Canada Revenue Agency Annual Report to Parliament 2013-2014

Canada Revenue Agency Financial Statements – Agency Activities

INDEPENDENT AUDITOR'S REPORT

To the Board of Management of the Canada Revenue Agency and the Minister of National Revenue

I have audited the accompanying financial statements of the Agency Activities of the Canada Revenue Agency, which comprise the statement of financial position as at 31 March 2014, and the statement of operations and agency net financial position, statement of change in agency net debt and statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information.

Management's Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with Canadian public sector accounting standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditor's Responsibility

My responsibility is to express an opinion on these financial statements based on my audit. I conducted my audit in accordance with Canadian generally accepted auditing standards. Those standards require that I comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

I believe that the audit evidence I have obtained is sufficient and appropriate to provide a basis for my audit opinion.

Opinion

In my opinion, the financial statements present fairly, in all material respects, the financial position of the Agency Activities of the Canada Revenue Agency as at 31 March 2014, and the results of its operations, changes in its net debt, and its cash flows for the year then ended in accordance with Canadian public sector accounting standards.

original signed
Michael Ferguson, CPA, CA
FCA (New Brunswick)
Auditor General of Canada

26 August 2014
Ottawa, Canada

Contingent liabilities (note 13)

The accompanying notes form an integral part of these financial statements. 

Approved by:

original signed by
Andrew Treusch
Commissioner of Revenue and Chief Executive Officer of the Canada Revenue Agency

original signed by
Richard Thorpe, CPA, CMA, FCMA
Chair, Board of Management

The accompanying notes form an integral part of these financial statements.

The accompanying notes form an integral part of these financial statements. 

The accompanying notes form an integral part of these financial statements.  

Notes to the Financial Statements – Agency Activities

1. Authority and objectives

The Canada Revenue Agency (CRA) is an agent of Her Majesty in right of Canada under the Canada Revenue Agency Act. The CRA is a departmental corporation named in Schedule II of the Financial Administration Act and reports to Parliament through the Minister of National Revenue.

The mandate of the CRA is to support the administration and enforcement of tax legislation and other related legislation. The CRA provides support, advice, and services by:

(a) supporting the administration and enforcement of program legislation;

(b) implementing agreements between the Government of Canada or the CRA and the government of a province, territory or other public body performing a function of government in Canada to carry out an activity or administer a tax or program;

(c) implementing agreements or arrangements between the CRA and departments or agencies of the Government of Canada to carry out an activity or administer a program; and

(d) implementing agreements between the Government of Canada and First Nations governments to administer a tax.

The CRA administers revenues, including income and sales taxes and employment insurance premiums, administers tax legislation, delivers a number of social benefit programs to Canadians for the federal, provincial, territorial, and First Nations governments, and administers other amounts, including Canada Pension Plan contributions, for other groups or organizations. It is responsible for administering and enforcing the following acts or parts of acts: the Air Travellers Security Charge Act, the Canada Revenue Agency Act, the Children's Special Allowances Act, Part V.1 of the Customs Act, section 2 of the Energy Costs Assistance Measures Act, the Excise Act, the Excise Tax Act (including the goods and services tax (GST) and the harmonized sales tax (HST) except for GST/HSTon imported goods), the Excise Act, 2001, the Income Tax Act, the Softwood Lumber Products Export Charge Act, 2006, the Universal Child Care Benefit Act, and others including various provincial acts.

In delivering its mandate, the CRA operates under the following program activities:

(a) Reporting compliance: Verifies complete and accurate disclosure by taxpayers of all required information to establish tax liabilities;

(b) Internal services: Provides internal services across the CRA, such as human resources management, financial management and information technology, to support the needs of programs and corporate obligations;

(c) Assessment of returns and payment processing: Processes and validates taxpayer returns; registers, establishes, and maintains taxpayer accounts; and, receives payments;

(d) Accounts receivable and returns compliance: Identifies and addresses non-compliance with taxpayer filing and remittance requirements;

(e) Taxpayer and business assistance: Assists taxpayers in meeting their obligations under the self-assessment;

(f) Appeals: Provides a dispute resolution process for taxpayers who disagree with decisions taken by the CRA;

(g) Benefit programs: Provides Canadians certain income-based benefits, credits and other services on behalf of federal, provincial (except Québec), and territorial governments;

(h) Taxpayers' Ombudsman: Addresses requests for reviews made by taxpayers and benefit recipients with respect to service matters.

