A federal probe of Canadian retail pharmacists who received gift cards, travel vouchers, pre-paid credit cards and other "incentives" from generic drug firms has turned up more than 1,000 who failed to pay the taxes due on the unreported benefits, drawing penalties for some.

The four-year Canada Revenue Agency (CRA) investigation found more than $58 million worth of hidden income by pharmacists and their corporations across the country.

Template of a letter the Canada Revenue Agency sent to some 2,000 pharmacies in July 2015, inviting them to review their tax returns. (CBC News) "While there have been no criminal charges filed in connection with the compliance action, penalties for failing to report incentives as income have been levied," said agency spokeswoman Jelica Zdero.

The results of the probe, now nearing completion, come at an awkward time for the pharmacy industry, which is lobbying the government to sell medical marijuana because Canadians "trust" pharmacists.

CBC News has uncovered details of the massive operation, which involved two Federal Court applications, mail-outs of warning letters to some 22,000 pharmacies, and meetings with pharmacy associations and regulators across the country.

May go after other industries

Zdero says the CRA may use the lessons learned to go after other industries.

"The CRA will use the intelligence gathered from this project to determine if other industries should be evaluated for unreported incentives and to ensure compliance with reporting incentives," she said in an email.

At issue are the incentives and rebates that generic drug manufacturers give pharmacies to entice them to substitute a generic drug for brand-name products when filling prescriptions. These inducements are legal, but as a taxable benefit must be reported as income so that taxes owed are paid.

The Canada Revenue Agency says it has imposed penalties on some pharmacists for failing to report rebate income, but that no charges have been laid. (Chris Young/Canadian Press) The agency got wind of the scale of the problem in 2012, when auditors found 15 pharmacies in Newfoundland and Labrador that had failed to report the incentives.

Auditors expanded the probe to the four Atlantic provinces, obtaining information voluntarily from generic drug manufacturers about which pharmacies had received their benefits.

About 44 per cent of Atlantic pharmacies that received CRA warning letters voluntarily came forward with a request to have tax returns reassessed.

... we are giving you an opportunity to correct your tax returns without civil penalties ... - Canada Revenue Agency letter to 2,000 pharmacies

The results showed 150 pharmacists had failed to report more than $18 million worth of such benefits, prompting an expansion of the probe to all of Canada in the fall of 2014.

The agency went to Federal Court in November 2014 and January 2015 to get an order requiring generic drug manufacturers to produce details of the pharmacies that had received inducements.

Some 2,000 pharmacies appeared on the lists. Letters were sent to all of them, inviting them to revise their tax returns to report any undeclared benefits.

"Please review your filed income tax returns to verify whether you reported all incentives," says a copy of the letter, among several documents obtained by CBC News under the Access to Information Act.

"If you have additional amounts to report, we are giving you an opportunity to correct your tax returns without civil penalties, only arrears interest may apply."

The agency sent another letter to 20,000 other pharmacies – about which it had no information from the generic drug manufacturers – inviting them in a general way to review their previous returns.

Amount falls short

CRA auditors had expected the Canada-wide operation to flush out about $75 million in unreported rebates and incentives, but so far the amount has fallen short – just over $58 million.

The rebates, which can include travellers cheques and pre-paid vacations, are typically dependent on the volume of generic-drug sales at a retail pharmacy.

Zdero did not respond to several questions about the exercise, including the amounts of penalties and interest levied on the unreported income.

A spokesman for a group representing the industry, the Canadian Pharmacists Association, declined comment on the CRA operation. Mark McCondach pointed to a 2014 statement from the association as its position on the issue.

Shoppers Drug Mart is among the drugstore chains pressing the federal government for permission to sell medical marijuana in their retail outlets. (Google) The statement says "rebates are a normal part of many commercial businesses in Canada. … For community pharmacies in many parts of Canada, these resources help support patient care to meet the auxiliary health service needs of Canadians."

The association "believes that all pharmacies need to respect the relevant tax laws and regulations …."

The news of $58 million in unreported income comes as major players in the retail pharmacy industry, including Shoppers Drug Mart and Loblaw, have lobbied the federal government for permission to sell medical marijuana at their outlets.

In April, the Canadian Pharmacists Association, which is leading the initiative, said "the best way to enhance patient safety, education and appropriate access is through pharmacist dispensing and management of medical marijuana" because Canadians "trust pharmacists."

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