Quarterly Financial Report (QFR) for the Quarter Ended December 31, 2022

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

This section provides financial highlights and explanations for differences between the fiscal-quarter and fiscal-year-to-date results for the quarter ended on December 31, 2022, and the results of the same period last year.

2.1 Statement of authorities

When compared to those of the same quarter of the previous year, the department's year-to-date budgetary authorities available for use have increased by $1,594.9 million. As reflected in Table 1: Statement of authorities, the total budgetary authorities increased from $25,933.0 million in 2021–22 to $27,527.9 million in 2022–23. Major reasons for the changes are outlined below.

*A positive variance indicates an increase in authorities available for use in Q3 2022–23 compared to Q3 2021–22 and a negative variance indicates a decrease in authorities available for use in Q3 2022–23 compared to Q3 2021–22.

Note: Numbers may not add up due to rounding.

The year-to-date net increase in authorities of $1,594.9 million over the third quarter in 2022–23 can be explained by variances in funding for a number of initiatives.

• Contributions to the Ukraine Operation (increase of $500.0 million)

  The increase is due to funding received in Supplementary Estimates (A) 2022-23 to support Ukraine in its efforts to defend its sovereignty by providing both lethal and non-lethal aid as announced in Budget 2022. Furthermore, in Supplementary Estimates (B) 2022-23, the department internally reallocated $250 million from Vote 1 to Vote 10 to provide additional military aid to Ukraine.

• Operation and sustainment (fleet maintenance) of military capabilities and operating requirements (increase of $429.0 million)

  In order to provide ongoing support for operating and capital requirements, the department received additional funding to offset sustainment growth and the inflationary impact on the defence budget.

• Heyder-Beattie Class Action Final Settlement Agreement (increase of $294.9 million)

  The Heyder-Beattie class action sought damages related to gender-based discrimination, sexual assault and sexual harassment. The increase in funding accounts for the additional claims that were submitted to allow the Department to fulfil its obligations and payments under the final agreement.

• Budget 2021 initiatives (increase of $203.5 million)

  Funding for initiatives announced in Budget 2021 pertaining to:

  • The North Atlantic Treaty Organization (NATO) Readiness Initiative and the NATO Contribution Programs
  • Modernizing the department’s information management and information technology systems
  • Sustaining health services for the Canadian Armed Forces
  • Addressing sexual misconduct and gender-based violence in the military

• Implementation of SSE (increase of $110.7 million)

  The net increase in funding is primarily related to incremental demands required to execute the overall SSE policy commitments, including funding requirements for the expansion of the Canadian Armed Forces and civilian support, and for capital investments.

• Major capital equipment and infrastructure projects (increase of $93.3 million)

  The net increase in funding is due to modifications to the multi-year spending profile of major capital equipment and infrastructure projects. These adjustments serve to align financial resources with project acquisition timelines. This increase in cash requirements is mainly due to funding to support the Joint Support Ship and the Canadian Surface Combatant projects. These increases are partially offset by decreases in cash requirements related to the Fixed-Wing Search and Rescue Aircraft Replacement and the Light Armoured Vehicle Reconnaissance Surveillance System Upgrade projects.

• Pay administration – Federal public servants and Canadian Armed Forces (increase of $35.8 million)

  The increase is due to adjustments to the rates of pay and allowances for Canadian Armed Forces members and adjustments made to the terms and conditions of service or employment of the federal public administration in various collective agreements.

• Service Income Security Insurance Plan (SISIP) (increase of $23.3 million)

  An increase to payments in respect of the long-term disability and life insurance plan for members of the Canadian Forces to align with the recent increases to the Canadian Forces rates of pay.

• Miscellaneous departmental requirements (decrease of $13.4 million)

  The net decrease is due to miscellaneous funding variances. The decrease in Operating is partially related to a transfer to Shared Services Canada to support the enterprise funding model for government IT services. Furthermore, in 2022–23, the department requested a vote transfer from Operating to Capital to support the implementation of a common definition of the capital expenditures vote. The transfer resulted in a net decrease in Operating funding and an increase in Capital funding in 2022–23 compared to 2021–22. Lastly, the increase in statutory authorities is mainly due to an increase in contributions to employee benefit plans for military and civilians and an increase in the proceeds from disposal of surplus Crown assets.

