Archived - Department of Finance Canada Quarterly Financial Report for the Quarter Ended December 31, 2018 (unaudited)

1. Introduction

• 1.1 Authority, Mandate and Program Activities 
• 1.2 Basis of Presentation
• 1.3 Department of Finance Canada – 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 Directive on Accounting Standards, GC 4400 Departmental Quarterly Financial Reports. 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 Economic Statement;
• 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 Departmental Plan.

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 2017–18 Main Estimates and Supplementary Estimates A and B, as well as transfers from Treasury Board Central Votes that were approved by the end of the quarter.

The following graph provides a comparison of budgetary authorities available for the full fiscal year and budgetary expenditures for the first nine months of 2017–18 and 2018–19. 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.

Sections 2.1 and 2.2 below highlight the significant items that contributed to the increase in the resources available from 2017–18 to 2018–19 and the increase in actual expenditures as at December 31, 2018 compared to December 31, 2017. Full details on authorities and expenditures can be found in Table 1, Statement of Authorities at the end of this document.

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

Total 2018–19 Vote 1 program authorities available as at December 31, 2018 are $107.9 million compared to $131.1 million for the same period in 2017–18, representing a decrease of $23.2 million. This variance is primarily attributable to a one time $30 million funding received in 2017–18 for a grant to the Government of Alberta to support provincial actions that would stimulate economic activity and employment in Alberta’s resource sector. Apart from this item, the 2018–19 voted budgetary authorities increased by $6.8 million primarily due to:

• $2.1 million related to Budget 2017 initiatives consisting of Financial Sector Policy Funding Renewal, Corporate Assets Review and Canada Infrastructure Bank;
• $2 million for Tsimshian First Nations consultations related to the potential divestiture of Ridley Terminals Inc.;
• $1.8 million for hosting the 2018 G7 summit;
• $1.2 million for enhanced capacity for Indigenous policy;
• $0.6 million related to the financial sector legislative review.

These increases were partially offset by the following:

• $0.9 million decrease in sunsetting funding related to the Cooperative Capital Market Regulatory System
• $0.9 million decrease in funding for the process under Canada-Québec Comprehensive Integrated Tax Coordination Agreement Arbitration.

Major transfer to other levels of government increased by $2,331.9 million, primarily due to the net effect of the following factors:

Increases include:

• Canada Health Transfer (CHT) – An increase of $1,434 million reflecting a 3.9% annual growth rate of gross domestic product (GDP). This CHT grows based on a 3-year moving average of nominal GDP, with funding guaranteed to increase by at least 3% per year;
• Fiscal Equalization – An increase of $704.6 million reflecting the 3.9% GDP-based escalator being applied to the 2017–18 level;
• Canada Social Transfer – An increase of $412.5 million reflecting the 3% annual increased funding commitment that commenced in 2009–10 and which was continued in the Jobs, Growth and Long-term Prosperity Act, 2012 for 2014–15 and subsequent years; and
• Territorial Financing – An increase of $103.5 million reflecting the incorporation of new and updated data for territorial expenditure requirements and revenue capacities into the program’s legislated formula.

Decreases include:

• Alternative Payments for Standing Programs – A decrease of $187.1 million due to higher recoveries as a result of an increase in the estimated value of personal income tax points that were transferred to Québec;
• Additional Fiscal Equalization to Nova Scotia – A decrease of $85.3 million is due to new data entering formula, which uses an average of data for three fiscal years. This program ensures that there is no reduction in combined Equalization and 2005 Offshore Accord Offset Payments relative to the previous Equalization formula (pre-2007);
• Youth Allowance Recovery – A decrease of $48.4 million due to higher recoveries as a result of an increase in the estimated value of personal income tax points that were transferred to Québec; and
• Additional Fiscal Equalization Offset Payment to Nova Scotia – A decrease of $1.9 million due to a decline in Nova Scotia's offshore oil and gas revenues. The Nova Scotia 2005 offshore arrangement provides offset payments equal to the decline in Equalization due to the inclusion of these revenues in the program.

Interest on Unmatured Debt and Interest on Other Liabilities increased by $1,543 million, due to the following factors:

• Interest on Unmatured Debt – An increase of $1,863 million due to the upward revision of forecasted interest rates by private sector economists, consistent with Budget 2018; and
• Interest on Other Liabilities – A decrease of $320 million largely reflecting the decrease in the average Government of Canada long-term bond rate forecast for 2018–19.

Direct program expenses increased by $180.4 million, due primarily to the net effect of the following factors:

• $477.3 million in Funding for Canada Infrastructure Bank; and
• $11.4 million for Canadian Securities Regulation Regime Transition Office.

These increases were offset by the $300 million in funding received in 2017–18 for Home Care Services and Mental Health Care Services that did not reoccur in 2018–19. Remaining immaterial decreases were for various programs.

Total 2018–19 non-budgetary authorities increased by $52.3 million for Canada’s purchase of initial shares pursuant to the Asian Infrastructure Investment Bank Agreement Act.

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 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.

As an 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 throughout the year. 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 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 Year-to-Date spending as at December 31 by vote for the current and previous fiscal years.

