Financial Statements Discussion and Analysis – Administered Activities (unaudited)

Introduction

The Financial Statements – Administered Activities reflect the total assets and liabilities, tax and non-tax revenues, expenses and recoveries, and cash flows administered by the Canada Revenue Agency (CRA) for the Government of Canada, provinces, territories, First Nations (FN), and other government organizations. Revenues and expenses are recorded on an accrual basis.

Tax revenues

The CRA  collects the majority of federal tax revenues. Other agencies and departments, such as the Canada Border Services Agency, account for the balance of total federal tax revenues reported in the Public Accounts of Canada. For further information on the Government of Canada’s total revenues, please refer to the Annual Financial Report of the Government of Canada, available at https://www.canada.ca/en/department-finance/services/publications/annual-financial-report.html.

Impact of COVID-19 pandemic on financial results

In March 2020, the World Health Organization classified the outbreak of COVID-19 disease as a global pandemic. In response, the Government of Canada enacted emergency measures to combat the spread of the virus and help stabilize the economy during the pandemic. Canada’s COVID-19 Economic Response Plan includes measures intended to protect the health and safety of Canadians and provide direct support to Canadian workers and businesses.  Measures administered by the CRA were implemented subsequent to year-end  and  will have the most significant impact on the CRA’s 2020-2021 Financial statements.

The COVID-19 pandemic has led to additional measurement uncertainty in the preparation of these financial statements given the declining economic situation that prevailed after year end. Historical experiences related to the estimates of unassessed tax revenues and the related amounts receivable and payable, as well as the allowance for doubtful accounts, may not be relevant to predict future outcomes which may lead to a greater possibility of a material variance in the upcoming year. Assumptions in the methodologies applied to estimate individual income tax revenues, GST/HST revenues, and allowance for doubtful accounts were refined to take in consideration the current economic climate and the extensions provided to taxpayers to file and pay their tax returns. Accounting estimates subject to additional measurement uncertainty due to the pandemic which relates to the fiscal year ended March 31, 2020 include the doubtful accounts expense and the administered tax revenues.

Revenues Administered for the Government of Canada ($ millions)

Revenues administered for the Government of Canada were $282,191 million in 2020, $5,519 million higher than in 2019. The increase in revenues is mainly due to sustained economic growth for individuals and trusts and the implementation of the Greenhouse Gas Pollution Pricing Act, which was effective April 1, 2019. The increase was offset in part by the income tax payment deferral relief measures announced in Canada’s COVID-19 Economic Response Plan and lower profit expectations from the corporate sector.

Individuals and Trusts income tax

Individuals and trusts income tax revenues increased by $3,762 million or 2.3%. The increase reflects the growth in wages and employment, partially offset by lower estimates, resulting from reduced receipts as tax payments were deferred to September 30, 2020 under the income tax payment deferral relief measures announced in Canada’s COVID-19 Economic Response Plan.

Corporations income tax

Corporations income tax revenues decreased by $308 million or 0.6%. The decrease is due to a decline in tax year 2020 corporate tax revenue estimates offset in part by a higher than estimated federal share of tax year 2018 corporate tax revenues. The decline in tax year 2020 corporate income tax revenues is attributable to the income tax payment deferral relief measures announced in Canada’s COVID-19 Economic Response Plan and the expected drop in corporate profits.

Non-resident tax withholdings

Non-resident tax withholdings revenues increased by $106 million or 1.1%. The increase reflects higher taxes paid by non-residents on investments.

Goods and services tax revenues (GST)

GST revenues increased by $128 million or 0.9%. The modest increase was in line with the growth in retail sales during the fiscal year, despite the change in economic conditions in March 2020. This was further increased by lower input tax credits resulting from a decrease in GST on imports. The increase was partially offset by higher rebates and GST quarterly tax credits for low-income individuals and families.

Energy taxes

Energy taxes revenues decreased by $131 million or 2.3%. Lower revenues resulted from a decline in motive fuel consumption during the year.

Other excise taxes and duties

Other excise taxes and duties revenues decreased by $266 million or 6.8%. The decrease reflects a decline in tobacco production, offset in part by higher liquor and licenses duty revenues as well as the increase of duty rates on alcoholic beverages and tobacco.

Air travellers security charge

Air travellers security charge revenues decreased by $74 million or 8.4%. The decrease is due to lower air passenger traffic. The COVID-19 pandemic had a significant impact on March 2020 revenues.

Cannabis duties

Cannabis duties revenues increased by $34 million or 188.8%. Fiscal year 2020 is the first full year that revenues on recreational cannabis, legalized on October 17, 2018, are being administered.

