Archived - Department of Finance Canada Quarterly Financial Report for the Quarter Ended September 30, 2014 (unaudited)

• 1.1 Authority, Mandate and Program Activities
  1.2 Basis of Presentation
  1.3 Department of Finance – Financial Structure

• 2.1 Authorities Analysis
  2.2 Expenditure Analysis

3. Risks and Uncertainties
4. Significant changes in relation to operations, personnel and programs
5. Budget 2012 Implementation

This quarterly financial report has been prepared by management as required by section 65.1 of the Financial Administration Act and in the form and manner prescribed by the Treasury Board Accounting Standard 1.3. This quarterly financial report should be read in conjunction with the Main Estimates, Supplementary Estimates as well as Canada’s Economic Action Plan 2012 (Budget 2012). The quarterly financial report has not been subject to an external audit or review.

The Department of Finance Canada (The ‘Department’) helps the Government of Canada develop and implement strong and sustainable economic, fiscal, tax, social, security, international and financial sector policies and programs. It plays an important central agency role, working with other departments to ensure that the government's agenda is carried out and that ministers are supported with high-quality analysis and advice.

The Department's responsibilities include the following:

• Preparing the federal Budget and the fall Update of Economic and Fiscal Projections;
• Preparing the Annual Financial Report of the Government of Canada and, in cooperation with the Treasury Board of Canada Secretariat and the Receiver General for Canada, the Public Accounts of Canada;
• Developing tax and tariff policy and legislation;
• Managing federal borrowing on financial markets;
• Designing and administering major transfers of federal funds to the provinces and territories;
• Developing financial sector policy and legislation; and,
• Representing Canada in various international financial institutions and organizations.

The description of the program activities for the Department can be found in Part II of the Main Estimates and the Report on Plans and Priorities.

This quarterly report has been prepared by management using an expenditure basis of accounting. The accompanying Statement of Authorities includes the Department’s spending authorities granted by Parliament and those used by the Department, consistent with the Main Estimates and Supplementary Estimates for both fiscal years as well as transfers from Treasury Board central votes that are approved by the end of the quarter. This quarterly financial report has been prepared using a special purpose financial reporting framework designed to meet financial information needs with respect to the use of spending authorities.

The authority of Parliament is required before monies can be spent by the Government. Approvals are given in the form of annually approved limits through appropriation acts or through legislation in the form of statutory spending authority for specific purposes.

The Department uses the full accrual method of accounting to prepare and present its annual departmental financial statements that are part of the departmental performance reporting process. However, the spending authorities voted by Parliament remain on an expenditure basis.

The Department has three major categories of expenditure authority. These categories are:

• Voted budgetary authorities: included in this category are the operational expenditures of the Department itself as well as authorized expenditures under grants and contribution programs. These expenditures must be specifically approved by Parliament through an appropriation act.
• Statutory budgetary authorities: included in this category are expenditure authorities that are granted through an existing Act of Parliament. Further parliamentary approval is not required for expenditures related to statutory amounts and it is within the normal course of business that statutory expenditures may in some cases exceed planned spending estimates. Departmental statutory payments include those made under the Federal-Provincial Fiscal Arrangements Act as well as interest incurred in connection with the public debt of Canada.
• Non-budgetary authorities: included in this category are disbursements made by the Department which do not have a direct budgetary impact to the Government. This includes the value of loans initially disbursed to Crown Corporations participating in the Crown Borrowing Framework.

This Departmental Quarterly Financial Report (QFR) reflects the results of the current fiscal period in relation to the Main Estimates and Supplementary Estimates A of 2013-14.

Sections 2.1 and 2.2 below highlight the significant items that contributed to the increase in the resources available from 2013-14 to 2014-15 and the increase in actual expenditures as at September 30, 2013 and September 30, 2014. Full details can be found in Table 1 Statement of Authorities found at the end of this document.

The following graph provides a comparison of budgetary authorities available for the full fiscal year and budgetary expenditures for the first six months of 2013-14 and 2014-15.

Percentages reflect the utilization of authorities at quarter-end.

The following table provides a comparison of cumulative authorities by vote for the current and previous fiscal years.

Authorities available in fiscal year 2014-15 are $87,615.7 million at the end of the second quarter as compared to $87,614.0 million at the end of the second quarter of 2013-14, representing an increase of $1.7 million.