• Travel Reduction (decrease of $82.2 million)

  A permanent ongoing reduction for travel as announced in Budget 2021.

2.2 Departmental budgetary expenditures by standard object

When compared to those of the same quarter of the previous fiscal year, the department’s year-to-date total net budgetary expenditures have increased by $1,273.4 million. As reflected in Table 2: Departmental budgetary expenditures by standard object, the expenditures increased from $16,069.6 million in 2021–22 to $17,342.9 million in 2022–23.

Year-to-date variances in net budgetary expenditures (presented by standard object)(in millions of dollars)

Note: Numbers may not add up due to rounding.

Year-to-date net increase of $1,273.4 million is attributable mainly to the following:

• Transfer payments (increase of $512.7 million)

  The increase in spending is primarily due to contributions to Ukraine. A small portion of this increase was spent on researching how to be better prepared in future potential pandemics, timing differences on foreign exchange gains/losses, and 22 Wing North Bay PFAS (Poly and Perfluoroalkyl substances) monitoring.

• Professional, special & other services (increase of $392.9 million)

  The increase in spending is primarily due to an increase in engineering-related costs and timing differences for capital projects. In addition, the industry has ramped up its workforces and costs will continue to increase until a steady state is reached. Additionally, the variance is coming from a larger annual payment for the Joint Strike Fighter that took place this fiscal year.

• Other subsidies and payments (increase of $175.8 million)

  The increase in expenditures is primarily due to a significant payment made to claimants of settlement agreements. This increase was partially offset by a decrease in the timing of scheduled payments for settlement agreements.

• Transportation and communications (increase of $134.3 million)

  The increase in expenditures is primarily due to the resumption of domestic and international travel, governance activities, and military training due to lifting of COVID-19 restrictions. As well, an increase in move related service costs was observed due to factors such as a higher number of house hunting trips and resumption of moves of some military members. In addition, expenditures in operations and freight/shipping costs have increased based on location and distance. Furthermore, due to inflation, the cost of air travel, living, and gas has increased.

• Utilities, materials and supplies (increase of $133.3 million)

  The increase in spending is primarily due to reduced Federal and Provincial COVID-19 restrictions. This resulted in increases in fuel requirements due to increased flying hours. There has also been a significant increase in fuel and utility prices compared to last year. As military operations and training have resumed, there has been an increase in general supplies and food usage.

• Personnel (increase of $52.3 million)

  The increase in spending is primarily due to the increase in the employer’s CPP (Canada Pension Plan) and EI (Employment Insurance) contributions. In addition, there have been increases in some allowances, such as pay raises for senior officers.

• Rentals (increase of $49.6 million)

  The increase in spending is primarily due to the resumption of activities and training exercises that had been reduced due to COVID-19. The lifting of COVID-19 restrictions led to an increase in TD (temporary duty) travel both domestic and international, which resulted in higher costs in accommodation, car, and aircraft rentals. In addition, the current geopolitical situation in Europe (Russia/Ukraine) has resulted in increased requirements for accommodation rentals for deployed personnel. The increase can be also explained by various timing differences in license and maintenance fees for IT (Information Technology) security software, capital projects rental payments, and accommodations and lease charges.

• Acquisition of machinery and equipment (decrease of $86.7 million)

  The decrease in spending was primarily due to efficiencies realized during the construction of ships. In addition, project milestone differences and FMS (Foreign Military Sales) case payments for Hornet Extension project and Maritime Helicopter project explains the decrease in expenditures. A production schedule change in vehicle deliveries to accommodate Canada’s priority of donating vehicles to Ukraine has also contributed to the decrease.

• Acquisition of land, buildings and works (decrease of $57.9 million)

  The decrease in spending is primarily due to timing differences on several construction projects such as Airfield Pavement rehab runway and Royal Canadian Dragoons CFB Petawawa. There was a decrease in expenditures for       the Canadian Special Operations Regiment (CSOR) infrastructure and work on infrastructure Artic Jetty in Esquimalt completed last FY.