Employment insurance premiums

Employment insurance premiums revenues decreased by $88 million or 0.4%. The reduction in employment insurance premium rates was offset by the growth in employment and wages.

Fuel Charge Proceeds

Fuel charge proceeds amounted to $2,655 million. The proceeds reflect the implementation of the Greenhouse Gas Pollution Pricing Act, which became effective April 1, 2019.

Interest, penalties, and other revenues

Interest, penalties, and other revenues decreased by $299 million or 4.9%. The decrease is due to higher corporate interest revenues in fiscal year 2019 due to reassessments of large filers. This was partially offset by higher interest and penalties levied on a GST registrant.

Figure 1 – Direct tax revenues

As shown in Figure 1, the distribution of direct tax revenues remained stable in 2020.

Figure 2 – Indirect tax and other revenues

As shown in Figure 2, the distribution of indirect tax and other revenues remained stable in 2020, with the exception of fuel charge proceeds.

Revenues administered for provincial and territorial governments, and FN ($ millions)

Revenues administered for provincial and territorial governments, and FN, were $128,774 million in 2020, $485 million lower than in 2019. The decrease in revenues is mainly due to income tax payment deferral relief measures announced in Canada’s COVID-19 Economic Response Plan and lower profit expectations in the corporate sector, offset in part by sustained economic growth for individuals and trusts.

Individuals and trusts income tax

Individuals and trusts income tax revenues increased by $1,649 million or 2.2%. The increase reflects the growth in wages and employment, partially offset by lower estimates resulting from reduced receipts as income tax payments were deferred to September 30, 2020 under the payment deferral relief measures announced in Canada’s COVID-19 Economic Response Plan.

Corporations income tax

Corporations income tax revenues decreased by $2,218 million or 8.9%. The decrease is due to a decline in tax year 2020 corporate tax revenue estimates and to a lower than estimated provincial share of tax year 2018 corporate tax revenues. The decline in tax year 2020 corporate tax revenues is attributable to the payment deferral relief measures announced in Canada’s COVID-19 Economic Response Plan and the expected drop in corporate profits.

Provincial portion of harmonized sales tax (HST)

The provincial portion of HST revenues increased by $13 million or 0.04%. This was in line with the modest growth in retail sales despite the drop in March 2020 due to the economic downturn resulting from the COVID-19 pandemic. This was offset in large part by the increase in Ontario sales tax credits.

Other revenues

Other revenues increased by $71 million or 12.5%. The increase is due to the provincial component of cannabis duties revenues. Fiscal year 2020 is the first full year that revenues on recreational cannabis, legalized on October 17, 2018, are being administered. This was offset in part by lower revenues in regards to Québec Sales Tax on Selected Listed Financial Institutions.

Figure 3 – Revenues administered for provincial and territorial governments, and FN

As shown in Figure 3, the distribution of provincial and territorial, and FN revenues, remained stable in 2020.

Pension contributions, interest, and penalties administered for the Canada Pension Plan ($ millions)

Pension contributions, interest and penalties administered for the Canada Pension Plan increased by $4,963 million or 9.7%. The increase results from the growth in employment and wages along with the impact of the CPP enhancement rate increases.

Expenses and recoveries administered for the Government of Canada ($ millions)

Net expenses and recoveries administered for the Government of Canada

Expenses administered for the Government of Canada increased by $3,190 million or 9.7%. This reflects higher planned Climate Action Incentive payments for tax year 2019, along with the inclusion of Alberta in the Greenhouse Gas Pollution Pricing Act regime. It also reflects higher Canada Workers’ Benefits,  refundable investment tax credits and doubtful accounts expense and the indexation of Canada Child Benefit basic entitlements. The increase is partially offset by lower interest expense as a result of lower corporations interest.

Recoveries administered for the Government of Canada decreased by $33 million or 1.5%. The decrease is due to a lower number of returns processed, offset in part by the increase in the basic entitlement for Old Age Security (OAS) and the number of OAS recipients.

Expenses administered for provincial and territorial governments, and Doubtful accounts expenses administered for the Canada Pension Plan ($ millions)

Expenses administered for provincial and territorial governments increased by $146 million or 2.2%. The increase is due to the implementation of the Ontario child care tax credit as well as higher Ontario production services tax credits and interactive digital media tax credits. This was offset in part by the termination of the Alberta climate leadership adjustment rebates and a decrease in British Columbia production services tax credits.  

Doubtful accounts expense administered for the Canada Pension Plan increased by $5 million or 4.9% resulting from higher write-offs, offset in part by a lower doubtful account allowance.