Quarterly Financial Report (QFR) for the Quarter Ended June 30, 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 June 30, 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 $2,172.4 million. As reflected in Table 1: Statement of authorities, the total budgetary authorities increased from $24,300.1 million in 2021–22 to $26,472.5 million in 2022–23. Major reasons for the changes are outlined below.

*A positive variance indicates an increase in authorities available for use in the first quarter (Q1) of 2022–23 compared to Q1 2021–22 and a negative variance indicates a decrease in authorities available for use in Q1 2022–23 compared to Q1 2021–22.

The year-to-date net increase in authorities of $2,172.4 million over the first quarter in 2021–22 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 receiving funding 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.

• Pay administration – Federal public servants and Canadian Armed Forces (increase of $485.7 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.

• 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  (increase of $341.0 million)

  The Heyder and Beattie class actions sought damages related to gender-based discrimination, sexual assault and sexual harassment. This funding will be used to continue to fulfill obligations and payments under the final agreement, including compensating claimants, administering claims, and implementing the restorative engagement program.

• Budget 2021 initiatives (increase of $267.4 million)

  Funding for initiatives that were 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.

• 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 (increase of $4.2 million)

  The net increase is due to miscellaneous funding variances. 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. This increase was partially offset by a decrease in Operating 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.

• Travel reduction (decrease of $82.2 million)

  There has been 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 $599.0 million. As reflected in Table 2: Departmental budgetary expenditures by standard object, the expenditures increased from $4,481.1 million in 2021–22 to $5,080.1 million in 2022–23.

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

The year-to-date net increase in budgetary expenditures of $599.0 million can be mainly explained by the variances detailed below.

• Professional and special services (increase of $211.3 million)

  The increase in spending is primarily due to an increase in engineering and project management as projects are closer to implementation, and milestone payments. Delays in global supply chain and effects of inflation have significantly increased costs.

• Other subsidies and payments (increase of $152.4 million)

  The increase in expenditures in primarily due to a significant payment made to claimants of a settlement agreement. This was offset by a decrease due to timing difference for payments in lieu of taxes.

• Transfer payments (increase of $61.7 million)

  The increase in spending is primarily due to contributions to Ukraine, as well as the timing of expenditures such as the implementation of milestone payments, increased cost due to COVID-19 challenges, and calls for contributions from earlier this year.

• Utilities, materials and supplies (increase of $59.1 million)

  The increase in spending is primarily due to reduced federal and provincial COVID-19 restrictions. The result was increases in fuel requirements due to increased numbers of flights, operating and maintenance (O&M), utility costs due to increased access to buildings, and general supply and food usage as military operations and training resumed. Increases can also be explained by the significant increase in fuel prices from last year, as well as increased medical expenditures such as supplies for expeditions to Ukraine, non-core vaccines and surgeon-general-authorized projects for CAF personnel deployed on operations, and a rise in Blue Cross dental service supplies.

• Acquisition of machinery and equipment (increase of $48.4 million)

  The increase in spending is primarily due to the timing of milestone payments and higher volume of deliveries this year for various major projects.

• Transportation and communications (increase of $47.8 million)

  The increase in expenditures is primarily due to the resumption of domestic and international travel, and governance activities due to the lifting of COVID-19 restrictions. There was also an increase in move-related service costs attributed, to COVID-19 and disruption in the supply chain. Freight costs increased based on location and distance of training audiences for major training events that change year to year. An increase in surge is happening in Operation REASSURANCE due to the situation in Ukraine impacting freight costs and deployed personnel.

3. Risks and uncertainties

Following a successful vaccination campaign, a decrease of case counts, hospitalization and deaths, the COVID-19 pandemic is not over yet and there is still the possibility of future resurgence of cases or a new variant of concern. As such, vaccination continues to be one of the most effective tools to protect Canadians, the health care system, and the economy. The government is closely monitoring domestic and international scientific evidence to assess the need for additional public health measures, including the possible reintroduction of vaccination mandates. Meanwhile, the Canadian Armed Forces is currently assessing the need for an amendment to the Chief of the Defence Staff (CDS) Directive on COVID-19 Vaccination as the intent of the department is to continue to maintain a safe working environment while remaining ready to conduct CAF operations in support of Canadians at home and around the world. In addition to the risks associated with COVID-19, the other risks discussed below are still relevant.

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 affecting increases to costs of goods and services, labour shortages, and supply chain delays. Depending on how these risks unfold, they could lead to higher- or lower-than-anticipated 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 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 Defence Team continues with increased contributions in support of Ukraine. 

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.

Approved by:

Dated: August 26, 2022

Ottawa, Canada

5. Financial tables

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