Canada Revenue Agency Financial Statements – Agency Activities

Canada Revenue Agency
Statement of Financial Position - Agency Activities
as at March 31
(in thousands of dollars)

Approved by:

Canada Revenue Agency
Statement of Operations and Agency Net Financial Position - Agency Activities
for the year ended March 31
(in thousands of dollars)

Canada Revenue Agency
Statement of Change in Agency Net Debt - Agency Activities
for the year ended March 31
(in thousands of dollars)

Canada Revenue Agency
Statement of Cash Flows - Agency Activities
for the year ended March 31
(in thousands of dollars)

Canada Revenue Agency
Notes to the Financial Statements – Agency Activities

1. Authority and objectives

The Canada Revenue Agency (CRA) is an agent of Her Majesty in right of Canada under the Canada Revenue Agency Act. The CRA is a departmental corporation named in Schedule II of the Financial Administration Act and reports to Parliament through the Minister of National Revenue.

The mandate of the CRA is to support the administration and enforcement of tax legislation and other related legislation. The CRA provides support, advice, and services by:

1. supporting the administration and enforcement of program legislation;
2. implementing agreements between the Government of Canada or the CRA and the government of a province, territory or other public body performing a function of government in Canada to carry out an activity or administer a tax or program;
3. implementing agreements or arrangements between the CRA and departments or agencies of the Government of Canada to carry out an activity or administer a program; and
4. implementing agreements between the Government of Canada and First Nations governments to administer a tax.

The CRA administers revenues, including income and sales taxes and employment insurance premiums, administers tax legislation, delivers a number of social benefit programs to Canadians for the federal, provincial, territorial, and First Nations governments, and administers other amounts, including Canada Pension Plan contributions, for other groups or organizations. In addition to the Canada Revenue Agency Act, the CRA is responsible for administering and enforcing the following acts or parts of acts: the Air Travellers Security Charge Act, the Canada Pension Plan, the Children's Special Allowances Act, Part V.1 of the Customs Act, section 2 of the Energy Costs Assistance Measures Act, the Employment Insurance Act, the Excise Act, the Excise Tax Act (including the goods and services tax (GST) and the harmonized sales tax (HST) except for GST/HST on imported goods), the Excise Act, 2001, the Income Tax Act, the Universal Child Care Benefit Act, the Greenhouse Gas Pollution Pricing Act and others including various provincial acts.

In delivering its mandate, the CRA operates under the following core responsibilities:

1. Tax: to ensure that Canada's self-assessment tax system is sustained by providing taxpayers with the support and information they need to understand and fulfil their tax obligations, and by taking compliance and enforcement action when necessary to uphold the integrity of the system, offering avenues for redress whenever taxpayers may disagree with an assessment/decision;
2. Internal services: Internal services are those groups of related activities and resources that the Federal Government considers to be services in support of programs and/or required to meet corporate obligations of an organization. Internal services refer to the activities and resources of ten distinct services that support program delivery in the organization: Acquisition Management, Communications, Financial Management, Human Resources Management, Information Management, Information Technology, Legal Services, Materiel Management, Management and Oversight and Real Property Management;
3. Benefits: to ensure that Canadians obtain the support and information they need to know what benefits they may be eligible to receive, that they receive their benefit payments in a timely manner, and have avenues of redress when they disagree with a decision on their benefit eligibility;
4. Taxpayers' Ombudsman: Canadians have access to trusted and independent review of service complaints about the CRA.

2. Summary of significant accounting policies

For financial reporting purposes, the CRA's activities have been divided into two sets of financial statements: agency activities and administered activities. The Financial Statements - Agency Activities include those operational revenues and expenses which are managed by the CRA and utilized in running the organization. The Financial Statements - Administered Activities include those revenues and expenses that are administered on behalf of the federal, provincial, and territorial governments, First Nations, and other organizations. The purpose of the distinction between agency and administered activities is to facilitate, among other things, the assessment of the administrative efficiency of the CRA in achieving its mandate. Tax-related assets, liabilities, revenues and expenses are excluded from these financial statements because they can only accrue to a government, not to the tax agency that administers those transactions.

