In order to comply with a requirement of the Ontario Health Insurance Plan (OHIP) that it would only pay for audiology tests performed by (or under the supervision of) a physician, the respondent numbered company entered into an agreement with two physicians which stated that the physicians would pay the company for the use of its facilities and management services, and that they would employ the company owner (an audiologist but not a physician) to conduct hearing tests for them. The Minister assessed the company on the basis that it provided the two physicians with taxable supplies of building and equipment rentals together with management services, on which it had failed to charge and collect GST. The Tax Court found, on the basis of oral evidence that the agreement did not reflect the true legal relationship between the parties, that there was no taxable supply by the company.
After finding on other grounds that this decision should be reversed, Décary J.A. stated (para. 18) that the Tax Court:
erred in finding...that the "doctors were in fact acting as the Appellant's agents with respect to its dealings with OHIP". An agent cannot have a legal capacity that exceeds that of the principal. A principal can only appoint an agent to make a contract which the principal himself has the capacity to make (see Haggstrom v. Dey (1965), 54 D.L.R. (2d) 29 (B.C.C.A.)). As the respondent clinic was not legally authorized to collect fees from OHIP, neither were its "agents".