2. Summary of significant accounting policies

For financial reporting purposes, the CRA's activities have been divided into two sets of financial statements: agency activities and administered activities. The Financial Statements - Agency Activities include those operational revenues and expenses which are managed by the CRA and utilized in running the organization. The Financial Statements - Administered Activities include those revenues and expenses that are administered on behalf of the federal, provincial, and territorial governments, First Nations, and other organizations. The purpose of the distinction between agency and administered activities is to facilitate, among other things, the assessment of the administrative efficiency of the CRA in achieving its mandate. Tax-related assets, liabilities, revenues and expenses are excluded from these financial statements because they can only accrue to a government, not to the tax agency that administers those transactions.

As required by the Canada Revenue Agency Act, the Financial Statements - Agency Activities have been prepared using accounting principles consistent with those applied in the preparation of the financial statements of the Government of Canada. The accounting principles used are based on Canadian public sector accounting standards. A summary of significant accounting policies follows:

(a) Parliamentary appropriations

The CRA is financed by the Government of Canada through Parliamentary appropriations. Accounting for appropriations provided to the CRA does not parallel financial reporting according to Canadian public sector accounting standards, as they are based in large part on cash flow requirements. Consequently, items recognized in the Statement of Financial Position and the Statement of Operations and Agency Net Financial Position may be different from those provided through appropriations from Parliament. Note 3(b) provides a high-level reconciliation between the two bases of reporting. The planned results in the Statement of Operations and Agency Net Financial Position are the amounts reported in the Future-oriented Financial Statements - Agency Activities included in the 2013-2014 Report on Plans and Priorities.

(b) Net cash provided by the Government of Canada

The CRA operates within the Consolidated Revenue Fund (CRF), which is administered by the Receiver General for Canada. All cash received by the CRA is deposited to the CRF and all cash disbursements made by the CRA are paid from the CRF. The net cash provided by government is the difference between all respendable cash receipts and all cash disbursements including transactions with departments and agencies.

(c) Expense recognition

Expenses are recognized when goods are received and/or services are rendered.

(d) Services provided without charge from other government agencies and departments

Estimates of the cost for services provided without charge from other government agencies and departments are recorded as expenses at their estimated cost.

(e) Revenue recognition

Non-tax revenues are recognized when the services are rendered by the CRA.

Non-tax revenues that are not available for spending cannot be used to discharge the CRA's liabilities. While management is expected to maintain accounting control, it has no authority regarding the disposition of non-respendable revenues. As a result, non-respendable revenues are considered to be earned on behalf of the Government of Canada and are therefore presented as a reduction of the CRA's gross revenues.

(f) Vacation pay and compensatory leave

Vacation pay and compensatory leave expenses are accrued as the benefits are earned by the employees under their respective terms of employment. The liability for vacation pay and compensatory leave is calculated at the salary levels in effect at the end of the year for all unused vacation pay and compensatory leave benefits accruing to employees.

(g) Employee benefits

(a) Pension benefits

All eligible CRA employees participate in the Public Service Pension Plan administered by the Government of Canada. The CRA's contributions reflect the full cost as employer. These amounts are currently based on a multiple of an employee's required contributions and may change over time depending on the experience of the plan. The CRA's contributions are expensed during the year in which the services are rendered and represent the total pension obligation of the CRA. Current legislation does not require the CRA to make contributions with respect to any actuarial deficiencies of the Public Service Pension Plan.

(b) Health and dental benefits

The Government of Canada sponsors employee benefit plans (health and dental) in which the CRA participates. Employees are entitled to health and dental benefits, as provided for under labour contracts and conditions of employment. The CRA's contributions to the plans, which are provided without charge by the Treasury Board Secretariat, are recorded at cost based on a percentage of the salary expenses and charged to personnel expenses in the year incurred. They represent the CRA's total obligation to the plans. Current legislation does not require the CRA to make contributions for any future unfunded liabilities of the plans.

