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

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 2022 to 2023, the Agency incurred additional expenses of $452 million, of which $301.9 million were incurred and recovered from Employment and Social Development Canada (ESDC) for program administration activities conducted on its behalf. The CRA's COVID-19 program expenses and recoveries will continue to decline as a result of the end of benefit programs.

Context

The CRA administers taxes, benefits and related programs for governments across Canada, to contribute to the economic and social well‑being of Canadians. The CRA's work is critical to generating the revenue needed to support government operations – from healthcare to transportation and beyond – and to provide benefits to specific client populations, such as modest‑income households or persons with disabilities.

Risk management

The CRA recognizes that a variety of risks could have potential implications on its financial position and operations. The Enterprise Risk Management Division (ERMD) of the Audit, Evaluation, and Risk Branch (AERB) 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 ERMD 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 2022 to 2023 fiscal year, the CRA operated within its Parliamentary approved authorities.

The CRA's lapse is a result of the compounded impact of prior year carry-forwards which could not be completely invested due to a focus on the administration of benefits programs. In addition, many of the strategic investment projects were slowed in recent years, as information technology personnel and resources were redirected to incremental workloads which directly impacted the CRA's year-end financial position. These unspent funds, which are available for use in the 2023 to 2024 fiscal year, will be directed towards emerging operational pressures, the post-pandemic sustainability of CRA contact centres, major project investments, and addressing backlogs.

Through 2022 to 2023, the CRA continued to complete incremental workloads including compliance work on COVID-19 benefits to protect the integrity of the programs and to help ensure that only eligible Canadians and businesses have received payments. The CRA also began the implementation of Government of Canada initiatives, which focused on measures related to housing, combatting offshore tax avoidance and evasion, and new reporting requirements for registered retirement savings plans (RRSPs) and registered retirement income funds (RRIFs). A significant number of employees were hired in the contact centres to maintain the client service experience while also responding to inquiries regarding new benefit programs announced, including the Canada Housing Benefit and Canada Dental Benefit.

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, and has significant controls in place to ensure effective financial management.

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 2022 to 2023 amounted to $6,171.8 million, an increase of $807.3 million from the $5,364.5 million net cost of operations before government funding and transfers in the fiscal year 2021 to 2022.

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).

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 $574.7 million during fiscal year 2022 to 2023, mainly due to expired collective agreements and the onboarding of employees to support the post-pandemic sustainability of CRA contact centres, the administration of the one-time top-up to the Canada Housing Benefit and the Canada Dental Benefit.

The remaining 22% of expenses are comprised of other costs such as Federal sales tax administration costs by the Province of Québec and professional and business service expenses. Total non-personnel expenses have increased by $159.8 million in the fiscal year 2022 to 2023. This variance mainly stems from the re-evaluation of Federal sales tax administration costs by the Province of Québec ($69.6 million). Additionally, there was an increase in professional and business services excluding information technology expenses ($26.8 million) mainly relating to legal services paid to the Department of Justice following an increase in Treasury Board Secretariat approved rates.

Non-tax revenues decreased by $72.7 million in fiscal year 2022 to 2023, attributable to the decrease in costs recovered to administer COVID-19 benefit programs ($205.9 million). The overall decrease was mainly offset by costs recovered from Canada Mortgage and Housing Corporation to administer the one-time top-up to Canada housing benefit ($86.2 million), and from ESDC for collection activities of the employment insurance emergency response benefits ($35.3 million).

Financial position

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

Statement of Financial Position

Liabilities

Liabilities increased by $176.0 million in the fiscal year 2022 to 2023. The increase is mainly due to salary and employee benefits accruals for expired collective agreements ($123.9 million). This resulted in an increase in the accrued salary proportion in the liabilities, as illustrated below:

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.

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.

As a result, management believes the estimates and assumptions to be reasonable and the methodologies used to determine the estimates were applied consistently with the previous year.

Financial assets

The increase of $40.4 million in financial assets is mainly explained by an increase in the Due from Consolidated Revenue Fund for CRA's employee benefit plan ($33.9 million).

Non-financial assets

Non-financial assets are primarily comprised of tangible capital assets (98%). 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.

To prioritize investment decisions regarding in-house developed software and support the effective management of resources, the CRA's Resource Management Committee (RMC) oversees all investment projects above $1 million in any one fiscal year; additional oversight is provided by the Board of Management for projects with a total funding envelope over $40M or those that meet complexity and risk considerations. 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 AERB's ERMD. A review by ERMD 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 $22.6 million in fiscal year 2022 to 2023. Costs capitalized ($92.3 million) are mostly comprised of in-house software development ($91.8 million) for major projects, including the T3 modernization ($21.1 million), Appeals modernization ($8.4 million), and Secure portal re-engineering ($7.9 million).

The CRA managed a capital budget of $114.5 million in fiscal year 2022 to 2023 ($113.8 million in fiscal year 2021 to 2022), of which a total of $36.2 million ($43.6 million for the fiscal year 2021 to 2022) 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.

Statement of Financial Position

Segmented information – Expenses^{Footnote 1} 

Segmented information – Non-tax revenues

Outlook

Over the past three years, CRA's focus has been to design and roll-out the emergency benefit and subsidy programs to support Canadians facing hardship in response to the pandemic. As a result of the end of COVID-19 programs, the spending associated with these programs will continue to decline and give way to new priorities and initiatives. For fiscal year 2023 to 2024, the CRA will focus on the four following priorities, which are detailed in CRA's Corporate Business Plan:

1. deliver seamless client experiences and tailored interactions that are digital first
2. combat aggressive tax planning and tax evasion
3. strengthen security and safeguarding privacy
4. nurture a high-performing, diverse, and inclusive workforce in a modern, flexible, and accessible workplace

In addition, Budget 2023 announced several initiatives and updates that will impact the CRA, including:

• measures affecting individuals such as a one-time Grocery Rebate, providing $2.5 billion in targeted inflation relief to the Canadians who need it most
• measures affecting businesses such as investment tax credits for clean technologies
• reduced spending on consulting, other professional services, and travel by roughly 15% of planned 2023 to 2024 discretionary spending that will result in savings of $7.1 billion over five years starting in 2023 to 2024, and $1.7 billion ongoing
• phased in reductions of roughly 3% of eligible spending by departments and agencies by 2026 to 2027 that will result in reduced government spending by $7.0 billion over four years, starting in 2024 to 2025, and $2.4 billion ongoing.

Budget 2023 is also committed to ensure more low-income Canadians have the ability to quickly and easily auto-file their tax returns by increasing the number of eligible Canadians for File My Return to two million by 2025, almost triple the current number. Furthermore, starting next year, the CRA will pilot a new automatic filing service that will help vulnerable Canadians who do not file their taxes receive the benefits to which they are entitled.

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 trusted, fair and helpful, by putting people first.