After a four year investigation, the Canada Revenue Agency (CRA) has assessed more than 1,000 pharmacists for what it says are unreported benefits they received from generic drug companies, such as gift cards, travel vouchers, and pre-paid credit cards. These benefits were incentives given to pharmacists by generic drug companies to entice them to substitute their product for brand-name products when filling prescriptions.

The investigation took off after auditors identified 15 pharmacies in Newfoundland and Labrador that had failed to report the benefits. The probe eventually expanded across the country and the CRA went as far as getting a Federal Court order requiring the generic drug companies to disclose information about the incentives they gave to pharmacies. Subsequently, the CRA sent letters to approximately 22,000 pharmacies inviting them to review their tax returns and report any unreported benefits. The CRA gave the pharmacies an opportunity to avoid penalties if they voluntarily corrected their tax returns and paid the corresponding tax and interest due.

The CRA says that the total unreported income is more than $58 million. Although no criminal charges were laid, financial penalties for failing to report the benefits as income were levied on those who did not take up the CRA’s offer to voluntarily correct their returns. It is noteworthy that these penalties and the corresponding interest can sometimes surpass the original tax due on the income amounts.

It is not uncommon for the CRA to do a bulk review of taxpayers who operate in a particular industry, or with similar business activities, with respect to a particular tax matter. These are called “projects” and it is the CRA’s way of efficiently tackling an area where it suspects widespread non-compliance or abuse. Auditors are provided with specialized training to familiarize them with the industry so that they can identify anomalies, and then taxpayers in that industry are audited quickly and methodically. A taxpayer who becomes aware of a project in their area of business and finds themselves in a position that may attract CRA attention, may want to consider consulting legal counsel about the CRA’s Voluntary Disclosures Program (VDP). A successful VDP application means that a taxpayer will not be charged penalties or prosecuted with respect to the disclosure, and some interest relief may be granted as well. This is essentially what the CRA originally offered to taxpayers in the pharmacies project.