Section III: Supplementary information

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Statement of Management Responsibility Including Internal Control over Financial Reporting

We have prepared the accompanying financial statements of the Canada Revenue Agency (CRA) according to accounting principles consistent with those applied in preparing the financial statements of the Government of Canada. Significant accounting policies are set out in note 2 to the financial statements. Some of the information included in the financial statements, such as accruals and the allowance for doubtful accounts, is based on management's best estimates and judgment, with due consideration to materiality. The CRA's management is responsible for the integrity and objectivity of data in these financial statements. Financial information submitted to the Public Accounts of Canada and included in the CRA's Annual Report, is consistent with these financial statements.

To fulfill its accounting and reporting responsibilities, management maintains sets of accounts which provide records of the CRA's financial transactions. Management also maintains financial management and an effective system of internal control over financial reporting (ICFR) that take into account costs, benefits, and risks. They are designed to provide reasonable assurance that transactions are within the authorities provided by Parliament, and by others such as provinces and territories, are executed in accordance with prescribed regulations and the Financial Administration Act, and are properly recorded to maintain the accountability of funds and safeguarding of assets.

Financial management and internal control systems are reinforced by the maintenance of internal audit programs. The CRA also seeks to assure the objectivity and integrity of data in its financial statements by the careful selection, training, and development of qualified staff, by organizational arrangements that provide appropriate divisions of responsibility, by communication programs aimed at ensuring that its regulations, policies, standards, and managerial authorities are understood throughout the organization, and by conducting an annual assessment of the effectiveness of its system of ICFR. An assessment for the year ended March 31, 2012 was completed in accordance with the Policy on Internal Control and the results and action plans are summarized in the annex.

The system of ICFR is designed to mitigate risks to a reasonable level based on an on-going process to identify key risks, to assess effectiveness of associated key controls, and to make any necessary adjustments. The effectiveness and adequacy of the CRA's financial management and its system of internal control are reviewed by the work of internal audit staff, who conduct periodic audits of different areas of the CRA's operations, and by the Board of Management, which is responsible for ensuring that management fulfills its responsibilities for financial reporting and internal control and exercises this responsibility through the Audit Committee of the Board of Management. To assure objectivity and freedom from bias, these financial statements have been reviewed by the Audit Committee and approved by the Board of Management. The Audit Committee is independent of management and meets with management, the internal auditors, and the Auditor General of Canada on a regular basis. The auditors have full and free access to the Audit Committee.

The Auditor General of Canada conducts independent audits and expresses separate opinions on the accompanying financial statements which do not include an audit opinion on the annual assessment of the effectiveness of the CRA's internal controls over financial reporting.

Approved by:

Linda Lizotte-MacPherson
Commissioner and Chief Executive Officer

Filipe Dinis
Chief Financial Officer and Assistant Commissioner, Finance and Administration

Ottawa, Ontario
August 28, 2012

Financial performance information – parliamentary appropriations

Introduction

This section of the Canada Revenue Agency (CRA) Departmental Performance Report 2011-2012 provides the details of the CRA's resource management performance for the purpose of reporting to Parliament on the use of appropriations in 2011-2012. This complements the information provided in the spending profile sections under each program activity and satisfies the reporting requirements set for departmental performance reports.

Financial reporting methodologies

The CRA's funding is provided by Parliament through annual appropriations (modified cash accounting basis) and, in this section, the CRA reports its expenditures and performance to Parliament, together with details on the management of Parliamentary appropriations on the same basis. In addition to the above reporting requirements, the CRA is also required to prepare its annual financial statements in accordance with the accounting principles applied in preparing the financial statements of the Government of Canada (full accrual accounting basis). Accordingly, the audited Statement of operations and Agency Net Financial Position - Agency activities in the Annual Report to Parliament 2011-2012 includes certain items such as services received without charge from other government departments and federal agencies. A reconciliation can be found in Note 3 in the Annual Report to Parliament 2011-2012.

The CRA is participating in a Treasury Board of Canada Secretariat pilot project to extend accrual accounting to the budgeting and appropriations process. As required by the pilot project, CRA prepared and included future-oriented financial statements in the 2011-2012 Report on Plans and Priorities. This future-oriented financial information was prepared on an accrual basis to strengthen accountability and improve transparency and financial management. As part of the analysis of net cost of operations, this Departmental Performance Report compares actual results to the initial future-oriented financial statements contained in the 2011-2012 Report on Plans and Priorities.

