Quarterly Financial Report (QFR) for the Quarter Ended June 30, 2021

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, 2021, 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, the total budgetary authorities include 75% of the voted appropriations in the 2020–21 Estimates, whereas for 2021–22, full supply of 2021–22 Estimates was received. Due to the COVID-19 pandemic, there were limited sessions in spring 2020 for Parliament to study supply, the Standing Orders of the House of Commons were amended to extend the study period into fall 2020 and 2020–21 Estimates full supply was received in the third quarter of 2020–21.

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 $5,670.9 million. As reflected in Table 1: Statement of authorities, the total budgetary authorities increased from $18,629.2 million in 2020–21 to $24,300.1 million in 2021–22. Major reasons for the changes are outlined below.

Year-to-date variances in authorities available for use

(in millions of dollars)

Initiative Operating Capital Grants and contributions Payments in respect of the long-term disability and life insurance plan for members of the Canadian Forces Budgetary statutory authorities Total variances*
Baseline funding 2,729.9 290.8 n/a n/a n/a 3,020.7
Operation and sustainment (fleet maintenance) of military capabilities and operating requirements 1,440.8 n/a n/a n/a n/a 1,440.8
Major capital equipment and infrastructure projects 126.8 711.9 n/a n/a 2.4 841.1
Implementation of SSE 165.0 28.8 13.8 n/a 13.5 221.1
Service Income Security Insurance Plan (SISIP) n/a n/a n/a 105.8 n/a 105.8
Miscellaneous departmental requirements (161.4) 246.7 76.3 n/a (58.3) 103.3
Pay administration – Federal public servants and Canadian Armed Forces 78.5 n/a n/a n/a 11.9 90.4
Incremental funding for deployed operations (136.2) (5.3) n/a n/a (10.8) (152.3)
Cumulative variance in authorities available for use 4,243.4 1,272.9 90.1 105.8 (41.3) 5,670.9

*A positive variance indicates an increase in authorities available for use in the first quarter (Q1) of 2021–22 compared to Q1 2020–21 and a negative variance indicates a decrease in authorities available for use in Q1 2021–22 compared to Q1 2020–21.

The year-to-date net increase in authorities of $5,670.9 million over the first quarter in 2020–21 can be explained by variances in funding for a number of initiatives.

  • Baseline funding (increase of $3,020.7 million)

The increase in funding is related to the department only receiving 75% of full supply in June 2020 whereas 100% of full supply was received in June 2021.

  • Operation and sustainment (fleet maintenance) of military capabilities and operating requirements (increase of $1,440.8 million)

The increase in funding is mainly due to the department only receiving 75% of full supply in June 2020 whereas 100% of full supply was received in June 2021. 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.

  • Major capital equipment and infrastructure projects (increase of $841.1 million)

The net increase in funding is mainly due to only receiving 75% of full supply in June 2020 whereas 100% of full supply was received in June 2021.

  • Implementation of SSE (increase of $221.1 million)

The net increase in funding is partially 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 the Total Health and Wellness Strategy. In addition, the increase was also due to only receiving 75% of full supply in June 2020 for the implementation of SSE initiatives whereas 100% of full supply was received in June 2021.

  • Service Income Security Insurance Plan (SISIP) (increase of $105.8 million)

The increase is 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 whereas 100% of full supply was received in June 2021.

  • Miscellaneous departmental requirements (increase of $103.3 million)

The net increase is mainly due to only receiving 75% of full supply in June 2020 for miscellaneous departmental requirements whereas 100% of full supply was received in June 2021. This increase was partially offset by decreases in contributions to employee benefit plans for military members and civilians.

  • Pay administration – Federal public servants and Canadian Armed Forces (increase of $90.4 million)

The increase is mainly due to adjustments made to the terms and conditions of service or employment of the federal public administration in various collective agreements.

  • Incremental funding for deployed operations (decrease of $152.3 million)

The decrease is due to the timing requirements for funding. Incremental funding for various deployed operations was not requested during the first quarter of 2021–22. It is anticipated that funding will be requested later in the 2021–22 fiscal year.

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 $260.4 million. As reflected in Table 2: Departmental budgetary expenditures by standard object, the expenditures increased from $4,220.7 million in 2020–21 to $4,481.1 million in 2021–22.

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

(in millions of dollars)

Standard object

2021–22

Year-to-date used at quarter-end

2020–21

Year-to-date used at quarter-end

Year-to-date variance
Personnel 2,619.1 2,447.3 171.8
Professional and special services 616.5 554.5 62.0
Utilities, materials and supplies 189.1 132.2 56.9
Transportation and communications 107.7 62.3 45.4
Rentals 128.2 83.7 44.5
Repair and maintenance 237.2 200.6 36.6
Other expenditures 6.2 2.3 3.9
Transfer payments 5.8 4.7 1.1
Acquisition of machinery and equipment 474.4 621.5 (147.1)
Other subsidies and payments 85.0 117.0 (32.0)
Acquisition of land, buildings and works 59.6 63.1 (3.5)
Revenues netted against expenditures (47.7) (68.5) 20.8
Total net budgetary expenditures 4,481.1 4,220.7 260.4

The year-to-date net increase in budgetary expenditures of $260.4 million can be mainly explained by the variances detailed below.

