice actually runs. The CRA’s position sits in GST/HST Policy Statement P-238, which is policy rather than law: it says how the CRA will treat these arrangements. Issued in 2000 and never withdrawn, it carries the CRA’s own warning that it may not reflect later changes in the law.⁶

Where the principal (the practitioner or corporation that owns the practice) and the associate genuinely agree to share fees, the CRA treats the money as one fee for the patient’s exempt care, split between two practitioners. Dividing a fee isn’t a sale, so no tax applies to it. Where instead the associate has agreed to pay for the use of the premises, staff and administration, the principal has made a taxable sale, and charges tax if it’s registered or required to register. P-238 reaches both answers on the same 60/40 numbers, so there’s no magic percentage. Nor does it matter who holds the money (e.g. a clinic that collects everything and pays out 40% is treated like an associate who collects everything and pays the clinic 60%).

Fee-sharing isn’t free for the clinic. A clinic making no taxable sale isn’t running a taxable business in sales-tax terms, so it can’t reclaim any of the GST/HST on its own rent, equipment and supplies. Charging the associate for facilities buys part of that back. In our view fee-sharing still wins for most clinics, because the tax avoided is 13% of the whole share the clinic keeps, while the credits given up are 13% of the clinic’s taxable costs, and the biggest cost is usually wages, which carry no GST/HST. The balance changes in a heavy build-out year, so run your own numbers first.

Which company signs the associate agreement decides much of this. P-238 says a corporation that provincial law entitles to practise medicine or dentistry counts as a practitioner, so fee-sharing treatment is open to it. A management company, meaning a separate corporation holding the premises, equipment and non-clinical staff (e.g. reception and bookkeeping), supplies no health care and isn’t a practitioner. P-238 treats what such a company charges for facilities, staff and billing as taxable, and treats a clinic collecting patient fees on the associates’ billing numbers as still supplying facilities. Reading those together, our view is that a management company on the agreement is taxable whichever way the cash flows.

What we’d do

Where the working arrangement genuinely points to self-employment, we’d do four things.

• Write the agreement as a sharing of the fees patients are billed for care, with the clinic owner’s own practice corporation on the clinic side, and say nothing in it about paying for premises, equipment, staff or administration.
• Then operate the clinic the way the agreement reads: no invoices to the associate for use of the premises, and no billing them for a share of the clinic’s running costs.
• Ask the CRA for a written ruling on the associate’s status, on Form CPT1, by June 29 of the year after the year worked. If the CRA rules the associate self-employed and later reverses that, the clinic escapes the associate’s own CPP contributions it didn’t deduct, plus interest and penalties. The clinic’s own share of CPP still has to be paid, and the relief goes if the ruling rested on wrong information the clinic gave.⁷
• Put a gross-up clause in the agreement, saying that if sales tax turns out to apply, the associate owes it on top of the stated share. The CRA can go back four years and bill the clinic for all of it at once, by which time some of those associates will have left, and the clause helps establish their obligation to pay it.⁸

Two cases change that. Where the clinic sets the schedule, assigns the patients and owns the records, we’d put the associate on payroll instead. And where a management company has to stay on the agreement for reasons outside tax (e.g. bank lending built around it), we’d register it for GST/HST, charge the tax openly on a stated administration fee, and price that fee knowing the associate can’t recover it.

How often this changes

The employment answer should be re-checked whenever the working arrangement moves. A guaranteed minimum going in removes the associate’s risk of losing money on the work. Exclusivity clauses and days picked up at a second clinic move the answer too. The sales tax answer should be re-checked whenever the practice reorganises its companies, because a reorganisation moves the entity on the associate agreement while nobody is watching.

Two dates belong in a calendar. One is June 29 of the year after each year of associate work, the last day the clinic or the associate can ask for a ruling. The other isn’t annual, which is why it’s easy to miss. Administration fees charged to associates count toward the $30,000 small-supplier threshold, tested both within one quarter and across four consecutive quarters. Crossing in one quarter brings the crossing sale into tax. Crossing only the four-quarter total normally leaves you a small supplier through the following month, with registration effective on your first taxable supply afterwards.⁹

Closing thoughts

An associate agreement is drafted once, usually by a lawyer asked to protect the clinic commercially. Protecting the clinic and characterising the money for tax are different jobs, and the second goes stale on its own as the practice reorganises and the associate incorporates. If you do one thing after reading this, check which company signs your associate agreements, and whether that’s still the company you meant.

How we handle it

We read the associate agreements you actually have against how the clinic actually runs, and tell you which question you’re exposed on. Where the answer is self-employed, we draft the fee-sharing and gross-up wording with your lawyer and file the CPT1 before the June deadline. Where the answer is employment, we set up your payroll account with the CRA, send the deductions in on the CRA’s schedule, and file the T4 slips reporting each associate’s pay and deductions. GST/HST returns and payroll sit in the same file as the corporate return.