CRA financial information

Activities of the Canada Revenue Agency

Spending authorized by Parliament at the beginning of the fiscal year. Main Estimates authorities plus other amounts anticipated to be authorized during the fiscal year. Total spending authorized by Parliament during the fiscal year.

The Financial Statements - Agency Activities reports $3,913.6 million as total Parliamentary appropriations used (Note 3 on page 90 shows the reconciliation to the net cost of operations in the 2011-2012 Annual Report to Parliament). The difference from the $4,351.3 million reported in this section is explained by the following three items reported in the Financial Statements - Administered Activities: the statutory disbursements to provinces under the Softwood Lumber Products Export Charge Act,2006, $213.9 million; the Children's Special Allowance payments, $223.5 million; and other miscellaneous items, $0.3 million.

Overview

For 2011-2012, Parliament approved $4,293.0 million through the Main Estimates, as shown in the CRA's 2011-2012 Report on Plans and Priorities.

The 2011-2012 Main Estimates were adjusted to include:

• $178.0 million for the carryforward from 2010-2011;
• $101.4 million for maternity and severance payments;
• $73.9 million for increased disbursements to provinces under the Softwood Lumber Products Export Charge Act, 2006;
• $19.1 million for the implementation of various tax measures announced in the 2011 Federal Budget;
• $14.8 million for increased Respendable Revenue mainly to provide services to the Canada Border Services Agency;
• $6.2 million to begin the upgrade of the personal income tax processing system;
• $1.5 million for Court Awards and Crown Assets Disposal;
• $1.0 million for increased Government advertising campaigns; and
• $0.3 million due to other miscellaneous items.

These increases were offset by the following reductions:

• $72.3 million for the transfer to Shared Services Canada of email, data centre and network responsibilities;
• $3.5 million for decreased statutory Children's Special Allowance payments;
• $3.2 million for decreased employee benefits plan costs; and
• $0.1 million transferred to the Treasury Board Secretariat to support the National Managers' Community.

This resulted in total approved authorities of $4,610.1 million for 2011-2012, representing an in-year increase of 7.4% over the Main Estimates.

Of the $4,610.1 million total authority, CRA's actual spending totalled $4,351.3 million resulting in $258.8 million remaining unexpended at year-end. After deducting unused resources related to Government advertising campaigns and a frozen allotment for the Foreign Investment Entities and Non-Resident Trusts legislative initiative which has not yet received Royal Assent, the remaining $248.3 million is available for use by the CRA in 2012-2013 under its statutory two-year spending authority. This amount represents 5.4% of the total authority.

The CRA's two-year spending authority enables the CRA to be more strategic in its use of public funds by taking a multi-year view of plans and budgets. The financial flexibility in 2011-2012 was somewhat higher than usual due to restraint measures introduced by the CRA during the latter half of the fiscal year in response to the Operating Budget freeze implemented by the Government in Budget 2010. This increased carryforward was part of the CRA's strategy to address unfunded operating pressures in 2012-2013, including previously approved salary increases for employees.

Revenues administered by the Canada Revenue Agency

Total revenues administered by the CRA amount to some $332.0 billion in 2011-2012, an increase of 6.6% from the $311.3 billion administered in 2010-2011.

Capacity to deliver services

The CRA's workforce of over 40,000 employees is fundamental to the achievement of its mandate. In the course of 2011-2012, this workforce was comprised on average of 83% permanent employees, 16% term employees and 1% students.

The CRA's employees are located throughout Canada, in the following operational regions: Ontario (32%), Headquarters (21%), Prairies (15%); Québec (12%); Pacific (12%) and Atlantic (8%). They provide services to taxpayers in over 40 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. This is a sizeable task which requires the involvement of two data centres which process up to 4 million transactions per hour, 7 mainframe computers, about 1,700 servers, and the maintenance of over 495 applications across a distributed computing environment covering more than 400 locations. As explained below, effective November 15, 2011, IT infrastructure services related to email, data centres and network services are provided through Shared Services Canada in partnership with the CRA.

Financial highlights

Four developments have significantly influenced the 2011-2012 results in the financial statements.

