The agency is looking at whether pharmacies are correctly declaring the incentives on tax returns after finding a number in Atlantic Canada were not following tax rules. The agency has so far unearthed $18 million in unreported income.
So-called professional allowances have been standard for years in Canada. Because multiple generic manufacturers are often producing identical drugs, they battle to get their products stocked on pharmacy shelves.
Incentives and payments are used to persuade pharmacists to choose one company's generic drug over others.
The revenue agency is now taking aim at those payments. This fall, it sought judicial authorization through courts in Halifax and Fredericton to compel more than a dozen of Canada's largest drug manufacturers to turn over reams of data showing how much they pay each pharmacy.
Most of the pharmaceutical companies have said they will comply with the orders.
'It's bad for business'
In Halifax, pharmacist Peter Jorna says roughly 75 per cent of his prescription drugs are generics. Each month he receives cheques from generic manufacturers — rebates for agreeing to stock their products.
It's an essential piece of his income, he says, adding up to between 15 and 20 per cent of his total revenue and the "difference between staying in business and not."
Jorna also declares it all to the Canada Revenue Agency.
"I do not want to run afoul of Revenue Canada," Jorna said. "It's bad for business."
But it appears some pharmacists are doing just that.
During a 2011 audit of Mississauga-based Cobalt Pharmaceuticals Ltd. — now called Actavis Pharma Company — revenue agency investigators learned of 13 pharmacies in Newfoundland and Labrador it says were not properly reporting the rebates as income.
It then cast a wider net, looking at payments across Atlantic Canada. In August 2013, the tax agency sent letters to all pharmacies in the region and gave them 45 days to voluntarily request an adjustment to previous tax returns if they had not reported the incentives. The agency also went on to audit some, although it won't say how many pharmacies were reassessed.
Ontario bans professional allowances
Now the tax agency wants information on incentives paid to pharmacies across the country and appears to be focused on independent operators.
"The information is sought to verify compliance with the pharmacies and pharmacists located in Canada with their duties under the [Income Tax Act]," says an application filed by the agency in Federal Court.
The list of possible incentives includes money transfers, preloaded credit cards, gift cards, concert tickets, trips and traveller's cheques.
It's not clear how much is currently paid in incentives to pharmacies. In 2009, the Ontario government reported generic manufacturers had paid $750 million in professional allowances to pharmacists. The province has since banned professional allowances.
Pharmacies that are offside with their taxes may not just be in trouble with the Canada Revenue Agency, but also with the provincial college that licenses them.
Character of pharmacist 'very important'
The registrar of the Nova Scotia College of Pharmacists says that if it learned a pharmacist was wilfully avoiding taxes, an investigation would likely be launched and the pharmacist could end up in front of a disciplinary hearing.
"The character of a pharmacist is very important with respect to their professionalism and how they practise," said Susan Wedlake.
"If a pharmacist were found to be intentionally avoiding paying taxes, or intentionally not reporting any income, then that goes to their character and goes to their ethics. That very much could have an impact on how they practise."
Wedlake said there's not been any reports of pharmacists in Nova Scotia dodging taxes, but pharmacists elsewhere in the country have been disciplined.
Both Ontario and British Columbia have suspended pharmacists for tax evasion in the past.