Total 2018–19 Vote 1 program expenditures at the end of the third quarter were $73.7 million compared to $98.2 million for the same period in fiscal year 2017–18, representing a decrease of $24.5 million. This decrease is primarily attributable to a one-time $30 million grant payment made in
2017–18 to the Government of Alberta to support provincial actions that would stimulate economic activity and employment in Alberta’s resource sector. Apart from this item, the 2018–19 voted expenditures increased by $5.5 million primarily due to:

• $1.8 million for collective agreements and other compensation adjustments;
• $1.3 million for the G7 summit;
• $0.8 million for IT investments;
• $0.4 million for Tsimshian First Nations consultations related to the potential divestiture of Ridley Terminals Inc.;
• $0.4 million related to the purchase of data for Pharmacare;
• $0.3 million for surge capacity to increase support services to employees with pay issues; and
• $0.5 million for various, individually immaterial, expenditures.

Major transfers to other levels of government increased by $1,819.2 million, primarily due to the net effect of the following factors:

• $1,075.5 million related to Canada Health Transfer;
• $528.4 million related to Fiscal Equalization;
• $309.3 million related to Canada Social Transfer; and
• $82.4 million related to Territorial Financing.

The increases above were offset by:

• $152.2 million decrease due to higher recoveries in the Alternative Payments for Standing Programs;
• $24.2 million decrease due to higher Youth Allowances Recovery.

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

Interest on unmatured debt and interest on other liabilities increased by $1,749.5 million, due to the net impact of the following two factors:

• Interest on unmatured debt – An increase of $1,894 million, largely reflecting higher Consumer Price Index adjustments on Real Return Bonds and a higher average effective interest rate on the stock of Government of Canada treasury bills; and
• Interest on other liabilities – A decrease of $144.5 million, largely reflecting a decrease in the average Government of Canada long-term bond rate.

Direct program expenses decreased by $132.2 million primarily due to the following factors:

• A payment of $300 million made in 2017–18 related to Funding for Home Care Services and Mental Health Care Services;
• Losses on foreign exchange – A decrease of $101.8 million due to the revaluation of International Monetary Fund related accounts; and
• Purchase of domestic coinage – A decrease of $4.4 million.

A $273.4 million increase in the payment to the Canada Infrastructure Bank (CIB) significantly offset the total decrease. The remaining $0.6 million variance relates to various, individually immaterial, expenditures.

Non-budgetary expenditures at the end of the third quarter of 2018–19 increased by $517.3 million primarily due to the following:

• An increase of $497.3 million in 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 $24 million expenditure made pursuant to Payments under Bretton Woods and Related Agreements Act – International Organizations.

A $4 million decrease in Advances made pursuant to section 13(1) of the Financial Consumer Agency of Canada Act served to offset the increases above.

Significant Changes on the Departmental Budgetary Expenditures by Standard Object Table

Table 2 located at the end of this report, presents budgetary expenditures by standard object. The main variance in year-to-date expenditures between 2018–19 and 2017–18 by standard object are as follows:

• Public debt charges – A net increase of $1,749.5 million attributable to an increase of $1,894 million in interest on unmatured debt offset by a decrease of $144.5 million in interest on other liabilities;
• Transfer payments – An increase of $1,489.6 million primarily attributable to the net effect of a $1,819.2 million increase in statutory expenditures pursuant to major transfers to other levels of government. This variance is offset by a $300 million expenditure in Direct program expense for Home Care Services and Mental Health Services that was made in fiscal year 2017–18 and a one-time $30 million grant payment also made in 2017–18 to the Government of Alberta to support provincial actions that would stimulate economic activity and employment in Alberta’s resource sector; and
• Other subsidies and payments – An increase of $171.7 million resulting from a $273.4 million increase in the payment to the Canada Infrastructure Bank (CIB) offset by a decrease of $101.8 million in Losses on foreign exchange.

Quarterly Spending

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

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

The complex and horizontal issues of the Department require ongoing discussions, consultations and coordination with central agencies, other departments and governments, and external stakeholders. In this context, the Department maintains high-level engagement and strong collaborative relationships with domestic and international partners to fulfill its commitments and deliver for Canadians.

The Department operates in an environment where the decisions and actions of its employees can have far-reaching impacts on the Canadian public and economy. As a knowledge–based organization, the Department recognizes that its employees are its strength. The Department will continue to focus on providing its employees a healthy and enabling work environment, so that it can attract, develop and retain a diverse and high–performing workforce that is fully committed to the success of the organization.

Planned activities in support of the Department’s objectives are also vulnerable to Information Technology (IT) issues. The Department relies on efficient and effective Information Management (IM) and technology to deliver informed policy advice and operate as an agile and responsive knowledge-based institution, while protecting its highly sensitive institutional information.

Cybersecurity incidents and failures in supporting systems have been identified as risks that could cause serious disruptions and affect the Department’s ability to execute critical government operations, including tax and transfer payments, and public debt-related transactions. A Business Continuity Plan (BCP) is in place to ensure that critical services are maintained in case of a system failure. Further, the Department is committed to building on recent improvements to increase the security posture of its IT infrastructure and ensure the effective protection of its information assets.

The Department’s Corporate Risk Profile provides a snapshot of the Department’s key corporate risks. The Department monitors its corporate risks and associated risk responses to identify areas of opportunity and to reflect progress made in implementing mitigation strategies.

Pamela Aung-Thin vacated the position of Assistant Deputy Minister, Consultations and Communications Branch, effective December 19, 2018. Marie-Elise Rancourt is currently the Acting Assistant Deputy Minister.

Approved by:

Ottawa, Canada
February 28, 2019