Total 2014-15 Vote 1 operating authorities available as at September 30, 2014 are $115.0 million as compared to $111.2 million at the same period in 2013-14, representing an increase of $3.8 million, which is mainly attributable to the net effect of the following factors:

• Government initiatives – A temporary increase of $6.6 million related to: the transition to a Common Securities Regulator ($3.0 million); the development of a Comprehensive Legislative Financial Consumer Code ($1.7 million); supporting the G-20 Framework Working Group ($0.6 million); implementing the Venture Capital Action Plan ($0.5 million); maintaining the strength of Canada’s financial system ($0.4 million); and the Corporate Asset Management Review ($0.4 million);
• Transfer to Shared Services Canada – A permanent decrease of $1.3 million for workplace technology device software and corporate information management/information technology;
• Toronto Waterfront Revitalization Initiative (TWRI) – A decrease of $587 thousand corresponding to the sunsetting of the TWRI program;
• Budget 2011 sunsetting initiatives – A decrease of $436 thousand related to Goods and Services Tax (GST) technical issues and legislative and regulatory drafting and printing activities; and,
• Savings identified as part of the Budget 2012 Spending Review – A permanent decrease of $428 thousand.

At the end of the second quarter in 2014-15, Vote 5 authorities are $5.0 million compared to $7.2 million at the end of the second quarter of 2013-14, representing a decrease of $2.2 million. This decrease of $2.2 million is attributable to the conclusion of the interim funding arrangement with the Canadian Securities Regulation Regime Transition Office.

Statutory Authorities available in fiscal year 2014-15 are $87,495.7 million at the end of the second quarter as compared to $87,495.6 million at the end of the same quarter of 2013-14, representing an increase of $0.1 million.

This increase of $0.1 million relates to three broad categories; increases of $832.3 million in major transfers to other levels of government, an increase in authorities for direct program expenses of $4.8 million, offset by a decrease of $837.0 million in Interest on Unmatured Debt and Interest on Other Liabilities. Additional details are provided below.

Authorities for major transfers to other levels of government as at September 30, 2014 are $60,552.3 million compared to $59,720.0 million for the same period in 2013-14. The increase of $832.3 million is mainly due to the net effect of the following factors:

• Canada Health Transfer – An increase of $1,830.9 million which reflects the 6% annual increased funding commitment in the Jobs, Growth and Long-term Prosperity Act, 2012. This program will increase by 6% per year until 2016–17, after which it will grow based on a 3-year moving average of nominal gross domestic product, with funding guaranteed to increase by at least 3% per year;
• Fiscal Equalization – An increase of $564.1 million which reflects the increase due to the 3.5% gross domestic product-based escalator applied to the 2013–14 level;
• Canada Social Transfer – An increase of $366.5 million which reflects the 3% annual increased funding commitment in the Jobs, Growth and Long-term Prosperity Act, 2012;
• Territorial Financing – An increase of $180.9 million which is a result of new and updated data entering the formula for Territorial Formula Financing;
• Additional Fiscal Equalization Offset Payment to Nova Scotia – A decrease of $25.0 million due to a decline in Nova Scotia’s offshore oil and gas revenues. The Nova Scotia’s 2005 Offshore Arrangement guarantees that the province’s offshore oil and gas revenues that enter the Equalization formula do not impact its Equalization payments. Consequently, the province receives payments equal to the decline in Equalization resulting from these revenues;
• Youth Allowance Recovery – An increase in recovery of $45.6 million which results from an increase in the estimated value of personal income tax points;
• Additional Fiscal Equalization to Nova Scotia – A reduction of $107.5 million in this program, which ensures that there is no reduction in Equalization and 2005 Offshore Accord Offset Payments due to the new formula for Equalization (2007), is due to higher growth of combined Equalization and 2005 Offshore Accord payments in the new formula compared to the formula which was in place prior to 2007;
• Alternative Payments for Standing Programs – An increase in recoveries in the amount of $203.0 million which results from an increase in the value of personal income tax points;
• Wait Times Reduction Transfer – A reduction of $250.0 million relates to the sun setting of this program in 2013–14; and,
• Payments to Provinces Regarding Sales Tax Harmonization – A decrease of $1,481.0 million which reflects the completion of scheduled payments to Quebec and Prince Edward Island under their respective Comprehensive Integrated Tax Coordination Agreements.

Authorities for the Interest on Unmatured Debt and Interest on Other Liabilities as at September 30, 2014 are $26,297.0 million compared to $27,134.0 million at the same period in 2013-14. The decrease of $837.0 million is mainly due to the following factors:

• Interest on Unmatured Debt – A reduction of $254.0 million which is largely due to assets maturing under the Insured Mortgage Purchase Program in 2013–14; and
• Other Interest Costs – A reduction of $583.0 million which is due to a decrease in the average Government of Canada long-term bond rate, which is used to calculate interest on the public sector pension obligations pertaining to service pre-April 1, 2000.

• Canadian Securities Regulation Regime Transition Office (CSTO) – An increase of $9.1 million which reflects the anticipated transfer to the CSTO in 2014–15 to fulfill its mandate of assisting in the establishment of a Canadian securities regulation regime and a Canadian regulatory authority; and
• Domestic Coinage – A decrease of $4.0 million which reflects the savings identified as part of the Budget 2012 Spending Review.