As required by the Canada Revenue Agency Act, the Financial Statements - Agency Activities have been prepared using accounting principles consistent with those applied in the preparation of the financial statements of the Government of Canada. The accounting principles used are in accordance with Canadian public sector accounting standards. A summary of significant accounting policies follows:

(a) Parliamentary appropriations

The CRA is financed by the Government of Canada through Parliamentary appropriations. Financial reporting of authorities provided to the CRA does not parallel financial reporting according to Canadian public sector accounting standards, as they are based in large part on cash flow requirements. Consequently, items recognized in the Statement of Financial Position and the Statement of Operations and Agency Net Financial Position may be different from those provided through appropriations from Parliament. Note 3(b) provides a high-level reconciliation between the two bases of reporting. The Future-oriented Statement of Operations - Agency Activities and its accompanying notes included in the 2018-2019 Departmental Plan are the source of information for the planned results in the financial statements.

(b) Net cash provided by the Government of Canada

The CRA operates within the Consolidated Revenue Fund (CRF), which is administered by the Receiver General for Canada. All cash received by the CRA is deposited to the CRF and all cash disbursements made by the CRA are paid from the CRF. The net cash provided by government is the difference between all respendable cash receipts and all cash disbursements including transactions with departments and agencies.

(c) Expense recognition

Expenses are recognized when goods are received and/or services are rendered.

(d) Revenue recognition

Non-tax revenues are recognized when the services are rendered by the CRA.

Non-tax revenues that are not available for spending cannot be used to discharge the CRA's liabilities. While management is expected to maintain accounting control, it has no authority regarding the disposition of non-respendable revenues. As a result, non-respendable revenues are considered to be earned on behalf of the Government of Canada and are therefore presented as a reduction of the CRA's gross revenues.

(e) Vacation pay and compensatory leave

Vacation pay and compensatory leave expenses are accrued as the benefits are earned by the employees under their respective terms of employment. The liability for vacation pay and compensatory leave is calculated at the salary levels in effect at the end of the year for all unused vacation pay and compensatory leave benefits accruing to employees.

(f) Employee future benefits

1. Pension benefits
   All eligible CRA employees participate in the Public Service Pension Plan administered by the Government of Canada. The CRA's contributions reflect the full cost as employer. These amounts are currently based on a multiple of an employee's required contributions and may change over time depending on the experience of the plan. The CRA's contributions are expensed during the year in which the services are rendered and represent the total pension obligation of the CRA. Current legislation does not require the CRA to make contributions with respect to any actuarial deficiencies of the Public Service Pension Plan.
2. Health and dental benefits
   The Government of Canada sponsors employee benefit plans (health and dental) in which the CRA participates. Employees are entitled to health and dental benefits, as provided for under labour contracts and conditions of employment. The CRA's contributions to the plans, which are provided without charge by the Treasury Board Secretariat, are recorded as expenses at their carrying value. They represent the CRA's total obligation to the plans. Current legislation does not require the CRA to make contributions for any future unfunded liabilities of the plans.
3. Severance benefits
   Some employees are entitled to severance benefits, as provided for under labour contracts and conditions of employment. The cost of these benefits is accrued as employees render the services necessary to earn them. The severance benefits represent an obligation of the CRA that entails settlement by future payments. The liability resulting from the benefits earned by CRA employees is calculated using information from an actuarial valuation based on the projected benefit method prorated on services. Changes in actuarial assumptions and any variance between the expected and the actual experience of the severance benefits plan give rise to actuarial gains or losses. These gains or losses are not recognized immediately but amortized on a straight-line basis over the expected average remaining service life of the employees starting in the fiscal year following the one in which they arose. In addition, an unrecognized net actuarial loss is recognized immediately upon a plan amendment, up to a maximum of the related decrease in the accrued benefit obligation; similarly, an unrecognized net actuarial gain is recognized immediately, up to a maximum of the related increase in the accrued benefit obligation. The unrecognized net actuarial gain or loss arising from a curtailment or settlement of severance benefits is recognized immediately upon the plan curtailment or settlement.
4. Sick leave benefits
   Employees are eligible to accumulate sick leave benefits until retirement or termination according to their terms of employment. Sick leave benefits are earned based on employee services rendered and are paid upon an illness or injury related absence. These are accumulating non-vesting benefits that can be carried forward to future years, but are not eligible for payment on retirement or termination, nor can these be used for any other purpose. A liability is recorded for unused sick leave credits expected to be used in future years in excess of future allotments, based on an actuarial valuation using an accrued benefit method. Changes in actuarial assumptions and any variance between the expected and the actual experience of the sick leave benefits plan give rise to actuarial gains or losses. These gains or losses are not recognized immediately but amortized on a straight-line basis over the expected average remaining service life of the employees starting in the fiscal year following the one in which they arose.