• Revenues netted against expenditures (increase of $38.0 million)

  The increase in spending is primarily due to a timing difference as the system now charges quarterly instead of annually. In addition, an increase in international flying led to an increase in sales of POL (petroleum, oil and lubricants) to foreign military under the fuel exchange agreement due to COVID-19 restrictions being lifted.

3. Risks and uncertainties

The department’s financial transactions are exposed to a broad range of external financial and economic risks such as inflation, foreign exchange commodity price fluctuations and global supply chain. Currently we are seeing economic risks give rise to increases in costs of goods and services, labour shortages, and supply chain delays. Depending on how these risks unfold, they could lead to significant fluctuations in anticipated spending.

While the department considers key economic and financial risk factors (including defence- specific inflation and foreign exchange) in developing expenditure strategies, these risks are outside the control of the department.

The department continues to address the financial risks associated with Phoenix pay issues through the implementation of new controls and the strengthening of existing ones. The Civilian Quality Assurance program modified its sampling program and leveraged the use of robotic process automation to provide a better analysis of the current pay environment and lead to timelier corrective actions with the help of compensation advisors. Initiatives like the centralized data entry capability, the data integrity working group and the training working group continue to ensure sustained payment accuracy and iterative training.

The department’s capital acquisition program includes a number of large multi-year acquisition projects, mainly comprising of advanced fighter aircrafts, naval ships and armored vehicles. Delays in contracting and procurement activities or delays in deliveries by suppliers for individual projects can lead to reduced expenditures or budgetary surpluses.

Risks also flow from claims and litigations involving the department’s normal operations. When the department receives a claim or litigation alleging liability in tort or extra contractual responsibility to cover losses, expenditures or damages, it is analyzed and an appropriate position is developed, based on legal advice. Litigation or settlement may be pursued and they are tracked through the department’s reporting.

The pandemic has exacerbated the problem for the CAF to grow its Force, in addition to existing personnel issues and changing demographics. As a result, the CAF is applying reconstitution measures at the tactical, operational, and strategic levels to restore units to an acceptable level of readiness to excel as a modern and combat-ready military force. This is intended to enable the CAF to adapt quickly to action when called for significant unexpected operational demands, which can occur at any time anywhere on the globe.

As Canada is moving towards adapting to a post-pandemic landscape, the Government of Canada suspended its mandatory COVID-19 vaccination policy for federal public servants in June 2022. The Canadian Armed Forces amended the CAF directives on COVID-19 mandatory vaccination effective on 14 October 2022. Vaccine requirements will be driven by operational necessity to maintain domestic and international operational viability, which is essential to the protection of Canadians and defence of Canada. In addition, the department continues its transition to a hybrid workforce, further reinforced by the recent Treasury Board of Canada Secretariat (TBS) direction.

Additionally, significant unforecasted operational demands can occur at any time, requiring the department to respond anywhere on the globe. Depending on the extent of the operational demand, the cost of unforecasted operations would be mitigated either through internal reallocations or by requesting incremental funding from the government.

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

Of note, the Department has restructured its organization by reallocating human resources to create the Digital Transformation Office and its Chief Information Office.

Since February 2022, Canada has committed $1 billion of military support to Ukraine, which includes procurement of military equipment, artillery, combat support vehicles, satellite communication services, uniforms/gear, and training for Ukrainian troops.

Furthermore, the CAF has reallocated their current forces to continue to support Ukraine, maintain its NATO commitments, increase its presence in the Indo-Pacific, and reduce its presence in the Middle East. These movements will incur additional impacts on transportation, relocation, and overall military salary expenditures.

To address the shortfall and increase the recruitment pool of military personnel, the federal government announced policy changes in December 2022 that will allow permanent residents to join the CAF.

Approved by:

5. Financial tables

• Table 1: Statement of authorities
• Table 2: Departmental budgetary expenditures by standard object