Financial Statements Discussion and Analysis - Agency Activities (unaudited)

Introduction

This section of the financial statements provides unaudited complementary information on Agency Activities, on an accrual basis, in respect of matters reported in the audited financial statements. The Canada Revenue Agency's (CRA) management is responsible for the preparation of this financial statements discussion and analysis.

Capacity to deliver services

The CRA's workforce of approximately 46,000 employees is fundamental to the achievement of its mandate.

CRA employees are located throughout Canada, in the following operational regions: Pacific, Prairies, Ontario, Headquarters, Québec and Atlantic. They provide services to taxpayers in multiple tax services offices and tax centers, as well as program services and internal services supporting those programs.

The CRA's information technology (IT) capacity is also critical to its ability to deliver services to Canadians. It involves an extensive IT infrastructure that is managed primarily by Shared Services Canada and includes the development and maintenance of applications across a distributed computing environment.

Risk management

The CRA recognizes that a variety of risks could have potential implications on its financial position and operations. The Enterprise Risk Management (ERM) Division of the Audit, Evaluation, and Risk Branch plays a key role in ensuring that corporate risks are identified, impacts are assessed, and strategies for risk management are adopted, notably by producing the CRA Corporate Risk Profile.

Further details on ERM at the CRA are discussed in the Departmental Results Report. This financial statements discussion and analysis will elaborate on specific financial risks throughout its content, where applicable.

Financial highlights

In 2018-2019, the CRA operated within its Parliamentary approved authorities, with underspending of $179.4 million. These unspent funds, available for use in 2019-2020, are a crucial element of the current resource management strategy to address known and emerging financial challenges as well as manage changes in the funding profile of major investment projects.

Budget 2018 earmarked $515.0 million over five years and $83.5 million in ongoing funding to address the following key areas:

• Cracking down on tax evasion and combatting tax avoidance;
• Improving client services at the CRA;
• Combatting aggressive international tax avoidance;
• Enhancing the security of taxpayer information;
• Improving access to the Canada Workers Benefit; and
• Stabilizing and future transformation of the federal government's pay administration.

In Budget 2017, the Government announced that it would put in place the federal carbon pricing system as part of the Pan-Canadian Framework on Clean Growth and Climate Change. In 2018-2019, CRA received $15.1 million for the administration of the new federal fuel charge scheduled to commence in 2019, $9.8 million for the Climate Action Incentive Payments as well as an additional $5.1 million for the administration of this fuel charge in Ontario. These initiatives were fully implemented within the approved funding.

On August 24, 2018, the CRA announced it would be opening three new Northern Service Centres and providing enhanced year round services out of Whitehorse, Yellowknife, and Iqaluit beginning in the last quarter of 2018-2019. This initiative, internally funded in 2018-2019, allows for better support to the Indigenous communities and Canadians living in the North and expand the CRA's presence.

As part of its ongoing resource management strategy, the CRA continuously reviews and revises plans and priorities to ensure the effective and efficient use of government resources and the achievement of its core business outcomes.

Discussion and analysis

Net cost of operations before government funding and transfers

The CRA's 2018-19 net cost of operations before government funding and transfers amounted to $4,580.0 million, an increase of $183.5 million from the $4,396.5 million net cost of operations before government funding and transfers in 2017-18.

Details of the net cost of operations before government funding and transfers are illustrated below (see note 8a to the Financial Statements - Agency Activities for a further breakdown of expenses by category):

Figure 1: Details on the net cost of operations before government funding and transfers

Personnel expenses (salaries, other allowances and benefits) represent 74% of total expenses and are the CRA's primary costs. The remaining 26% of expenses are comprised of other costs such as information technology (IT) and accommodation expenses.

Personnel costs have increased by $132.5 million in 2018-19, including salary expenses ($101.9 million) and other allowances and benefits ($30.6 million). The increase is mainly explained by expenses resulting from increase in the number of employees, economic salary increases and salary increments.

Non-personnel expenses have increased by $67.5 million in 2018-19. This net variance mainly results from an increase in IT services provided by Shared Services Canada (SSC) ($73.0 million) mostly due to the implementation of a costing methodology by SSC to refine its assessment of the cost of services provided without charge to other government departments (OGD), as well as an increase in computer purchases resulting from the End user Renewal Program ($20.2 million). This increase was offset in part by a decrease in accommodation costs as a result of a reduction in the number of fit-up projects ($10.5 million) and a decrease in direct occupancy costs due to the net reduction of space used, as well as an incentive to re-locate to locations with lower rent cost ($15.5 million).

