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.

Impact of COVID-19 pandemic

The COVID-19 pandemic has had a major impact on all Canadians and on CRA and its employees

CRA has been a major contributor to the success of Canada’s COVID-19 Economic Response Plan, requiring a significant growth in workforce and internal resources to be reallocated to administer COVID-19 benefits. In 2021 to 2022, the Agency incurred additional expenses of $663.4 million, of which $472.5 million were incurred and recovered from Employment and Social Development Canada (ESDC) for program administration activities conducted on its behalf.

The complete duration and impact of the COVID-19 pandemic is still unknown as at March 31, 2022 but the CRA continues to adapt and respond accordingly.

Context

The CRA’s workforce of approximately 50,000 full-time equivalents is fundamental to the achievement of its mandate. CRA 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 CRA’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 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, likelihood and impacts are assessed, and strategies for mitigating risks that are above tolerance are adopted and reported on periodically, notably by producing the CRA’s Corporate Risk Profile (CRP). Additionally, the ERM Division continually innovates and adapts its risk management processes to meet the changing needs of the CRA in an environment of increasing uncertainty.

The quarterly CRP process was designed to keep pace with fluctuations in the risk landscape caused by major events. Quarterly reports to senior management and the Board ensures they have timely and relevant risk information to support the CRA in achieving its mandate and priorities in a shifting social, political, economic, technological and legislative environment.

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

During the fiscal year 2021 to 2022, the CRA operated within its Parliamentary approved authorities, with underspending of $722.7 million. The CRA’s operating environment continued to be affected by the COVID-19 pandemic which imposed additional work in many areas while curtailing planned spending in other areas. For example, the compliance and collections programs were not delivered in the same capacity as pre-pandemic, and travel expenditures continued to be minimal. Despite an unprecedented level of hiring during the fiscal year, which saw a growth of approximately 6,600 full-time equivalents compared to the prior year, the demands on the Agency continued to be high and efforts were focused on the delivery of critical new and extended COVID-19 benefits and subsidy programs. Throughout the fiscal year 2021 to 2022, CRA resources continued to be redirected from tax and benefits workloads to ensure the delivery of these programs, such as the Local Lockdown Program and the Tourism and Hospitality and Hardest-Hit Business recovery programs, which resulted in underspending in the core programs. Similarly, many of the strategic investment projects were slowed due to lack of capacity which directly impacted the CRA’s year-end financial position. These unspent funds, which are available for use in the fiscal year 2022 to 2023, will be directed to emerging tax and benefits pressures, the contact centre pandemic sustainability, major project investments, and to align CRA’s business model to the post-pandemic environment.

Investments are being made in the CRA’s Digital Business Implementation Plan which supports and promotes digital advancement and transformation in all facets of the organization, such as streamlining the Disability Tax Credit application process, establishing channels to exchange information securely with third parties and developing other digital options for its clients, third parties and partners. CRA investments also support more effective use and integration of data to identify non-compliance through major projects.

During fiscal year 2021 to 2022, the CRA received $643.4 million in total funding for the administration of COVID-19 benefits. The CRA will continue to administer COVID-19 programs in the fiscal year 2022 to 2023 and will further strengthen controls in place to protect the integrity of the programs and to help ensure that only eligible Canadians and businesses are receiving payments.

The CRA has successfully delivered on the majority of its program commitments as per the departmental results indicators and service standards for both existing and new initiatives. As the CRA prepares for re-integration into its worksites and ramps up staffing plans targeting new incremental workloads, it has renewed its focus on advancing the inclusion of equity-deserving groups and ensuring that diversity is reflected across the CRA at all levels, including senior leadership positions. 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. The CRA continues to be well positioned to respond to its evolving environment.

Discussion and analysis

Net cost of operations before government funding and transfers

The CRA’s net cost of operations before government funding and transfers in the fiscal year 2021 to 2022 amounted to $5,364.5 million, an increase of $305.1 million from the $5,059.4 million net cost of operations before government funding and transfers in the fiscal year 2020 to 2021.

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

Personnel expenses (salaries and other allowances and benefits) represent 78% of total expenses and are the CRA’s primary costs. They have increased by $472.6 million in the fiscal year 2021 to 2022, mainly due to an increase in the number of employees, economic salary increases and salary increments. The growth of approximately 6,600 full-time equivalents was critical to ensure the delivery of new and extended COVID-19 benefits and subsidy programs as well as Budget 2021 initiatives.