1. Shared Services Canada

In fiscal year 2011-2012, the Government of Canada announced the creation of Shared Services Canada, a new organization with a mandate to establish a government-wide approach to managing the delivery of information technology infrastructure services. In light of Shared Services Canada's responsibilities, the CRA transferred to Shared Services Canada the control and supervision of operational domains related to email, data centres and network services.

By Order-in-Council, effective November 15, 2011, $72.3 million in CRA resources were deemed appropriated to Shared Services Canada for 2011-2012. The deemed appropriations included $11.7 million in planned carry forwards required by Shared Services Canada to meet existing contractual agreements in 2012-2013.

The cost of IT activities that were transferred to Shared Services Canada continues to be fully reflected in the financial statements as professional services received without charge (refer to Note 10 of the Annual Report to Parliament - Financial Statements - Agency Activities).

The CRA worked closely with the Treasury Board Secretariat, the Receiver General and Shared Services Canada to ensure that accounting and reporting requirements were met for the deemed appropriations and associated expenditures.

2. Collective Bargaining

As part of the 2010 Federal Budget, the Government announced a freeze on the operating budgets of departments and agencies up to and including 2012-2013. As a result, no incremental central funding is being provided to organizations for the cost of wage increases that take effect between April 1, 2010 and March 31, 2013.

In fiscal year 2011-2012, the funding shortfall associated with these wage increases amounted to approximately $48.0 million. The CRA managed this operating pressure with internal funding from general administrative and program efficiencies identified through a targeted program spending review.

3. CRA's Financial Management

The CRA employs a multi-year resource management strategy by utilizing its two-year spending authority to better position itself in future years to address known pressures and / or respond quickly to unforeseen and extraordinary operating pressures. In 2011-2012 the total appropriations available for future years was $248.3 million. While this was higher than prior years, it was due in large part to plans to re-profile funds to 2012-2013 in order to mitigate the impacts of the operating budget freeze.

As part of its resource management strategy, the CRA continuously reviews and revises plans and priorities to ensure the effective use of government resources and the achievement of our core business outcomes. In 2011-2012, the majority of key performance targets were met or exceeded.

4. Provincial Sales Tax Administration Reform

On July 1, 2010, the CRA implemented the harmonized sales tax (HST) in the provinces of Ontario and British Columbia. The CRA received funding in 2011-2012 of $137.8 million (including employee benefit plan contributions and accommodation charges) for the continued implementation and administration of the HST in both provinces. This funding was used to transition affected provincial employees to the CRA, identify and address risk of HST non-compliance, and administer province-specific HST flexibilities in Ontario and British Columbia. Since that time, the province of British Columbia has confirmed it will return to the provincial sales tax model effective April 1, 2013. In addition, on April 18, 2012, the province of Prince Edward Island announced that it will transition to the HST effective April 1, 2013. Adjustments to the CRA funding associated with these announcements will be reflected in future years, as necessary.

Discussion and analysis

Analysis of net cost of operations

Actual net cost of operations

The CRA's 2011-2012 net cost of operations amounted to $4,198.8 million, increasing by $143.8 million from the $4,055.0 million net cost of operations in 2010-2011.

Details of the net cost of operations are illustrated below (see Note 8 of the Financial Statements - Agency Activities for a further breakdown of expenses by category):

The CRA's expenses are comprised of 74% personnel expenses (salaries, other allowances and benefits) and 26% non-personnel expenses.

Personnel expenses are the primary drivers for the CRA. A number of significant factors contributed to the increase of $109.8 million for these expenses in 2011-2012: annual economic salary increases pursuant to collective agreement provisions; the increase in the actuarial rate used to calculate severance benefits; termination benefits related to workforce adjustments resulting from the CRA's ongoing transformation. These increases were partially offset by salaries and benefits transferred to Shared Services Canada.

A significant portion of non-personnel expenses relates to accommodation and IT equipment and services. The net increase of $43.1 million in non-personnel expenses in 2011-2012 is mainly attributable to greater expenses relating to accommodations, as well as IT related expenses, and reflects an offset related to a decrease in transportation and communications costs.

