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 management is responsible for the preparation of this financial statements discussion and analysis.

Impact of COVID-19 pandemic

The COVID-19 pandemic has resulted in governments worldwide enacting emergency measures to combat the spread of the virus. These measures, which include the implementation of travel bans, self-imposed quarantine periods and social distancing, have caused material disruption to businesses globally resulting in an economic slowdown. To mitigate the risks to its operations, the Agency prioritized critical services according to its National COVID-19 Business Continuity Plan (BCP), leading to some non-critical programs and services being temporarily impacted. As a result, a large number of employees were reassigned to administer and respond to public enquiries related to Canada’s COVID-19 Economic Response Plan. During the initial phase of the BCP, timely measures were implemented to ensure the connectivity of all employees to ensure its programs and services continue to be delivered to Canadians. Also, in response to the pandemic, the Agency played a significant role by administering several new programs to contribute to Canada’s COVID-19 Economic Response Plan while ensuring the delivery of its broader mandate of tax administration. The duration and impact of the COVID-19 pandemic is still unknown at this time but the Agency will continue to adapt and respond accordingly.

Context

The Agency’s workforce of approximately 48,000 employees is fundamental to the achievement of this mandate. Agency employees are located throughout Canada, in the following operational regions: Western, Ontario, Headquarters, Quebec 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 Agency’s information technology capacity is also critical to its ability to deliver services to Canadians. It involves an extensive information technology infrastructure that is managed primarily by Shared Services Canada and includes the development and maintenance of numerous applications across multiple locations in Canada.

Risk management

The Agency 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, likelihood and impacts are assessed, and strategies for mitigating risks that are above tolerance are adopted and reported on periodically, notably by producing the Agency’s Corporate Risk Profile (CRP). Additionally, the ERM Division continually innovates and adapts its risk management processes to meet the changing needs of the Agency in an environment of increasing uncertainty. During the COVID-19 pandemic, the ERM division developed frequent additional risk reporting to senior management and the Board on emerging risks and issues warranting special attention, such as increasing threats to cybersecurity, reputational risk and employee health and safety.

The previously annual CRP process was also redesigned during the COVID-19 pandemic to provide quarterly updates to senior management and the Board to ensure they have timely and relevant risk information to support the Agency in achieving its mandate and priorities in an ever-changing social, political and economic environment.

Further details on ERM at the Agency 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

During the 2020-2021 fiscal year, the Agency operated within its Parliamentary approved authorities, with underspending of $487.6 million. The Agency’s operating environment changed dramatically as a result of the COVID-19 pandemic which curtailed planned spending in many areas. For example, travel related to compliance and collections was put on hold and external hiring did not materialize as planned. In addition, throughout the 2020-2021 fiscal year, Agency resources were redirected from tax and benefits delivery to ensuring critical COVID-19 measures were delivered. Similarly, many of the strategic investment projects were paused at the beginning of the fiscal year to focus on critical COVID-19 programs thereby having a direct impact on the Agency’s year-end financial position. These unspent funds, which are available for use in the 2021-2022 fiscal year, will be directed to emerging tax and benefit pressures, as well as major project investments. Investments are being made in the Agency’s Digital Business Implementation Plan which supports and promotes digital advancements and transformations in all facets of the organization. Over the past few years, the Agency has invested in stronger governance, several programs and initiatives, and new tools to protect data under its responsibility, including taxpayer information, in order to manage this risk appropriately. Furthermore, the Agency currently has a rigorous security program in place to guard against both external and internal threats and has recently elevated its profile, expanded its mandate and implemented an additional funding envelope to further security sustainability initiatives.

Since the start of the pandemic, the Agency has received $1.2 billion over six years, starting in the 2019-2020 fiscal year, to administer certain programs, for example, the Canada Emergency Response Benefit, the Canada Emergency Student Benefit, the Canada Emergency Wage Subsidy, the Canada Emergency Rent Subsidy and the Canada Recovery Benefit. In the Fall Economic Statement 2020, the Government announced additional funding to ensure the Agency could continue to support COVID-19 related measures.