The remaining 22% of expenses are comprised of other costs such as information technology (IT) and accommodation expenses. Total non-personnel expenses have increased by $37.4 million in the fiscal year 2021 to 2022. This variance mainly stems from IT equipment and services ($68.0 million), including services from Shared Services Canada, which increased for expanded mainframe processing capacity for income tax filings and the implementation and ongoing support of real-time T1 notices of assessment. Additionally, there was an increase in accommodation expenses ($18.6 million) due to major tenant services projects and fit-up costs related to the Workplace of the future. The overall increase was offset by an adjustment recorded in fiscal year 2021 to 2022 following the conclusion of an agreement with a provincial partner.

Non-tax revenues have increased by $204.9 million in the fiscal year 2021 to 2022, mostly attributable to the increase in costs recovered for the administration of COVID-19 benefit programs ($226.8 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 remained stable in the fiscal year 2021 to 2022. Similarly, proportions of the various categories of liabilities have not varied significantly, 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, CRA’s financial position 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 increase of $35.9 million in financial assets is mainly explained by an account receivable recorded in fiscal year 2021 to 2022 following the conclusion of an agreement with a provincial partner.

Non-financial assets

Non-financial assets are primarily comprised of tangible capital assets (97%). The majority of tangible capital assets owned by the CRA relate 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 federal and 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’s 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 require a full project risk register in the Detailed Planning Report. The risk register is completed according to requirements prescribed by the ERM Division of the Audit, Evaluation, and Risk Branch. A review by ERM takes place at various project development stages. Enterprise risk information is also used to inform the development of the CRA’s Strategic Investment Plan, a long-term plan of significant future investments.

The net book value of tangible capital assets has increased by $11.7 million in fiscal year 2021 to 2022. Costs capitalized ($81.5 million) are mostly comprised of in-house software development ($78.8 million) for major projects, including T3 modernization ($27.9 million), Canada emergency benefits in response to COVID-19 ($15.2 million), Canada Pension Plan and Employment Insurance Act rulings and agreements ($4.8 million) and Appeals modernization ($4.5 million).

The CRA managed a capital budget of $113.8 million in fiscal year 2021 to 2022 ($89.1 million in fiscal year 2020 to 2021), of which a total of $43.6 million ($12.7 million for the fiscal year 2020 to 2021) remains available for use in future years in accordance with the CRA’s multi-year resource management strategy.

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, CRA’s focus has been to design and roll-out the emergency benefit and subsidy programs to support Canadians facing hardship. For fiscal year 2022 to 2023, the CRA will continue to administer COVID-19 programs but will also focus on the five following priorities, which are detailed in CRA’s Corporate Business Plan:

1. providing a seamless, empathetic, and client-centric service experience
2. enhancing the fairness of Canada’s tax and benefit administration
3. strengthening trust through enhanced security, transparency, and accountability
4. fostering an innovative and data-driven organization
5. promoting a thriving diverse workforce and inclusive workplace

In addition, Budget 2022 proposes several important tax measures that will impact the CRA, including:

• measures related to housing, including a new Tax-Free First Home Savings Account for first-time home buyers
• measures to further strengthen the CRA’s ability to combat offshore tax avoidance and tax evasion, such as new rules related to the exchange of tax information on digital economy platform sellers and international tax reform
• clean technology tax credits
• new reporting requirements for Registered Retirement Savings Plans (RRSPs) and Registered Retirement Income Funds (RRIFs)

Budget 2022 also proposes additional funding to support the Minister of National Revenue’s compliance priorities. More specifically, $1.2 billion over five years, starting in fiscal year 2022 to 2023, for the CRA to:

• expand audits of larger entities and non-residents engaged in aggressive tax planning
• increase both the investigation and prosecution of those engaged in criminal tax evasion
• expand its educational outreach

These measures are expected to recover $3.4 billion in revenues over five years, with additional benefits to be realized by provinces and territories whose tax revenues will also increase as a result of these initiatives.

As the CRA pursues its strategic objectives and advances the priorities set out above, the CRA will continue to work towards its vision of being trustworthy, fair and helpful, by putting people first.