(g) Due from the Consolidated Revenue Fund (CRF)

Amounts due from the CRF are the result of timing differences between when a transaction affects authorities and when it is processed through the CRF. Amounts due from the CRF represent the net amount of cash that the CRA is entitled to draw from the CRF without further authorities to discharge its liabilities.

(h) Accounts receivable and advances

Accounts receivable and advances are stated at the lower of cost and net recoverable value. An allowance for doubtful accounts is recorded where recovery is considered uncertain.

(i) Tangible capital assets

All initial costs of $10,000 or more incurred by the CRA to acquire or develop tangible capital assets are capitalized and amortized over the useful lives of the assets. Similar items under $10,000 are expensed. When conditions indicate that an asset no longer contributes to the CRA's ability to provide services, or that the value of the future economic benefits associated with the asset is less than its net book value, the cost of the asset is reduced to reflect the decline in the asset's value.

Tangible capital assets are amortized on a straight-line basis over the estimated useful lives of assets as follows:

Assets under construction/development are recorded as costs are incurred and are not amortized until completed and put into operation.

(j) Contingent liabilities

Contingent liabilities are potential liabilities that may become actual liabilities when one or more future events occur or fail to occur. To the extent that the future event is likely to occur or fail to occur, and a reasonable estimate of the loss can be made, an estimated liability is accrued and an expense recorded. If the likelihood is not determinable, the CRA's best estimate of the contingency is disclosed in the notes to the financial statements.

(k) Foreign currency translation

Transactions involving foreign currencies are translated into Canadian dollars by applying the exchange rate in effect at the time of those transactions. Realized foreign exchange gains and losses resulting from foreign currency transactions are included in the other services and expenses category in note 8a - Segmented information - Expenses.

(l) Financial instruments

The CRA uses non-derivative financial instruments in the course of its operations. Those financial instruments gave rise to the following financial assets and financial liabilities that are measured at cost or amortized cost, as per the table below.

(m) Related party transactions

The CRA is related in terms of common ownership to all Government of Canada departments, agencies, and Crown corporations and transactions between commonly controlled entities are considered inter-entity transactions. Services provided without charge by other government departments and inter-entity transfers of tangible capital assets for nominal or no consideration are recorded and measured at the carrying amount. Services provided on a cost recovery basis are recognized as revenues and expenses on a gross basis and measured at the exchange amount. Transactions with Crown corporations are entered into using similar terms and conditions to those adopted if the entities were dealing at arm's length. They are recorded at the exchange amount.

(n) Measurement uncertainty

The preparation of these financial statements in accordance with Canadian public sector accounting standards requires management to make estimates and assumptions that affect the reported amounts of liabilities, assets, revenues, expenses and related disclosure reported on the financial statements. At the time of preparation of these statements, management believes the estimates and assumptions to be reasonable. Employee severance and sick leave benefits, accrued salaries, contingent liabilities, the useful life of tangible capital assets and services provided without charge are the most significant items where estimates and assumptions are used. Actual results could differ significantly from the current estimates. Management's estimates are reviewed periodically and, as adjustments become necessary, they are recorded in the financial statements in the period in which they become known. The methodologies used to determine the estimates were applied consistently with the previous year.

3. Parliamentary appropriations

The CRA receives most of its funding through annual Parliamentary appropriations. Items recognized in the Statement of Financial Position and the Statement of Operations and Agency Net Financial Position in one year may be funded through Parliamentary appropriations in prior, current, or future years. Accordingly, the CRA has different net results of operations for the year on a government funding basis than on an accrual accounting basis. These differences are reconciled below.

a) Reconciliation of Parliamentary appropriations provided and used:

b) Reconciliation of net cost of operations before government funding and transfers to current year Parliamentary appropriations used:

4. Accounts payable and accrued liabilities

Accounts payable and accrued liabilities are measured at cost, the majority of which are due within 30 days of year-end.