Non-tax revenues increased by $16.5 million in 2018-19, which is attributable to fees for the administration of various initiatives.

Financial position

The change in the Agency's net financial position compared to the previous year is as follows:

Figure 2: Statement of Financial Position

Liabilities

Liabilities have decreased by $99.5 million in 2018-19. This was mainly attributable to a reversal of salary accruals resulting from the ratification of the collective agreements for the Public Services Alliance of Canada (PSAC) ($51.9 million) and the Professional Institute of the Public Service of Canada (PIPSC) ($125.9 million) in fiscal year 2018. This decrease was offset in part by an increase in the current year provision for salary accruals to reflect expired collective agreements ($77.4 million).

These variances impacted significantly the proportions of the various categories of liabilities as illustrated below.

Figure 3: Liabilities by category

Employee sick leave and severance benefits are significant liabilities that require the use of management estimates and assumptions to determine their present value as at March 31 of each year. As such, there is a financial risk of imprecision in the financial position of the CRA where actual liabilities and the related expenses may differ significantly from current estimates.

To minimize this risk, the CRA uses the expertise of the Office of the Chief Actuary, who provides an actuarial valuation report on a yearly basis, presenting the actuarial assumptions and method used to determine the actuarial present value of those employee benefits. Actuarial assumptions used by the CRA are consistent with those used by the Government of Canada.

Financial assets

The decrease of $138.7 million in financial assets reflects a decrease in the Due from the Consolidated Revenue Fund (CRF) as the prior year amount included accrued salaries resulting from the ratification of collective agreements in 2017-18 which have been settled in 2018-19. The Due from the CRF account represents the net amount of cash that the CRA is entitled to draw without using further appropriations to discharge its liabilities.

Non-financial assets

Non-financial assets are comprised of 96% tangible capital assets. The CRA managed a capital budget of $85.0 million for the year 2018-19 ($80.8 million for 2017-18), of which a total of $26.3 million ($6.1 million for 2017-18) remains available for use in future years in accordance with the CRA's multi-year resource management strategy.

The net book value of tangible capital assets has increased by $8.9 million in 2018-19. The costs capitalized remained fairly stable at $71.6 million, while amortization expenses decreased by $16.3 million reflecting the increased number of in house developed software that are now fully depreciated. The vast majority of tangible capital assets owned by the CRA relates to IT, specifically in-house developed software. As a large organization responsible for delivering an extensive range of tax and benefits programs on behalf of the federal and of provincial governments, the CRA has specialized software needs that are primarily fulfilled internally through the development of in-house tailored applications by CRA employees.

To prioritize investment decisions regarding in-house developed software and support the effective management of resources, the CRA Resource Management Committee (RMC) oversees investment projects above $1 million. All projects brought to the RMC require a formal attestation from the ERM Division of the Audit, Evaluation and Risk Branch that the CRA risk management process was followed and that sound risk information forms part of the submission. The attestation process takes place at various project development stages. Enterprise risk information is also used to inform the development of the CRA Strategic Investment Plan, a long-term plan of significant future investments.

Five year comparative financial information

The following tables provide a five year comparison of financial information based on the accounting policies described in note 2 to the audited financial statements.

Figure 4: Statement of Financial position

Figure 5: Segmented information - Expenses

Figure 6: Segmented information - Non-tax revenues

Outlook

The CRA will continue to innovate in order to improve the efficiency and effectiveness of its operations and programs while contributing to the Government of Canada's priorities, by continuously optimizing the use of its resources and modernizing its services and compliance activities.

As part of Budget 2019, the CRA has received funding of more than $150 million over five years allowing the CRA to fund new initiatives and extend existing programs to strengthens its ability to combat tax evasion and aggressive tax avoidance. Budget 2019 also proposes to invest more than $65 million over five years to improve the CRA's information technology systems, including replacing legacy systems, so that the infrastructure used to fight tax evasion and aggressive tax avoidance continues to evolve.

In addition, Budget 2019 earmarked funding of $50 million over five years and $4 million ongoing to continue improving CRA's commitments to service excellence. This will allow the CRA to improve the telephone services and to stabilize timeframes for taxpayers requested reassessments.

In 2018, the Government completed a departmental review of the CRA's service model. As a result of this review, CRA resources will be reallocated internally to improve service delivery for Canadians. This includes improved digital services, timely resolution to taxpayers' objections, and additional liaison officers. These changes accompany other important steps taken by CRA to support the Government‘s commitment to service excellence, including the appointment of a Chief Service Officer.