On November 13, 2020, the collective agreement between the Agency and the Public Service Alliance of Canada (PSAC) - Union of Taxation Employees (UTE) group was signed, covering the period from November 1, 2016, to October 31, 2021. The Agency had 180 days to implement the agreement and ensure all retroactive payments were issued. All compensation related to this collective agreement has been paid out.

As part of its ongoing resource management strategy, the Agency 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. Although the duration and full impact of the COVID-19 pandemic continues to be unknown, the Agency continues to be well positioned to respond to this evolving situation.

Discussion and analysis

Net cost of operations before government funding and transfers

The Agency’s net cost of operations before government funding and transfers in the 2020-2021 fiscal year amounted to $5,059.4 million, an increase of $100.1 million from the $4,959.3 million net cost of operations before government funding and transfers in the 2019-2020 fiscal year.

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

Figure 1: Details on the net cost of operations before government funding and transfers^{Footnote 1}

Personnel expenses (salaries, other allowances and benefits) represent 77% of total expenses and are the Agency’s primary costs. The remaining 23% of expenses are comprised of other costs such as information technology and accommodation expenses.

Personnel costs have increased by $287.7 million in the 2020-2021 fiscal year, including salary expenses ($96.5 million) and other allowances and benefits ($191.2 million). This is mainly explained by an increase in the number of employees, economic salary increases and salary increments. Additionally, a signing bonus and a one-time payment for the late implementation of the 2017 collective agreement were awarded to employees as part of the new PSAC-UTE collective agreement ($32.2 million). Members of the Professional Institute of the Public Service of Canada (PIPSC) were also awarded additional damages for the late implementation of the 2014 collective agreement (estimated at $12.1 million).

Non-personnel expenses have increased by $56.8 million in the 2020-2021 fiscal year. This net variance in most part results from an increase in information technology services ($54.9 million) and equipment purchases ($35.8 million) and a decrease in travel expenses ($36.9 million), all mainly due to the Agency’s response to COVID-19.

Non-tax revenues have increased by $244.4 million in the 2020-2021 fiscal year, attributable to the increase in costs recovered for the administration of COVID-19 programs ($176.4 million) such as the Canada Emergency Response Benefit and for the administration of the Canada Pension Plan and Employment Insurance Act ($84.7 million).

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 $180.0 million in the 2020-2021 fiscal year. This was mainly attributable to the payment of retroactive salary increases for the expired PSAC-UTE collective agreement ($329.5 million) which reversed the previous years’ salary accruals. The overall decrease was offset by an increase in vacation pay and compensatory leave liability ($80.6 million), which resulted mainly from the increase in salaries and the number of employees as well as the increase in unused vacation banks since the start of COVID-19. Additionally, there was an increase in the amount payable to the Treasury Board Secretariat for the final adjustment of the Agency’s 2020-2021 fiscal year employee benefit plan costs ($122.8 million).

These variances significantly impacted 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 Agency where actual liabilities and the related expenses may differ significantly from current estimates.

To minimize this risk, the Agency 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 Agency are consistent with those used by the Government of Canada.

Financial assets

The increase of $87.7 million in financial assets reflects the increase in the Due from the Consolidated Revenue Fund (CRF) resulting mainly from the increase in the amount payable to the Treasury Board Secretariat for the final adjustment of the Agency’s 2020-2021 fiscal year employee benefit plan costs ($122.8 million). The Due from the CRF account represents the net amount of cash that the Agency is entitled to draw without using further appropriations to discharge its liabilities.  

Non-financial assets

Non-financial assets are comprised of 94% tangible capital assets. The Agency managed a capital budget of $89.1 million in the 2020-2021 fiscal year ($62.3 million in the 2019-2020 fiscal year), of which a total of $12.7 million ($9.8 million for the 2019-2020 fiscal year) remains available for use in future years in accordance with the Agency’s multi-year resource management strategy.

The net book value of tangible capital assets has increased by $32.5 million in the 2020-2021 fiscal year. The costs capitalized ($88.7 million) have increased by $24.7 million due to major projects of in-house developed software. The vast majority of tangible capital assets owned by the Agency relates to information technology, 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 provincial governments, the Agency has specialized software needs that are primarily fulfilled internally through the development of in-house tailored applications by Agency employees.