5. Employee future benefits

a) Pension benefits

The CRA and all eligible employees contribute to the public service pension plan (The "Plan"), which is sponsored and administered by the Government of Canada. Pension benefits accrue up to a maximum period of 35 years at a rate of two percent per year of pensionable service, times the average of the best five consecutive years of earnings. The benefits are integrated with Canada/Québec Pension Plan benefits and they are indexed to inflation.

Both the CRA and the employees contribute to the Plan. Due to the amendment of the Public Service Superannuation Act following the implementation of provisions related to the Jobs and Growth Act 2012, employee contributors have been divided into two groups - Group 1 relates to existing plan members as of December 31, 2012 and Group 2 relates to members joining the Plan as of January 1, 2013.

Each group has a distinct contribution rate. The current year expense for the CRA's contributions for Group 1 members represents approximately 1.01 time (1.01 times in 2017-2018) the contributions by employees and, for Group 2 members, approximately 1.00 time (1.00 time in 2017-2018) the contributions of employees.

The contributions to the Plan for the year were as follows:

The CRA's responsibility with regard to this Plan is limited to its contributions. Actuarial surpluses or deficiencies are recognized in the financial statements of the Government of Canada.

b) Health and dental benefits

The CRA contributes for all eligible employees to the Public Service Health Care Plan and Public Service Dental Care Plan, which are sponsored by the Government of Canada. The CRA's responsibility with regard to these plans is limited to its contributions (refer to note 9).

c) Severance benefits

The CRA provides severance benefits to entitled employees based on eligibility, years of service and salary upon termination of employment. These severance benefits are unfunded. Benefits will be paid from future appropriations.

In 2016-2017 following collective agreement negotiations, the accumulation of severance benefits for voluntary departures ceased for the last employee group eligible to accumulate severance benefits. Employees subject to these changes were given the option to be immediately paid the full or partial value of benefits earned to date or collect the full or remaining value of benefits on termination from the public service. In 2017-2018, payments of $274 million were made to employees affected by the curtailment of the severance benefits who opted to cash out the full or partial value of their accumulated benefits. The settlements resulted in the immediate recognition of a previously unrecognized net actuarial gain of $10.9 million in 2017-2018.

d) Sick leave benefits

Employees are credited, based on service, a maximum of 15 days annually for use as paid absences, due to illness or injury. Employees are allowed to accumulate unused sick leave credits each year. Accumulated credits may be used in future years to the extent that the employee's illness or injury exceeds the current year's allocation of credits. The use of accumulated sick leave balance for sick-leave compensation ceases on termination of employment. These sick leave benefits are unfunded. They will be paid from future appropriations.

e) Valuation of future benefits

Annually, as at March 31 of each year, the CRA obtains an actuarial valuation of the accrued employee severance and sick leave benefit obligations for accounting purposes.

Changes from the prior year in the actuarial value of these accrued employee benefit obligations that is used to determine the related employee future benefits liabilities presented in the Statement of Financial Position as at March 31 were as follows:

f) Actuarial assumptions

Actuarial assumptions are used to determine the severance and sick leave accrued benefit obligations and includes estimates of the discount rate and yearly salary growth. These assumptions are reviewed at March 31 of each year and are based on management's best estimate. The actuarial valuation as at March 31, 2019 used discount rates of 1.73% for severance benefit obligation and 1.72% for sick leave benefit obligation (2.11% and 2.09% respectively as at March 31, 2018) and a salary growth of 2.0% - 2.6% for both obligations (1.8% - 2.6% as at March 31, 2018). The expected average remaining service life is 11.8 years for severance benefits and 13.43 years for sick leave benefits as at March 31, 2019 (11.8 years and 13.31 years respectively as at March 31, 2018).

g) Sensitivity Analysis

Changes in assumptions can result in significantly higher or lower estimates of the accrued employee benefits obligations. The table below illustrates the possible impact of a 1% change in the principal actuarial assumptions being the discount rate and the salary growth.

6. Accounts receivable and advances

7. Tangible capital assets

The cost of software in development, which is not amortized, is $144.1 million as at March 31, 2019 ($127.0 million as at March 31, 2018).

