Quarterly Financial Report (QFR) for the Quarter Ended June 30, 2020

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 June 30, 2020, and the results of the same period last year.

2.1 Statement of authorities

It should be noted that when referring to the Table 1: Statement of authorities for 2020–21, the total budgetary authorities include 75% of the voted appropriations in the 2020–21 Estimates, whereas for 2019–20, full supply of 2019–20 Estimates was received.

When compared to those of the same quarter of the previous year, the department's year-to-date budgetary authorities available for use have decreased by $3,287.2 million. As reflected in Table 1: Statement of authorities, the total budgetary authorities decreased from $21,916.4 million in 2019–20 to $18,629.2 million in 2020–21. Major reasons for the changes are outlined below.

Year-to-date variances in authorities available for use

(in millions of dollars)

The year-to-date net decrease in authorities of $3,287.2 million over the first quarter in 2019–20 can be explained by variances in funding for a number of initiatives.

• Major capital equipment and infrastructure projects (increase of $792.2 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, the Canadian Surface Combatant, Armoured Combat Support Vehicle, and Fixed-Wing Search and Rescue Aircraft Replacement projects.

• Implementation of SSE (increase of $126.4 million)

The net increase in funding represents incremental demands required to execute the overall SSE policy commitments, the expansion of the Canadian Armed Forces and civilian support and the realignment of the primary Reserve Force remuneration and benefits with those of the Regular Force.

• Pay administration – Federal public servants and Canadian Armed Forces (increase of $58.0 million)

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

• Miscellaneous departmental requirements (decrease of $37.0 million)

The net decrease is mainly due to only receiving 75% of full supply in June 2020 for miscellaneous departmental requirements. This decrease was partially offset by increases in contributions to employee benefit plans for military members and civilians.

• Federal Contaminated Sites Action Plan (FCSAP) (decrease of $49.1 million)

The FCSAP program is a government-wide initiative to reduce environmental and human health risks from known federal contaminated sites and associated federal financial liabilities. The decrease in funding is a result of the reduction in the planned expenditures for remediation activities in 2020–21 in addition to only receiving 75% of full supply in June 2020.

• Incremental funding for deployed operations (decrease of $81.2 million)

The decrease in funding is mainly due to the timing of the requirements for renewing Canada’s Middle East Strategy (Operation IMPACT), which is expected to be requested later in the year.

• Service Income Security Insurance Plan (SISIP) (decrease of $117.9 million)

The decrease is mainly due to only receiving 75% of full supply in June 2020 for payments with respect to the long-term disability and life insurance plans for members of the Canadian Armed Forces.

• Operation and sustainment (fleet maintenance) of military capabilities and operating requirements (decrease of $932.8 million)

In order to provide ongoing support for operating and capital requirements, the department receives additional funding to offset sustainment growth and the inflationary impact on the defence budget decreased as a result of only receiving 75% of full supply in June 2020.

• Baseline funding (decrease of $3,045.8 million)

The decrease in funding is related to the department only receiving 75% of full supply in June 2020.

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 decreased by $163.3 million. As reflected in Table 2: Departmental budgetary expenditures by standard object, the expenditures decreased from $4,384.0 million in 2019–20 to $4,220.7 million in 2020–21.

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

(in millions of dollars)

The year-to-date net decrease in budgetary expenditures of $163.3 million can be explained by the variances detailed below.

• Personnel (increase of $94.1 million)

The increase in spending is primarily due to a change in reporting for the Service Income Security Insurance Plan (SISIP), an increase in the strength of the Regular Force members, and an increase in the number of reservists on full-time contracts to support Operation LASER’s response to COVID-19.

• Other subsidies and payments (increase of $36.2 million)

The increase in expenditures is primarily due to a timing difference for payments in lieu of taxes and to settlements from other government departments taking longer to process as a result of COVID-19.

• Transportation and communications (decrease of $97.3 million)

The decrease in expenditures is primarily due to the delayed execution of military members’ relocations and a decrease in travel due to restrictions imposed by the department in response to COVID-19.