  • Personnel (increase of $171.8 million)

The increase in spending is primarily due to an increased number of reservists on full-time contracts. In addition, there were various collective agreements ratified for civilian employees and pay raises for Canadian Armed Forces members which resulted in an ongoing increase to personnel costs.

  • Professional and special services (increase of $62.0 million)

The increase in spending is primarily due to an increase in engineering services and to the timing of payments for legal services and pension services. There was also an increase in healthcare services to military members compared to the previous year mainly due to the COVID-19 related restrictions in 2020–21 that deferred or delayed most routine services.

  • Utilities, materials and supplies (increase of $56.9 million)

The increase in spending is primarily due to a relaxation in 2021–22 of federal and provincial restrictions implemented in 2020–21 as a result of COVID-19. This resulted in increases in fuel requirements due to a higher number of flights, utility costs due to increased access to buildings, and general supply usage as military operations and training resumed.

  • Transportation and communications (increase of $45.4 million)

The increase in expenditures is primarily due to the resumption of military members’ relocations that were cancelled or postponed in the previous fiscal year.

  • Rentals (increase of $44.5 million)

The increase in expenditures is due to the timing of payments for occupancy instruments for National Defence Headquarters (Carling), and an increase in software and application licensing for Microsoft Office 365 and an Integrated Financial and Materiel System.

  • Repair and maintenance (increase of $36.6 million)

The increase in expenditures is due to a resumption of infrastructure-related repairs and maintenance projects which were previously halted or postponed due to COVID-19, and the timing of Foreign Military Sales case payments under the Lightweight Torpedo Upgrade project.

  • Acquisition of machinery and equipment (decrease of $147.1 million)

The decrease in spending is primarily due to the timing of milestone payments and higher volume of deliveries in the previous year for various major projects, including the Defence Cryptographic Modernization Project, the Joint Support Ship project, and the Fixed-Wing Search and Rescue Aircraft Replacement project.

  • Other subsidies and payments (decrease of $32.0 million)

The decrease in expenditures is due to the timely settlement of payments to other government departments which took longer to process in the previous year due to COVID-19.

  • Revenues netted against expenditures (decrease of $20.8 million)

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

3. Risks and uncertainties

As the threat of the COVID-19 pandemic continues to evolve, the department remains committed to adapting its mitigation strategy to align with updated public health guidance for gradual resumption of business across Canada. The department has assessed its business resumption plan to determine the required steps and conditions for resuming work. Until a sufficient percentage of the population is fully vaccinated and the risk of transmission between individuals drops significantly, and where civilian rates of disease and of vaccination warrant, the department will continue to apply its Layered Risk Mitigation Strategy in its facilities. This includes restricting the number of people in facilities, continuing to enforce public health measures like mask wearing and physical distancing, and implementing the voluntary Rapid Antigen Detection Testing (RADT) program in higher risk departmental workplaces. How quickly restrictions are lifted in each departmental facility will depend on provincial/territorial and regional public health guidance, which is based on evidence and judgment around the different levels of risk that apply to different activities. Management will continue to adjust activities according to local situations. In all decisions, leadership will carefully consider the health of Defence Team members, Senior Medical Authority advice, and guidance from regional health authorities. In addition to the risks associated with COVID-19, the other risks discussed below are still relevant.

To fulfill its mission, the department purchases 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 continues to address 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 establishment of a centralized data entry capability, the creation of data integrity, and training working groups to improve payment accuracy and to identify training needs across the department.

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. For example, the department incurred unplanned expenditures for Operation GLOBE to repatriate Canadians across the world and for Operation LASER to support federal and provincial agencies’ efforts. Since the start of the COVID-19 pandemic, numerous directives have been issued to the Defence Team to preserve force health and to ensure the Canadian Armed Forces’ ability to defend and assist Canada and Canadians. In that time, the department and the Canadian Armed Forces have been instrumental to the COVID-19 response and vaccine roll-out operations of the Government of Canada. Operation VECTOR was launched in December 2020 to facilitate the Canadian Armed Forces’ support to the federal, provincial, and territorial governments for the distribution of COVID-19 vaccines. The Canadian Armed Forces have the unique ability to rapidly deploy anywhere in Canada to offer assistance to communities in need. This assistance complements and enhances federal, provincial and local resources with well-trained military personnel and specialized equipment.

In an environment impacted by a global pandemic, the department continues to implement its various SSE initiatives such as the renewal of its major equipment fleets including fighter aircraft and maritime warships.

General Wayne Eyre assumed the role of Acting Chief of the Defence Staff effective February 24, 2021.

Mr. Claude Rochette retired from the position of Associate Deputy Minister effective January 16, 2021.

The Prime Minister Justin Trudeau appointed Ms. Nancy Chahwan as the new Senior Associate Deputy Minister of the department effective March 31, 2021.

On June 28, 2021, Lieutenant-General Frances Allen was appointed as the new Vice Chief of the Defence Staff (VCDS).

 

 

Approved by:

 

// Original signed by //

Jody Thomas

Deputy Minister

 

// Original signed by //

Cheri Crosby, CPA, CMA

Chief Financial Officer

 

Dated: August 25, 2021

Ottawa, Canada

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