Non-budgetary authorities related to the value of loans disbursed to Crown Corporations participating in the Crown Borrowing Framework are not reflected in the Estimates. The gross borrowing requirements for Crown Corporations are driven by the need to match the term and structure of the borrowing requirements of corporations’ clients. These activities are influenced by current, and expectations of future, economic conditions and can vary greatly over a short period of time. For example, if clients of the Crown Corporation are seeking short-term, floating rate loans, the Crown Corporation will seek to match that with short-term borrowings from the government. This will result in the loan being refinanced several times through the year, with higher gross borrowings associated with a smaller net borrowing amount. This can change very quickly should market conditions suggest interest rates are going to rise and their clients seek to lock in their borrowing costs through longer term borrowings. As such, there can be very large and significant variances both inter-year and intra-year. Given the risk of forecast inaccuracy and that the gross advances to Crown Corporations are a non-budgetary item and do not impact on the net-debt of the government, the Department only reports on actual borrowings by the Crown Corporations.

The following table provides a comparison of cumulative spending by vote for the current and previous fiscal years.

At the end of the second quarter of the 2014-15 fiscal year, total expenditures were $85,404.7 million compared to $79,801.2 million reported in the same period of 2013-14, representing an increase of $5,603.5 million or 7.0%.

Total 2014-15 Vote 1 operating expenditures at the end of the second quarter were $49.5 million as compared to $45.9 million at the same period of fiscal year 2013-14, representing an increase of $3.6 million or 7.8%. The increase is mainly attributable to the Government-wide Payment in Arrears initiative and the cost associated with the move to 90 Elgin.

Total 2014-15 Vote 5 grants and contribution expenditures at the end of the second quarter were $2.5 million as compared to $6.7 million at the same period of fiscal year 2013-14, representing a decrease of $4.2 million. This decrease is attributable to interim funding of $4.2 million last fiscal year to the Canadian Securities Regulation Regime Transition Office (CSTO).

Total statutory expenditures at the end of the second quarter of 2014-15 are $44,003.1 million as compared to $43,309.7 million at the end of the second quarter of 2013-14 representing an increase of $693.4 million, or 1.6%.

This increase is primarily attributable to an increase of $1,193.4 million in major transfers to other levels of government, an increase of $111.0 million in direct program expenses and a decrease of $611.0 million in Interest on Unmatured Debt and Interest on Other Liabilities (decrease of $418.9 million and $192.1 million, respectively).

Expenditures related to major transfers to other levels of government as at September 30, 2014 are $30,498.4 million compared to $29,305.0 million at the same period in 2013-14 representing an increase of $1,193.4 million. This increase is mainly due to the net effect of the following factors:

• Canada Health Transfer – An increase of $915.5 million;
• Fiscal Equalization – An increase of $282.0 million;
• Canada Social Transfer – An increase of $183.2 million;
• Territorial Financing – An increase of $107.1 million;
• Payment to Provinces Regarding Sales Tax Harmonization – A decrease of $14.0 million;
• Youth Allowances Recovery – An increase in recoveries of $18.7 million which is forecast based on personal income tax data;
• Additional Fiscal Equalization Payment – Total Transfer Protection – A decrease of $55.8 million;
• Alternative Payments for Standing Programs – An increase in recoveries of $82.0 million; and
• Wait Times Reduction Transfer – A decrease of $125.0 million.

Explanations for all but one of the items listed above are consistent with the explanations found under the statutory budgetary authorities in Section 2.1. The decrease of $55.8 million in 2014-15 in Additional Fiscal Equalization Payment – Total Transfer Protection relates to one-time payments last fiscal year to New Brunswick and Manitoba to prevent by-province declines in major transfers between 2012-13 and 2013-14.

Expenditures for the Interest on Unmatured Debt and Interest on Other Liabilities as at September 30, 2014 are $12,762.5 million compared to $13,373.5 million at the same period in 2013-14 representing a decrease of $611.0 million. The decrease is mainly due to the following factors:

• Interest on Unmatured Debt – A decrease of $418.9 million which reflects a lower average effective interest rate on Government of Canada bonds, as well as assets maturing under the Insured Mortgage Purchase Program, offset in part by higher Consumer Price Index adjustments on real return bonds;
• Interest on Other Liabilities – A decrease of $192.1 million to reflect a decrease in the average Government of Canada long-term bond rate, which is used to calculate interest on public sector pension obligations pertaining to service pre-April 1, 2000.