(c) Severance benefits

Some employees are entitled to severance benefits, as provided for under labour contracts and conditions of employment. The cost of these benefits is accrued as employees render the services necessary to earn them. These benefits represent an obligation of the CRA that entails settlement by future payments. The liability resulting from the benefits earned by CRA employees is calculated using information from an actuarial valuation based on the projected benefit method prorated on services. Changes in actuarial assumptions and any variance between the expected and the actual experience of the severance benefits plan give rise to actuarial gains or losses. These gains or losses are amortized on a straight-line basis over the expected average remaining service life of the employees starting in the fiscal year following the one in which they arose.

(d) Sick leave benefits

Employees are eligible to accumulate sick leave benefits until retirement or termination according to their terms of employment. Sick leave benefits are earned based on employee services rendered and are paid upon an illness or injury related absence. These are accumulating non-vesting benefits that can be carried forward to future years, but are not eligible for payment on retirement or termination, nor can these be used for any other purpose. A liability is recorded for unused sick leave credits expected to be used in future years in excess of future allotments, based on an actuarial valuation using an accrued benefit method. Changes in actuarial assumptions and any variance between the expected and the actual experience of the sick leave benefits plan give rise to actuarial gains or losses. These gains or losses are amortized on a straight-line basis over the expected average remaining service life of the employees starting in the fiscal year following the one in which they arose.

(h) Due from the Consolidated Revenue Fund (CRF)

Amounts due from the CRF are the result of timing differences between when a transaction affects authorities and when it is processed through the CRF. Amounts due from the CRF represent the net amount of cash that the CRA is entitled to draw from the CRF without further authorities to discharge its liabilities.

(i) Accounts receivable and advances

Accounts receivable and advances are stated at the lower of cost and net recoverable value. An allowance for doubtful accounts is recorded where recovery is considered uncertain.

(j) Tangible capital assets

All initial costs of $10,000 or more incurred by the CRA to acquire or develop tangible capital assets are capitalized and amortized over the useful lives of the assets. Similar items under $10,000 are expensed.

Tangible capital assets are amortized on a straight-line basis over the estimated useful lives of assets as follows:

Assets under construction/development are recorded as costs are incurred and are not amortized until completed and put into operation.

(k) Contingent liabilities

Contingent liabilities are potential liabilities that may become actual liabilities when one or more future   events occur or fail to occur. To the extent that the future event is likely to occur or fail to occur, and a reasonable estimate of the loss can be made, an estimated liability is accrued and an expense recorded. If the likelihood is not determinable, the CRA's best estimate of the contingency is disclosed in the notes to the financial statements.

(l) Foreign currency translation

Transactions involving foreign currencies are translated into Canadian dollars by applying the exchange rate in effect at the time of those transactions. Realized foreign exchange gains and losses resulting from foreign currency transactions are included in the other services and expenses category in note 8 - Segmented information - Expenses.

(m) Financial instruments

The CRA uses non-derivative financial instruments in the course of its operations. Those financial instruments gave rise to the following financial assets and financial liabilities that are measured at cost or amortized cost, as per the table below.

(n) Measurement uncertainty

The preparation of these financial statements in accordance with Canadian public sector accounting standards requires management to make estimates and assumptions that affect the reported amounts of liabilities, assets, revenues, expenses and related disclosure reported on the financial statements. At the time of preparation of these statements, management believes the estimates and assumptions to be reasonable. Employee severance and sick leave benefits, contingent liabilities, the useful life of tangible capital assets, services provided without charge and the allowance for doubtful accounts are the most significant items where estimates and assumptions are used. Actual results could differ significantly from the current estimates. Management's estimates are reviewed periodically and, as adjustments become necessary, they are recorded in the financial statements in the period in which they become known.

3. Parliamentary appropriations

The CRA receives most of its funding through annual Parliamentary appropriations. Items recognized in the Statement of Financial Position and the Statement of Operations and Agency Net Financial Position in one year may be funded through Parliamentary appropriations in prior, current, or future years. Accordingly, the CRA has different net results of operations for the year on a government funding basis than on an accrual accounting basis. These differences are reconciled below.

(a) Reconciliation of Parliamentary appropriations provided and used:

(b) Reconciliation of net cost of operations before government funding and transfers to current year Parliamentary appropriations used:

4. Accounts payable and accrued liabilities

Accounts payable and accrued liabilities are measured at cost, the majority of which are due within 30 days of year-end.