• Utilities, materials and supplies (decrease of $78.4 million)

The decrease in spending is primarily due to the department activating its business continuity plan in mid-March 2020 in response to COVID-19, sending all non-critical employees to work remotely from home. This resulted in decreases in: fuel requirements, as operations were suspended; food and supply purchases, as military training was reduced; and utility costs, as many buildings had reduced occupancy.

• Professional and special services (decrease of $35.9 million)

The decrease in spending is primarily due to the completion of the All Domain Situation Awareness Science and Technology Program, and to delays in services, service contracts for repair and maintenance activities due to COVID-19.

• Acquisition of machinery and equipment (decrease of $21.5 million)

The decrease in spending is primarily due to a decrease in vehicles delivered from the Medium Support Vehicle System project, the completion of an aircraft lease for the NATO Flying Training in Canada, and procurement delays due to COVID-19. The decreases are partially offset by an increase in expenditures for the Challenger Aircraft project, the Joint Support Ship project, the Fixed-Wing Search and Rescue Aircraft Replacement project, and the Manned Airborne Intelligence Surveillance and Reconnaissance project.

• Transfer payments (decrease of $20.4 million)

The decrease in spending is due to the timing difference in payments to the North Atlantic Treaty Organization (NATO).

• Revenues netted against expenditures (increase of $26.9 million)

The increase in revenues netted against expenditures is mainly due to the timing of payments received from foreign countries.

3. Risks and uncertainties

During the first quarter of 2020–21, as a result of the activation of the business continuity plan, a limited number of employees had access to the network and changes in the operating environment resulted in changes in processes and controls. In addition, the department has, to date, incurred fewer expenditures due to travel restrictions, cancelled training exercises, and procurement delays. Management continues to assess the impact of implementation of the business continuity plan on the system of internal controls. Aside from the risks associated with COVID-19, the other risks discussed below are still relevant.

To fulfill its mission, the department purchases the goods and services necessary to train military forces, conduct operations at the request of the Government of Canada and acquire related infrastructure and equipment both domestically and internationally.

The department’s financial transactions are exposed to a broad range of external financial and economic risks such as inflation, foreign exchange and commodity price fluctuations. Depending on how these risks unfold, they could lead to higher or lower-than-anticipated spending. For example, an appreciation of the Canadian dollar or a deterioration of commodity prices (oil in particular) could result in lower spending. Conversely, a depreciation of the Canadian dollar or an increase in commodity prices could result in increased spending.

The department is addressing the financial risks associated with the Phoenix pay issues through the implementation of new controls and the strengthening of existing ones. As part of the department’s Phoenix risk mitigation efforts, several initiatives have been implemented, such as the creation of a centralized HR-to-Pay processing team to ensure pay accuracy and timeliness, a centralized trusted source team responsible for the verification of pay action requests, and contracting to use robotics to automate HR-to-Pay processing to improve pay accuracy and reduce the need for manual data intervention.

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 of the control of the department.

The department’s capital acquisition program includes a number of large multi-year acquisition projects. 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.

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

The worldwide spread of COVID-19 has impacted Canadian Armed Forces operations across all regions, personnel and programs. Certain measures were also imposed on personnel to reduce the impacts of the pandemic situation and maintain operational capability and readiness to support the Government of Canada objectives and programs. For example, the department has incurred unplanned expenditures for Operation GLOBE to repatriate Canadians across the world and for Operation LASER to support federal and provincial agencies’ efforts. The Canadian Armed Forces continue to analyze the risk factors in preparation for a return to their scheduled operations when conditions permit.

On April 29, 2020, a National Defence CH-148 Cyclone helicopter crashed at sea off the coast of Greece while on a training mission with NATO forces and six members of the Canadian Armed Forces were lost. While departing from Kamloops, British Columbia as part of Operation INSPIRATION, Snowbird 11 crashed on May 17, 2020, killing one Canadian Armed Forces member and seriously injuring another. The National Defence’s Airworthiness Investigative Authority continues to investigate.

Aside from these events, the department continues to implement its various SSE initiatives such as the renewal of its major equipment fleets including fighter aircraft and maritime warships.

In June 2020, Ms. Linda Drainville, previously acting Associate Assistant Deputy Minister (Finance), was appointed as Associate Assistant Deputy Minister (Finance).

Approved by:

Dated: August 20, 2020

Ottawa, Canada

5. Financial tables

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