To prioritize investment decisions regarding in-house developed software and support the effective management of resources, the Agency Resource Management Committee (RMC) oversees investment projects above $1 million in any one fiscal year, regardless of the source of funding. All projects brought to the RMC are reviewed by the ERM Division of the Audit, Evaluation and Risk Branch to provide advice and guidance to complete the full project risk register required in the Detailed Planning report. A review by ERM takes place at various project development stages. Enterprise risk information is also used to inform the development of the Agency 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^{Footnote 1}

Figure 6: Segmented information – Non-tax revenues

Outlook

Since the start of the COVID-19 pandemic, the Agency’s priority has been to provide support to Canada in delivering Canada’s COVID-19 Economic Response Plan. The Agency has been essential in delivering benefits and subsidies to support Canadians over the past year and will remain a key player as emergency benefits are extended or introduced by the Government. Early in the 2021-2022 fiscal year, Budget 2021 extended the Canada Emergency Wage Subsidy and introduced the Canada Recovery Benefit and the new Canada Recovery Hiring program which the Agency was asked to administer, making it the ninth measure administered by the Agency since the start of the pandemic.

In addition to extending COVID-19 support, Budget 2021 includes additional funding to support the Minister of National Revenue’s top priorities: continuing the work to modernize the Agency, improving the protection of taxpayer information against external and internal threats, improving tax fairness, and continuing to deliver quality, timely and accurate Agency services.

More specifically, Budget 2021 includes the following major initiatives:

• $330.6 million over five years, starting in the 2021-2022 fiscal year, to the Agency to invest in new technologies and tools to safeguard the electronic data stored by the Agency and protect Canadians’ personal information from falling into the wrong hands
• $304.1 million over five years, starting in the 2021-2022 fiscal year, to allow the Agency to fund new initiatives and extend existing programs to crack down on complex tax schemes, increase collaboration with international partners, and ultimately bring offenders to justice. It is estimated that the measures to combat tax evasion and aggressive tax avoidance will recover $810 million in revenues over five years. Additional gains will be realized by provinces and territories, whose tax revenues will also increase as a result of these initiatives
• $230 million over five years, starting in the 2021-2022 fiscal year, for the Agency to improve its ability to collect outstanding taxes. It is anticipated that this proposal will lead to the collection of an additional $5 billion in outstanding taxes over five years
• $214.6 million over five years, starting in the 2021-2022 fiscal year, to the Agency to change the delivery of Climate Action Incentive payments from a refundable credit claimed annually on personal income tax returns to quarterly payments made through the benefit system starting in 2022. This will deliver Canadians' Climate Action Incentive payments on a more regular basis

In addition to Budget 2021, the Fall Economic Statement 2020 focused on the following major initiatives:

• $461.2 million over five years, starting in the 2021-2022 fiscal year, and $109.8 million ongoing, to the Agency for closing the high-net-worth compliance gap. This will allow the Agency to increase the compliance capacity and emphasis on the high-net-worth individuals population through additional domestic and offshore audits, strengthen the exchange of information program to ensure this population cannot easily hide information from us or our international partners, and ensure that the Agency has a strong oversight function in place to ensure the long-term sustainability of our programs
• $356.5 million over five years, starting in the 2021-2022 fiscal year, and $32.4 million ongoing, to the Agency for strengthening the Agency’s commitment to customer service. This will allow the Agency to modernize and strengthen its three main service delivery channels—web, digital, and telephones—to help Canadians obtain the benefits to which they are entitled and help them properly comply with their tax obligations
• $129.8 million over five years, starting in the 2021-2022 fiscal year, and $29.2 million ongoing, to the Agency to bolster technical support for high-risk audits. This will allow the Agency to increase the technical expertise and audit capacity within the International Tax Audit Program

In the future and through these times of change, the Agency will continue to work towards its vision of being trustworthy, fair and helpful, by putting people first, and support Canadians as we adapt to the changing public health and economic circumstances.