5. Employee benefits

(a) Pension benefits

The CRA and all eligible employees contribute to the Public Service Pension Plan (Pension plan), which is sponsored and administered by the Government of Canada. Pension benefits accrue up to a maximum period of 35 years at a rate of two percent per year of pensionable service, times the average of the best five consecutive years of earnings. The benefits are integrated with Canada/Québec pension plans benefits and they are indexed to inflation.

Both the CRA and the employees contribute to the Pension plan. Due to the amendment of the Public Service Superannuation Act following the implementation of provisions related to the Jobs and Growth Act, 2012, employee contributors have been divided into two groups - Group 1 relates to existing plan members as of December 31, 2012 and Group 2 relates to members joining the Plan as of January 1, 2013.

Each group has a distinct contribution rate. The current year expense for the CRA's contributions for Group 1 members represents approximately 1.6 times (1.7 times in 2012-2013) the contributions by employees and, for Group 2 members, approximately 1.5 times (1.6 times in 2012-2013) the contributions of employees.

The contributions to the Pension plan for the year were as follows:

The CRA's responsibility with regard to this Pension plan is limited to its contributions. Actuarial surpluses or deficiencies are recognized in the financial statements of the Government of Canada.

(b) Health and dental benefits

The CRA contributes for all eligible employees to the Public Service Health Care Plan and Public Service Dental Care Plan, which are sponsored by the Government of Canada. The CRA's responsibility with regard to these plans is limited to its contributions (refer to note 10).

(c) Severance benefits

The CRA provides severance benefits to entitled employees based on eligibility, years of service and salary upon termination of employment. These severance benefits are unfunded. Benefits will be paid from future appropriations.

(d) Sick leave benefits

Employees are credited, based on service, a maximum of 15 days annually for use as paid absences, due to illness or injury. Employees are allowed to accumulate unused sick leave credits each year. Accumulated credits may be used in future years to the extent that the employee's illness or injury exceeds the current year's allocation of credits. The use of accumulated sick leave balance for sick-leave compensation ceases on termination of employment. These sick leave benefits are unfunded. They will be paid from future appropriations.

(e) Valuation of benefits

Annually, as at March 31 of each year, the CRA obtains an actuarial valuation of the accrued employee severance and sick leave benefit obligations for accounting purposes.

Changes from the prior year in the actuarial value of these accrued employee benefit obligations that is used to determine the related employee benefits liabilities presented in the Statement of Financial Position as at March 31 were as follows:

(f) Actuarial assumptions

Actuarial assumptions are used to determine the severance and sick leave accrued benefit obligations and include estimates of the discount rate and yearly salary increase. These assumptions are reviewed at March 31 of each year and are based on management's best estimate. The actuarial valuation as at March 31, 2014 for both severance and sick leave benefit obligations used a discount rate of 3.53% and salary growth of 2.0% - 2.6% (2.68% and 2.6% - 2.7% respectively as at March 31, 2013).

6. Accounts receivable and advances

7. Tangible capital assets

The cost of software in development, which is not amortized, is $80,843,958 as at March 31, 2014 ($59,055,301 as at March 31, 2013).

8. Segmented information - Expenses

The following table presents the expenses by program activity and expense category as described in note 1 of these financial statements.

9. Segmented information - Non-tax revenues

The following table presents the revenues generated by program activity and revenue category as described in note 1 of these financial statements.

10. Related party transactions

The CRA is related in terms of common ownership to all Government of Canada departments, agencies, and Crown corporations. Transactions with Crown corporations entered into by the CRA are in the normal course of business and on normal trade terms applicable to all individuals and enterprises. Transactions with other Government of Canada departments and agencies are conducted on a cost recovery basis, except for transfers of tangible capital assets that are carried out at net book value.

During the year, the CRA received various services without charge from other government agencies and departments. The estimated costs for significant services provided without charge that have been recorded include:

11. Transfer to Shared Services Canada

Effective April 3, 2013, the CRA transferred responsibilities over the acquisition and provision of hardware and software for workplace technology devices to Shared Services Canada in accordance with Order in Council (OIC) P.C. 2013-0368. As a first phase, the responsibilities and the related costs for activities related to the software portion of workplace technology devices incurred by the CRA in the course of fiscal year 2014 were transferred to Shared Services Canada.