Direct Program Expenditures at the end of the second quarter of fiscal year 2014-15 are $742.2 million as compared to $631.2 million at the same period in 2013-14, representing an increase of $111.0 million. This increase is primarily due to the net effect of the following factors:

• Incentive for Provinces to Eliminate Taxes on Capital – An increase of $88.7 million which primarily reflects a preliminary payment to Québec in respect of their 2010-11 foregone revenues;
• Establishment of a Canadian Securities Regulation Regime and Canadian Regulatory Authority – An increase of $45.8 million to New Brunswick consistent with an agreement in principle to move towards a Cooperative Capital Markets Regulatory System.
• Purchase of Domestic Coinage – A decrease of $4.4 million is attributable to normal variations in the demand for coinage from businesses and consumers and in the timing of costs incurred for coinage procurement throughout the year; and
• Losses on Foreign Exchange – A decrease of $17.2 million due to the revaluation of foreign denominated financial instruments.

Non-budgetary expenditures at the end of the second quarter of 2014-15 are $41,349.6 million compared to $36,438.9 million at the end of the same quarter in the prior year representing an increase of $4,910.7 million. This increase is due to an increase of $4,594.0 million related to the value of loans disbursed to Crown Corporations participating in the Crown Borrowing Framework. Gross borrowings by Crown Corporations are based on demand and the business requirements of the participating entities, and also depend on the terms of the Crown Corporation borrowings. As such, amounts can vary significantly from year to year. There is also an increase of $200.0 million related to a payment to the Ukraine for financial assistance under the Bretton Woods and Related Agreements Act and an increase of $113.4 million in payments to the International Monetary Fund New Arrangement to Borrow.

Table 2, located at the end of this report, presents Budgetary Expenditures by Standard Object (SO). The main variance in expenditures between 2014-15 and 2013-14 by standard object are as follows:

• Transfer Payments (SO 10) – An increase of $1,319.4 million of which the majority is related to the statutory expenditures pursuant to major transfers to other levels of government ($1,193.5 million) and transfer payments under Direct Program Expenses ($130.1 million) offset by Vote 5 grants and contributions ($4.2 million);
• Utilities, Materials and Supplies (SO 07) – A decrease of $4.4 million mainly due to a decrease in costs for domestic coinage;
• Other subsidies and payments (SO 12) – A decrease of $11.8 million primarily due to the revaluation of foreign denominated financial instruments; and
• Public Debt Charges (SO 11) – A decrease of $611.1 million.

The year over year variances are explained in detail in the preceding Section 2.2.

Expenditures in the second quarter of fiscal 2014-15 were $42,597.4 million compared with $40,845.7 million for the second quarter of 2013-14, representing an increase of $1,751.7 million or 4.3% in quarterly spending.

Variance explanations of the quarterly spending are in line with the year to date variance explanations provided in Section 2.2.

Private sector economists expect continued, moderate growth in the Canadian economy, as ongoing strength in domestic demand is expected to be moderated by a fragile global recovery and the related short- to medium-term risks. In particular, uncertainty stems from ongoing concerns over the U.S. government’s fiscal position, although the U.S. economy continues to show signs of improvement. In addition, any further slowdown in China and other emerging market economies would impact commodity prices.

The Department of Finance Canada’s Corporate Risk Profile provides a snapshot of the Department’s key corporate risks. It focuses the attention and action of senior management on measures to mitigate the adverse effects of global economic uncertainty and their impact on the Canadian economy. The Department monitors its corporate risks and associated risk responses to identify areas of opportunity and to reflect progress made in implementing measures to mitigate risks.

Effective July 28th, Louise Levonian, former Associate Deputy Minister of Finance, left the department. She has been replaced by Marta Morgan effective August 4, 2014.

Effective August 29th, 2014, Senior Associate Deputy Minister of Finance and G7 Deputy of Canada, Jean Boivin left the department. He has not yet been replaced.

In September 2014, the Department of Finance completed its move from 140 O’Connor Street to 90 Elgin Street.

This section provides an overview of the savings measures announced in Budget 2012 that will be implemented in order to refocus government and programs; make it easier for Canadians and business to deal with their government; and, modernize and reduce the back office.

The Department of Finance will achieve Budget 2012 savings of $32.4 million by fiscal year 2014-15 by reconfiguring and modernizing the Department’s internal services and policy analysis functions. It is also taking further significant steps to reduce coinage costs including, for example, measures such as changing the metal composition of $1 and $2 coins from metal alloys to plated steel cores and eliminating the penny.

All savings measures are on track to meet their planned savings. Staff reductions were fully completed in 2012-13.

Administration costs related to the phase out of the penny in 2013-14 were significantly lower than previously estimated. The Royal Canadian Mint contracted an external company to carry out the processing of the pennies, which significantly reduced capital and processing costs. These savings are expected to continue into 2014-15 and 2015-16.

Approved by:

Paul Rochon,
Deputy Minister

Randy Larkin,
Chief Financial Officer

Ottawa, Canada
November 24, 2014