8. Segmented information

Presentation by segment is based on the CRA's core responsibilities as described in note 1 of these financial statements. The presentation by segment is based on the same accounting policies as described in the Summary of significant accounting policies in note 2.

a) The following table presents the expenses incurred for the main core responsibilities, by major object of expense.

b) The following table presents the non-tax revenues generated for the main core responsibilities, by major type of non-tax revenues.

9. Related party transactions

The CRA is related in terms of common ownership to all Government of Canada departments, agencies, and Crown corporations. Related parties also include individuals who are members of the CRA key management personnel, close family members of those individuals, and entities fully or jointly controlled by any of them. Expenses and revenues resulting from related party transactions other than those entered into using similar terms and conditions to those adopted if the entities were dealing at arm's length are presented below.

During the year, the CRA received various services without charge from other government departments (OGD) and agencies. These services provided without charge have been recorded at the carrying value as follows:

In addition, the CRA recorded the following expenses and revenues at the exchange amount for services provided from or to OGD and agencies:

Expenses for services provided by OGD and agencies are mainly comprised of: $453 million as at March 31, 2019 for employer contributions to employee benefit plans charged by Treasury Board Secretariat and $290 million for accommodation costs charged by Public Services and Procurement Canada ($432 million and $321 million respectively as at March 31, 2018).

Revenues for services provided to OGD and agencies primarily relate to cost recoveries totaling $356 million as at March 31, 2019 for the administration and enforcement of the Canada Pension Plan and the Employment Insurance program on behalf of Employment and Social Development Canada ($355 million as at March 31, 2018).

10. Board of Management

Pursuant to the Canada Revenue Agency Act, a Board of Management is appointed to oversee the organization and administration of the CRA and the management of its resources, services, property, personnel and contracts. The expenses relating to the board's activities for the year included in the net cost of operations were as follows:

11. Contingent liabilities

The CRA is a defendant in certain cases of pending and threatened litigation which arises in the normal course of business of agency activities as defined in note 2. The amount to be paid in respect of the cases identified as likely to be lost has been recorded in accounts payable and accrued liabilities, based on the current best estimate of the consideration required to settle the present liabilities at the end of the reporting period, taking into account the risks and uncertainties surrounding the liabilities. The extent of these cases have not been disclosed as it could have an adverse effect on their outcome.

All other cases, excluding those assessed as unlikely to be lost, are considered contingent liabilities and the related amounts are disclosed whenever the amount of the contingency can be reasonably estimated. As at March 31, 2019, these contingent liabilities have been estimated at $66.6 million ($42.7 million as at March 31, 2018) which is based on management's best estimate determined on a case by case basis.

12. Financial risk management

The CRA uses non-derivative financial instruments in the course of its operations that give rise to financial assets and financial liabilities. Those financial liabilities comprise accrued salaries, accounts payable and accrued liabilities, vacation pay and compensatory leave. Accounts receivable and advances represent those financial assets.

The CRA is exposed to credit risk, liquidity risk and market risk in connection with its financial instruments.

The credit risk is the risk that another party owing money to the CRA would fail to discharge its obligation creating a financial loss for the CRA. The maximum exposure of the CRA to the credit risk amounted to $22.6 million as at March 31, 2019 ($35.6 million as at March 31, 2018), which is equal to the carrying value of its accounts receivable and advances. As the vast majority of the CRA's accounts receivable and advances are either with other government departments or employees, the credit risk is low.

The liquidity risk is the risk that the CRA would encounter difficulty in meeting its obligations associated with its financial liabilities. The CRA's liquidity risk is minimal given that the CRA receives most of its funding through annual Parliamentary appropriations and maintains strong controls over expenditure management.

The market risk is defined as the risk that future cash flows of a financial instrument would fluctuate because of changes in currency rates, interest rates and/or other rates. The CRA's exposure to market risk is limited to fluctuations in the currency rates and the impact of such variations on CRA's cash flows is negligible as its financial transactions in foreign currency are immaterial.

The CRA's exposure to these risks and the policies and processes to manage and measure them did not change significantly from the prior year.

13. Comparative figures

Certain comparative figures have been reclassified to conform with the presentation used in the current year.