The transferred expenses and prepaid expenses totaled $5,975,108 as at March 31, 2014 and the CRA used $5,199,621 of its net cash provided by the Government of Canada in fiscal year 2014 to settle them. These costs were included as services provided without charge by Shared Services Canada in note 10 of these financial statements.

12. Board of Management

Pursuant to the Canada Revenue Agency Act, a Board of Management is appointed to oversee the organization and administration of the CRA and the management of its resources, services, property, personnel and contracts. The expenses relating to the board's activities for the year included in the net cost of operations were as follows:

13. Contingent liabilities

The CRA is a defendant in certain cases of pending and threatened litigation which arose in the normal course of business of agency activities as defined in note 2. The current best estimate of the amount to be paid in respect of the cases identified as likely to be lost has been recorded in accounts payable and accrued liabilities. All other cases, excluding those assessed as unlikely to be lost, are considered contingent liabilities and the related amounts are disclosed whenever the amount of the contingency can be reasonably estimated. As at March 31, 2014, contingent liabilities for claims and pending and threatened litigation have been estimated by management at $11,481,104 ($9,882,645 as at March 31, 2013).

14. Financial risk management

The CRA uses non-derivative financial instruments in the course of its operations that give rise to financial assets and financial liabilities. Those financial liabilities comprise accrued salaries, accounts payable and accrued liabilities, vacation pay and compensatory leave. Cash, accounts receivables and advances represent those financial assets.

The CRA is exposed to credit risk, liquidity risk and market risk in connection with its financial instruments.

The credit risk is the risk that another party owing money to the CRA would fail to discharge its obligation creating a financial loss for the CRA. The maximum exposure of the CRA to the credit risk amounted to $6,624,223 as of March 31, 2014 ($37,347,968 as of March 31, 2013), which is equal to the carrying value of its accounts receivable and advances. As the vast majority of the CRA's accounts receivable and advances are either with other government departments or employees, the credit risk is low.

The liquidity risk is the risk that the CRA would encounter difficulty in meeting its obligations associated with its financial liabilities. The CRA's liquidity risk is minimal given that the CRA receives most of its funding through annual Parliamentary appropriations and maintains strong controls over expenditure management.

The market risk is defined as the risk that future cash flows of a financial instrument would fluctuate because of changes in currency rates, interest rates and/or other rates. The CRA's exposure to market risk is limited to fluctuations in the currency rates and the impact of such variations on CRA's cash flows is negligible as its financial transactions in foreign currency are immaterial.

The CRA's exposure to these risks and the policies and processes to manage and measure them did not change significantly from the prior year.

15. Comparative figures

Certain comparative figures have been reclassified to conform with the presentation used in the current year.

Financial Statements Discussion and Analysis – Agency Activities (unaudited)

Introduction

This section of the financial statements provides unaudited complementary and supplementary information on Agency Activities, on an accrual basis, in respect of matters reported in the audited financial statements. Responsibility for the preparation of this financial statements discussion and analysis rests with the CRA's management.

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 2013-2014, this workforce was comprised on average of 80% permanent employees, 18% term employees and 2% students.

The CRA's employees are located throughout Canada, in the following operational regions: Ontario (31%), Headquarters (24%), Prairies (14%); Québec (12%); Pacific (11%) and Atlantic (8%). They provide services to taxpayers in over 35 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. It involves an extensive IT infrastructure, significantly managed by Shared Services Canada (SSC), as well as the development and maintenance of applications across a distributed computing environment.

Risk management

The CRA recognizes that a variety of risks could have potential implications on its financial position and operations. Its Enterprise Risk Management (ERM) Division of the Audit, Evaluation, and Risk Branch plays a key role in ensuring that risks are identified, impacts are assessed and strategies for risk management are adopted, notably by producing the CRA Corporate Risk Profile.

Further details on ERM at the CRA are discussed in this annual report. This financial statements discussion and analysis will elaborate on specific financial risks throughout its content, where applicable.

Financial highlights

Four developments have significantly influenced the 2013-2014 results in the financial statements.

