Quarterly Financial Report (QFR) for the Quarter Ended September 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 September 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 $1,867.5 million. As reflected in Table 1: Statement of authorities, the total budgetary authorities increased from $25,128.3 million in 2021–22 to $26,995.8 million in 2022–23. Major reasons for the changes are outlined below.

*A positive variance indicates an increase in authorities available for use in Q2 of 2022–23 compared to Q2 2021–22 and a negative variance indicates a decrease in authorities available for use in Q2 2022–23 compared to Q2 2021–22.

Note: Numbers may not add up due to rounding.

The year-to-date net increase in authorities of $1,867.5 million over the second 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 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 Final Settlement Agreement (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, the administration of claims, and the implementation of 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 (decrease of $300.7 million)

  The net decrease is due to miscellaneous funding variances. More specifically, the decrease in operating authorities is largely related to the Operating Budget Carry Forward and only receiving approximately 60% of the requested allocation for 2022-23 at Q2, whereas in 2021-22 the full allocation was received. The remaining carry forward allocation for 2022-23 is expected to be received at Q3.

• 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 $830.5 million. As reflected in Table 2: Departmental budgetary expenditures by standard object, the expenditures increased from $10,247.0 million in 2021–22 to $11,077.5 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 $830.5 million is attributable mainly to the following:

• Transfer payments (increase of $331.9 million)

  The increase in spending is primarily due to contributions to Ukraine. A small portion of this increase was spent on researching how to better prepare for future potential pandemics.

• Professional, special & other services (increase of $205.1 million)

  The increase in spending is primarily due to an increase in engineering and project management costs as projects move closer to implementation, and an increase in milestone payments this FY. Overall, due to delays in global supply chain and effects of inflation, costs have significantly increased. In addition, there has been an increase in general external healthcare services claims.

• Other subsidies and payments (increase of $109.8 million)

  The net increase in expenditures is primarily due to a significant payment made to claimants of settlement agreements.

• Transportation and communications (increase of $102.4 million)

  The increase in expenditures is primarily due to the resumption of domestic and international travel, and governance activities due to lifting of COVID-19 restrictions. As well, an increase in move related service costs was observed due to factors such as an increase of 19% for United Van Lines contracts, a higher number of house hunting trips, and timing variances for travel payments. Increased expenditures in operations and support of the wideband global satellite communications also heightened expenditures. Freight costs increased based on further distances traveled for training exercises compared to last year. Due to distance between troop home location and exercise location this year, re-deployment of vehicles post-exercise also incurred higher costs. A surge in Op REASSURANCE activities due to the situation in Ukraine made for higher freight costs and deployed personnel costs.

• Utilities, materials and supplies (increase of $63.7 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 prices compared to last year. As military operations and training resume, general supply and food usage have also increased. These increases have been partially offset by a decrease in deliverables in capital projects and in the non-operational clothing and footwear contract.

• Rentals (increase of $33.1 million)

  The increase in spending is primarily due to resumption of activities that were reduced due to COVID-19, such as rentals of aircrafts, ships, machinery, and accommodations on training exercises and global operations. Higher expenditures are also due to timing differences on lease and rent payments and software maintenance licenses from Microsoft, an increase in the hourly rate and ferry rate along with greater distances aircraft need to be ferried, as well as costs related to training exercises (Ex MAPLE RESOLVE, Readiness Level 5 and Exercise Rim of the Pacific).

• Repair and maintenance (increase of $28.5 million)

  The increase in spending is primarily due to the work cycle timing difference for repairs and maintenance, increases in purchases of military equipment and repairs from the US, and a higher US dollar exchange rate partially offset by lower expenditures due to labor shortages for contractors and projects nearing completion.

• Acquisition of land, buildings and works (decrease of $32.6 million)

  The decrease in spending is primarily due to timing differences on various construction projects such as Airfield Pavement rehab runway and Royal Canadian Dragoons CFB Petawawa infrastructure. Completion of the Arctic Jetty in Esquimalt last year and lower expenditures for the Canadian Special Operations Regiment (CSOR) infrastructure also reduced spending. These decreases were partially offset by an increase A/B Jetty recapitalization and Construction and Renovation of ADM(DRDC)’s infrastructure.

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 from anticipated spending.

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.

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.

The pandemic has exacerbated the problems 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 October 14, 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 is in the process of transitioning to a hybrid workforce, aligned with current Treasury Board of Canada Secretariat (TBS) direction.

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

Since February 2022, Canada has committed $626 million 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.

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

Approved by:

5. Financial tables

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