Forecasted net cost of operations

The CRA's net cost of operations for 2011-2012 was $123.3 million more than was anticipated in the future-oriented financial statements included in the 2011-2012 RPP ($4,198.8 million - $4,075.5 million). This represents a 3.0% variance and is explained as follows:

• The future-oriented financial statements were prepared based on Parliamentary appropriations received as of the 2011-2012 Main Estimates and did not consider expenditures as a result of resources received for the remainder of the year for such items as:
  • Carryforward amounts from 2010-2011;
  • Funding related to measures arising from Budget 2011;
  • Funding adjustments for respendable revenue; and
  • An offsetting adjustment for the transfer of email, data centre and network responsibilities to Shared Services Canada.
• A change in accounting treatment for non respendable non-tax revenues, which are now presented in reduction of the CRA's gross revenues in the Statement of Operations and Agency Net Financial Position.
• Other explanations for the variance relate to accrual adjustments mainly for asset acquisitions and the related amortization, and personnel related costs such as severance liability.

Financial position

The increase in the Agency net financial position is attributable to both an increase in the liabilities due to employee severance benefits as explained below and to a decrease in financial and non-financial assets due in part to the transfer of assets to Shared Services Canada.

Liabilities

Liabilities increased by $77.7 million in 2011-2012. A significant part of this increase is attributable to changes in the economic assumptions used to estimate the actuarial present value as at March 31 of the expected future employee severance benefit payments.

Employee severance benefits are the CRA's most significant liability, as illustrated in the table below.

Figure 1 Liabilities by category

In the course of 2011-2012, conditions of employment for certain employee groups within the CRA were modified so that their employee severance benefits would cease to accrue. The employees concerned were given the option to be paid their accrued severance benefits as at the effective date of the new terms of employment. These modifications that were also introduced for other employee groups in the following fiscal year are expected to reduce the CRA's employee severance benefits liability in the coming and future years.

Non-financial assets

Non-financial assets are comprised of 97% tangible capital assets. The CRA managed a capital budget of $89.0 million for the year 2011-2012, of which $9.4 million was deemed appropriated to Shared Services Canada and $28.0 million remains available for use in future years in accordance with the CRA's multi-year resource management strategy.

The vast majority of tangible capital assets owned by the CRA relates to IT. A substantial portion of CRA's costs related to IT equipment was transferred to Shared Services Canada during the year as part of the Government's effort to streamline the delivery of email, data centre, network and telephony services across the Public Service.

Software remains the most significant type of tangible capital asset required by the CRA to deliver its mandate. As a large organisation 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 the CRA employees. During the year, the CRA invested $39.8 million in capital expenditures to develop customized software that will allow it to continue to administer and enforce tax legislation efficiently.

Risk

Risk management plays a key role in supporting sound financial management as it allows the CRA to protect its assets and reinforces a strong sense of prioritization in investment decisions. At the CRA, the Enterprise Risk Management (ERM) Branch supports the effective management of resources in multiple ways. Firstly, as a member of the committee overseeing investment projects above $1 million, the Chief Risk Officer and Assistant Commissioner of the ERM Branch brings a risk perspective to the committee's review activities. Secondly, all projects brought to the committee require a formal attestation from the ERM Branch that the CRA structured 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. Lastly, enterprise risk information is used to inform the development of the CRA Strategic Investment Plan (SIP); a long-term plan for significant future investments. More specifically, project alignment with the priorities outlined in the Corporate Risk Profile is one of the considerations used to inform the priority ranking of initiatives.

For further details on ERM at the CRA, please see the Enabling core business operations section of the annual report.

Outlook

The CRA continues to modernize its operations and reduce red tape to enhance services to Canadians while reducing its overall costs. It is increasingly providing services electronically to make it easier for Canadians and businesses to interact with the CRA at the lowest possible cost. By simplifying the way it collects taxes and distributes benefit payments, the CRA will ensure Canadians and small and medium-sized enterprises receive the benefits and credits to which they are entitled as efficiently and quickly as possible.

List of supplementary information tables

All electronic supplementary information tables found in the 2011-2012 Departmental Performance Report can be found on the CRA website.

• Sources of Respendable and Non-Respendable Non-Tax Revenue
• User fees reporting
• Status report on projects operating with specific Treasury Board approval
• Details on transfer payment programs
• Greening government operations
• Response to parliamentary committees and external audits
• Internal audits and evaluations

Financial statements

CRA financial statements can be found on the CRA website.

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