CRA Resource Management

With financial flexibility of $339.2M at year-end, the CRA has managed well within the expenditure authorities approved by Parliament for 2013-2014. This amount, largely planned and available for use in 2014-2015, is a crucial element of the current Resource Management Strategy for addressing known and emerging financial challenges.

The Government announced a two-year operating freeze in Budget 2014, which means the CRA will not be compensated for salary increases which take effect during this period. For 2013-2014, the delays in the ratification of collective agreements required the establishment of a provision for retroactive payments, contributing to the increase in the CRA's financial flexibility.

The CRA is currently implementing transformational measures announced in both Budget 2012 and 2013, which will reach maturity in 2016-2017 and 2015-2016, respectively. During 2013-2014, the CRA continued to position itself for end-state, further contributing to the year-over-year growth in financial flexibility.

As part of its multi-year resource management strategy, the CRA continuously reviews and revises plans and priorities to ensure the effective use of government resources and the achievement of its core business outcomes. In 2013-2014, the majority of key performance targets were met or exceeded.

Budget 2013 Implementation

As part of the Economic Action Plan 2013 (Budget 2013), the CRA was one of two government organizations asked to review its internal operations in the National Capital Region (NCR). As a result, the CRA identified savings totalling some $19 million in 2013-2014, growing to $61 million in 2015-2016. These back-office changes, which will reduce duplication of effort and allow the CRA to conduct business more efficiently, will not impact service levels, compliance activities, or the security of taxpayer information.

Budget 2013 also introduced a number of measures to close tax loopholes, address aggressive tax planning, reduce international tax evasion and aggressive tax avoidance, and improve the integrity of the tax system. For fiscal year 2013-2014, the implementation and administration costs of $12 million (excluding employee benefit plans and accommodation) associated with those measures were managed within the CRA's existing Parliamentary appropriations.

Budget 2012 Implementation

In 2013-2014, the CRA continued to contribute to the deficit reduction effort of the Government of Canada, with planned savings of $253 million at maturity. In 2013-2014, the CRA achieved savings of $59 million, which represents an increase of $31 million over the prior year. The savings target was achieved with minimal impact on the existing workforce as the vast majority of employees impacted by Budget 2012 savings measures have either been placed in other positions within the CRA, or have left the organization on a voluntary basis.

Shared Services Canada

SSC has been responsible for the delivery of IT infrastructure services to the CRA since November 2011. In April 2013, an Order in Council provided SSC with an additional mandate to acquire and provide workplace technology devices software and hardware to departments and agencies. In 2013-2014, all funding intended for software purchases was removed from the CRA's budgets, totaling $12 million. The timing for the transfer of funding and expenditures associated with workplace technology devices hardware acquisitions has yet to be finalised.

The cost of IT services provided without charge by SSC are reported as professional services in the financial statements (note 10).

Discussion and analysis

Net cost of operations before government funding and transfers

The CRA's 2013-2014 net cost of operations before government funding and transfers amounted to $4,068.6 million, decreasing by $9.7 million from the $4,078.3 million net cost of operations before government funding and transfers in 2012-2013.

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

Figure 1: Details on the net cost of operations before government funding and transfers

Comparative figures have been reclassified with the current year presentation.

Personnel expenses (salaries, other allowances and benefits) are the CRA's primary costs, representing 74% of total expenses while the remaining 26% of expenses are comprised of various other costs such as accommodation, information technology equipment and services.

The increase in personnel costs of $26.6 million is mostly attributable to economic salary increases and increments pursuant to collective agreement provisions, increases in employee severance benefits expenses offset by lower salary expenses resulting from a slight reduction of workforce and a decrease in the employer's contributions to the health and dental insurance plans.

Non-personnel expenses have decreased by $39.5 million in 2013-2014. This variance mainly results from a decrease in the purchases and maintenance of computer equipment and software in which the transfer of IT responsibilities to SSC contributed, a decrease in the interest on accrued employee benefits along with a decrease in postage and travel expenses. While the CRA significantly reduced its footprint in 2013-2014, accommodation expenses have remained stable as the savings will be achieved in 2014-2015 onward.

