Archived - Quarterly Financial Report for the Quarter Ended September 30, 2015 (unaudited)

1. Introduction

1.1 Authority, Mandate and Program Activities

1.2 Basis of Presentation

1.3 Department of Finance – Financial Structure

2. Highlights of fiscal quarter and fiscal year-to-date (YTD) results

2.1 Authorities Analysis

2.2 Expenditure Analysis

3. Risks and Uncertainties

4. Significant changes in relation to operations, personnel and programs

5. Approval by Senior Officials

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 and Supplementary Estimates of the Department of Finance Canada.

The quarterly financial report has not been subject to an external audit or review.

The Department of Finance Canada (the 'Department') provides the Government of Canada with high quality advice on appropriate economic, fiscal, tax, social, security, international and financial sector policies and programs with the goal of strengthening the Canadian economy and maintaining sustainable fiscal policy and social programs.

The Department's responsibilities include the following:

• Preparing the Federal Budget and the Fall Update of Economic and Fiscal Projections;
• Monitoring the Canadian economic and fiscal situation and developing and providing appropriate economic and fiscal policy advice;
• 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;
• Assessing and providing recommendations to the Minister of Finance on funding requests and new program proposals; 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 2014-15.

Sections 2.1 and 2.2 below highlight the significant items that contributed to the increase in the resources available from 2014-15 to 2015-16 and the decrease in actual expenditures as at September 30, 2014 and September 30, 2015. 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 2014-15 and 2015-16.

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

Authorities available in fiscal year 2015-16 are $89,646.4 million at the end of the second quarter as compared to $87,615.7 million at the end of the second quarter of 2014-15, representing an increase of $2,030.7 million.

Total 2015-16 Vote 1 operating authorities available as at September 30, 2015 are $100.0 million compared to $115.0 million for the same period in 2014-15, representing a decrease of $15.0 million. This decrease is mainly attributable to the following factors:

• James Michael Flaherty building – A permanent decrease of $10.5 million reflecting the one-time nature of the department's move in September 2014;
• Government initiatives – A decrease of $6.9 million related to the expiry of temporary funding for: Government advertising ($2.5 million); development of a Comprehensive Legislative Consumer Code ($1.7 million); GST technical issues ($1.2 million); supporting the G-20 Framework Working Group ($0.6 million); implementing the Venture Capital Action Plan ($0.5 million); and, Corporate Asset Management Review ($0.4 million);
• Renewal of Authorities to Support Comprehensive Claims and Self-Government Negotiations across Canada - A temporary increase of $0.3 million;
• Compensation adjustments - A permanent increase of $0.3 million to reflect salary adjustments in relation to collective agreements;
• Execution of Responsibilities Consequential to Sales Tax Harmonization - A temporary increase of $0.7 million; and
• Policy and Financial Analysis and Support related to ongoing and future Government of Canada priorities - A permanent increase of $1.1 million.

At the end of the second quarter in 2015-16, Vote 5 authorities are $3.0 million compared to $5.0 million at the end of the second quarter of 2014-15. The year-to-year change in Vote 5 authorities is due to the payment schedule for the Harbourfront Centre Funding Program, which had spending of $5.0 million in 2014-15 and $3.0 million in 2015-16, the final year of the program. From 2011-12 to 2015-16, the Harbourfront Centre Funding Program provided Harbourfront Centre with a total of $25.0 million over a five year period. Budget 2015 announced the program's renewal with funding of $25.0 million over five years, from 2016-17 to 2020-21.

Statutory Authorities available in fiscal year 2015-16 are $89,543.4 million at the end of the second quarter compared to $87,495.7 million at the end of the same quarter of 2014-15, representing an increase of $2,047.7 million.

This increase of $2,047.7 million relates to three broad categories: an increase of $2,760.1 million in major transfers to other levels of government, offset by a decrease in authorities for direct program expenses of $33.4 million and a decrease of $679.0 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, 2015 are $63,312.4 million compared to $60,552.3 million for the same period in 2014-15. The increase of $2,760.1 million is mainly due to the net effect of the following factors:

• Canada Health Transfer (CHT) – An increase of $1,912.1 million or 5.95% when compared to 2014-15. This growth rate is slightly less than the 6% escalator commitment introduced in the Jobs, Growth and Long-term Prosperity Act, 2012 due to one-time payments to Newfoundland and Labrador and Nunavut in 2014-15 to protect them from a decline in CHT payments relative to 2013-14 due to the transition to an equal per capita cash allocation of the CHT in 2014-15. This protection amount was no longer needed in 2015-16;
• Fiscal Equalization – An increase of $672.0 million due to the 4.0% gross domestic product-based escalator applied to the 2014-15 level;
• Canada Social Transfer – An increase of $377.5 million which reflects the 3% annual increased funding commitment in the Jobs, Growth and Long-term Prosperity Act, 2012.
• Territorial Financing – An increase of $91.8 million as 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 $27.7 million due to the decline in offshore revenues received by Nova Scotia. The Nova Scotia 2005 offshore arrangement guarantees that the province's offshore oil and gas revenues that enter the Equalization formula do not impact Equalization payments. Consequently, the province receives payments equal to the decline in Equalization due to these revenues;
• Youth Allowance Recovery – An increase in recovery of $37.1 million as a result of an increase in the estimated value of personal income tax points;
• Additional Fiscal Equalization to Nova Scotia – A reduction of $58.9 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; and
• Alternative Payments for Standing Programs – An increase in recoveries in the amount of $169.7 million as a result of an increase in the value of personal income tax points.

Authorities for direct program expenses at the end of the second quarter of fiscal year 2015-16 are $613.0 million as compared to $646.4 million at the same period in 2014-15, representing a decrease of $33.4 million. This decrease is primarily due to the following factors:

• Domestic Coinage – A decrease of $14.5 million which reflects the savings identified as part of the Budget 2012 Spending Review;
• Agriculture Advance Market Commitment – A decrease of $10.0 million as the last tranche of Canada's $40 million commitment towards the Agriculture Advance Market Commitment (AgResults), announced by Prime Minister Harper during the G20 Summit in June 2012, was paid in 2014-15; and
• A decrease of $9.1 million which reflects the anticipated transfer to the Canadian Securities Regulation Regime Transition Office (CSTO) in 2014–15 to fulfill its mandate of assisting in the establishment of a Canadian securities regulation regime and a Canadian regulatory authority. The CSTO is funded through a statutory authority. No additional funding for the CSTO is planned for 2015-16.

Authorities for the Interest on Unmatured Debt and Interest on Other Liabilities as at September 30, 2015 are $25,618.0 million compared to $26,297.0 million at the same period in 2014-15. The decrease of $679.0 million is mainly due to the following factors:

• Interest on Unmatured Debt – A decrease of $159.0 million due to an accounting change in 2013-14 relating to bond buybacks, as explained in the Annual Financial Report of the Government of Canada for 2013-14; and
• Other Interest Costs – A reduction of $520.0 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.

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 2015-16 fiscal year, total expenditures were $74,271.0 million compared to $85,404.7 million reported in the same period of 2014-15, representing a decrease of $11,133.7 million or 13.0%.

Total 2015-16 Vote 1 operating expenditures at the end of the second quarter were $46.5 million compared to $49.5 million for the same period in fiscal year 2014-15, representing a decrease of $3.0 million or 6.1%. The decrease is mainly attributable to costs associated with the move to the James Michael Flaherty Building which the department incurred in the first half of 2014-15.

There is no change to 2015-16 Vote 5 expenditures compared to the same period in fiscal year 2014-15.

Total statutory expenditures at the end of the second quarter of 2015-16 are $44,587.8 million as compared to $44,003.1 million at the end of the second quarter of 2014-15 representing an increase of $584.7 million or 1.3%.

This increase is primarily attributable to an increase of $1,476.9 million in major transfers to other levels of government, offset by a decrease of $564.9 million in direct program expenses, and a decrease of $327.3 million in Interest on Unmatured Debt and Interest on Other Liabilities (decrease of $37.2 million and decrease of $290.1 million, respectively).

Expenditures related to major transfers to other levels of government as at September 30, 2015 are $31,975.3 million compared to $30,498.4 million for the same period in 2014-15 representing an increase of $1,476.9 million. This increase is mainly due to the net effect of the following factors:

• Canada Health Transfer – An increase of $956.0 million;
• Fiscal Equalization – An increase of $336.0 million;
• Canada Social Transfer – An increase of $188.7 million;
• Territorial Financing – An increase of $54.4 million;
• Youth Allowances Recovery – An increase in recoveries of $10.2 million; and
• Alternative Payments for Standing Programs – An increase in recoveries of $48.1 million.