Non-tax revenues slightly decreased in 2013-2014, mostly as a result of IT services now being provided to the Canada Border Services Agency (CBSA) by SSC rather than by the CRA.

Financial position

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

Figure 2: Statement of Financial Position

The increase in the agency net financial position is mainly attributable to an increase in accrued salaries partly offset by a decrease in accounts payable and accrued employee severance benefits as explained below.

Liabilities

Employee benefits are the CRA's most significant liability. They include obligations for severance and sick leave benefits as well as vacation pay and compensatory leave accrual. Employee severance benefits remain the CRA's most important obligation as illustrated in the table below.

Figure 3: Liabilities by category

Employee sick leave and severance benefits combined account for 66% of the CRA total liabilities in 2013-2014. These are significant liabilities that require the use of management estimates and assumptions to determine their present value as at March 31 of every year. As such, there lies a financial risk of imprecision in the financial position of the CRA where actual liabilities and the related expenses may differ significantly from current estimates. To minimize this risk, the CRA makes use of the expertise of the Office of the Chief Actuary, who provides an actuarial valuation report yearly, discussing 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.

Non-financial assets

Non-financial assets are comprised of 97% tangible capital assets. The CRA managed a capital budget of $110.0 million for the year 2013-2014 ($83.4 million for 2012-2013), of which $46.7 million ($36.9 million for 2012-2013) remains available for use in future years in accordance with the CRA's multi-year resource management strategy.

The net book value of tangible capital assets remained fairly stable in 2013-2014 with a net decrease of $5.5 million mainly related to the transfer of assets to the CBSA and to SSC. The vast majority of tangible capital assets owned by the CRA relates 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 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.

To prioritize investment decisions regarding in-house developed software and support the effective management of resources, the CRA Resource and Investment Management Committee (RIMC) oversees investment projects above $1 million. All projects brought to the RIMC require a formal attestation from the ERM Division that the CRA 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. Enterprise risk information is used to inform the development of the CRA Strategic Investment Plan, a long-term plan of significant future investments. Alignment with the priorities outlined in the Corporate Risk Profile is one of the considerations used to inform the priority ranking of initiatives.

Investments in in-house developed software represent an increasingly significant portion of the CRA's total investments in IT, with $76.5 million in software acquisitions compared to $0.5 million in hardware acquisitions in 2013-2014 ($57.6 million and 1.9 million respectively in 2012-2013), as illustrated in the table below. The decrease in IT equipment acquisitions is attributable to the transfer to SSC of email, data centers and network services responsibilities in November 2011.

Figure 4: Breakdown of investments in IT

Five year comparative financial information

Below are tables that provide a five year comparison of financial information based on the accounting policies explained in note 2 to the audited financial statements.

Figure 5: Statement of Financial Position

Comparative figures have been reclassified with the current year presentation.

Figure 6: Segmented information - Expenses

Comparative figures have been reclassified with the current year presentation.

Figure 7: Segmented information - Non-tax revenue

Comparative figures have been reclassified with the current year presentation.

Outlook

Looking ahead, the CRA will continue to modernize its services and compliance activities to improve the efficiency and effectiveness of its operations and programs while contributing to the Government of Canada's goal of returning to a budgetary balance. In 2014-2015, the third consecutive year of measures announced in Budget 2012, further savings will be achieved through various initiatives including the deployment of a new storage model for records management, enhancing tax collection strategies and increasing internet filing for individual tax returns. In addition, as announced in Budget 2013, the CRA will continue to streamline internal operations in the National Capital Region (NCR) over the next two fiscal years.

1. In accordance with the division of activities for financial reporting purposes outlined in note 2, the payments under the Softwood Lumber Products Export Charge Act, 2006 and the Children’s Special Allowances Act are reported as federal administered expenses on the Statement of Administered Expenses and Recoveries of the CRA's Financial Statements - Administered Activities.

2. Pursuant to section 60(1) of the Canada Revenue Agency Act, the balance of money appropriated by Parliament for the use of the CRA that remains unexpended at the end of the fiscal year lapses at the end of the following fiscal year.

3. The CRA’s accounting policy for non-respendable revenues was modified for fiscal year 2010-2011 onward, presenting those revenues as earned on behalf of the Government of Canada in reduction of the CRA's gross revenue.