Explanations for the increases in the items listed above are consistent with the explanations found under the statutory budgetary authorities in Section 2.1.

Direct Program Expenditures at the end of the second quarter of fiscal year 2015-16 are $177.3 million as compared to $742.2 million at the same period in 2014-15, representing a decrease of $564.9 million. This decrease is primarily due to the net effect of the following factors:

• Payments to the International Development Association – A decrease of $441.6 million related to the implementation of a new payment mechanism for capital subscription payments, and the timing of payments. A direct payment is now issued later in the fiscal year.
• Incentive for Provinces to Eliminate Taxes on Capital – A decrease of $62.1 million which reflects the timing of provincial requests and the temporary nature of the incentive. In 2014-15, a preliminary payment of $90.1 million was made to Québec with respect to their 2010-11 foregone capital tax revenues. In 2015-16, a final payment of $28.0 million was made to Ontario with respect to their 2008-09 to 2010-11 foregone capital tax revenues.
• Establishment of a Canadian Securities Regulation Regime and Canadian Regulatory Authority – A decrease of $45.8 million. In 2014-15 a one-time payment was made to New Brunswick consistent with an agreement in principle to move towards a Cooperative Capital Markets Regulatory System.
• Losses on Foreign Exchange – A decrease of $8.7 million due to the revaluation of foreign denominated financial instruments; and
• Purchase of Domestic Coinage – A decrease of $6.2 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.

Expenditures for the Interest on Unmatured Debt and Interest on Other Liabilities as at September 30, 2015 are $12,435.2 million compared to $12,762.5 million at the same period in 2014-15 representing a decrease of $327.3 million. The decrease is mainly due to the following factors:

• Interest on Unmatured Debt – A decrease of $37.2 million, largely reflecting lower effective interest rates on Government of Canada bonds and Treasury bills, offset in part by higher inflation adjustments on Real Return Bonds; and
• Interest on Other Liabilities – A decrease of $290.1 million, largely reflecting 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.

Non-budgetary expenditures at the end of the second quarter of 2015-16 are $29,634.2 million compared to $41,349.6 million at the end of the same quarter in the prior year representing a decrease of $11,715.4 million. This decrease is due to the net effect of the following factors:

• a decrease of $11,504.4 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.
• a decrease of $200.0 million in Payments under the Bretton Woods and Related Agreements Act – National Governments.
• a decrease of $100.1 million in payments to the International Monetary Fund New Arrangement to Borrow.
• a decrease of $1.0 million in advances pursuant to section 13(1) of the Financial Consumer Agency of Canada Act; and
• an increase of $90.1 million in Payments under the Bretton Woods and Related Agreements Act – International Organizations.

Table 2, located at the end of this report, presents Budgetary Expenditures by Standard Object (SO). The main variance in expenditures between 2015-16 and 2014-15 by standard object are as follows:

• Transfer Payments (SO 10) – A net increase of $911.9 million of which the majority is related to an increase in the statutory expenditures pursuant to major transfers to other levels of government ($1,476.9 million), offset by decreases in transfer payments under direct program expenses to the International Development Association ($441.6 million), a decrease in Incentive to Provinces to Eliminate Taxes on Capital ($62.1 million) and a decrease related to the Establishment of a Canadian Securities Regulation Regime and Canadian Regulatory Authority ($45.8 million).
• Public Debt Charges (SO 11) – A decrease of $327.3 million.

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

Quarterly Spending

Expenditures in the second quarter of fiscal 2015-16 were $38,745.1 million compared with $42,597.5 million for the second quarter of 2014-15, representing a decrease of $3,852.3 million or 9.0% in quarterly spending.

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

Private sector economists expect moderate growth in the Canadian economy, as ongoing strength in domestic demand is expected to be moderated by a fragile global recovery and sharp declines in global crude oil prices. In the euro area, the recovery is uncertain and the risk of deflation is increasing. In China, the challenges that the authorities face in introducing necessary policy reforms while maintaining their targeted growth objectives could lead to slower and more-variable-than-expected growth. Furthermore, volatility in other global commodity markets also poses challenges and risks to Canada's economy. In contrast to these developments, the U.S. economic recovery appears to be gaining traction.

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.

There have been no significant changes in relation to operations, personnel and programs.

Approved by:

Ottawa, Canada
November 27, 2015