Canada Revenue Agency Quarterly Financial Report

For the quarter ended December 31, 2015

Statement outlining results, risks and significant changes in operations, personnel and program

Introduction

This quarterly financial report has been prepared by management as required by section 65.1 of the Financial Administration Act in the form and manner prescribed by the Treasury Board. This report should be read in conjunction with the Main Estimates and Supplementary Estimates B.

Further details on the Canada Revenue Agency’s (CRA) program activities can be found in the Report on Plans and Priorities, Main Estimates, and Supplementary Estimates.

Basis of Presentation

This quarterly report has been prepared by management using an expenditure basis of accounting. The accompanying Statement of Authorities includes the CRA's spending authorities granted by Parliament and those used by the CRA consistent with the Main Estimates for the 2015-2016 fiscal year. This quarterly report has been prepared using a special purpose financial reporting framework designed to meet financial information needs with respect to the use of spending authorities.

The authority of Parliament is required before moneys can be spent by the Government. Approvals are given in the form of annually approved limits through appropriation acts or through legislation of statutory spending authority for specific purposes.

The CRA uses the full accrual method of accounting to prepare and present its annual departmental financial statements that are part of the departmental performance reporting process. However, the spending authorities voted by Parliament remain on an expenditure basis.

This quarterly report has not been subject to an external audit or review.

Highlights of fiscal quarter and fiscal year to date (YTD) results

Analysis of Authorities

This report reflects the results for the current fiscal year in relation to the Main Estimates for which full supply was released on June 19, 2015, including authorities available for use from the prior fiscal year and technical adjustments. When compared to the same point in time, the 2014-2015 authorities include the Supplementary Estimates B.

As shown in the Statement of Authorities, the CRA’s total Budgetary Authorities available for use have decreased by $121 million, or 3%, from $4,188 million in 2014-2015 to $4,067 million in 2015-2016. The components of this reduction are outlined below.

The Vote 1 Gross Operating Expenditure Authority decreased by $101 million, or 3%, from $3,536 million in 2014-2015 to $3,435 million in 2015-2016. This is mainly due to the effect of the following factors:

In 2015-2016 the CRA expects to spend $322 million to fulfill its administrative responsibilities in support of the CPP and EI program, up from $310 million in 2014-2015. This $12 million increase in Vote 1 Gross Operating Expenditure Authority is offset by an equivalent increase in revenues recovered from the CPP and EI Accounts.

The Vote 5 Capital Expenditure Authority increased by $5 million, or 3%, from $123 million in 2014-2015 to $128 million in 2015-2016. This increase is primarily due to incremental funding received for the redesign of the individual income tax processing system, which has been partially offset by a planned reduction in the capital profile of the international tax evasion and aggressive tax avoidance initiative approved in Budget 2013.

Total Budgetary Statutory Authorities are forecasted to decrease by $13 million, or 2%, from $839 million in 2014-2015 to $826 million in 2015-2016. This reduction is attributable to the following:

Analysis of Expenditures

A two-year comparison of the CRA's annual net authorities available for use against year-to-date and third quarter net expenditures as at December 31 is presented in Figure 1.

Figure 1: Annual Authorities against Year-to-Date and Third Quarter Expenditures (in millions of dollars)
  2015-2016 2014-2015
Authorities 4066.7 4187.6
Year-to-Date 2946.1 2992.3
Third Quarter expenditures 978.6 975.1

Certain components of the quarterly year-over-year expenditure variances are attributable to timing differences in invoices and payments as well as the status of major project investments, which are often resolved by the end of the fiscal year.

A) Expended in the Third Quarter by Authority

As displayed in the Statement of Authorities, the third quarter expenditures have increased by $4 million, from $975 million in 2014-2015 to $979 million in 2015-2016. The components of this year-over-year change are discussed below.

The CRA’s third quarter net Vote 1 Operating Expenditures have increased by $37 million, or 5%, from $719 million in 2014-2015 to $756 million in 2015-2016. Timing differences in the spending of revenues account for $41 million of this variance and are offset by an equivalent decrease of expenditures under Total Budgetary Statutory Authorities. The annual revenue forecast for 2015-2016 is consistent with that of 2014-2015 and as such, the variance will be resolved by year-end.

Also contributing to the variance in net Vote 1 Operating Expenditures is an offsetting $4 million decrease in accommodation and real property services provided by Public Services and Procurement Canada based on the CRA’s occupancy requirements.

The CRA’s third quarter Vote 5 Capital Expenditures have decreased by $6 million from $19 million in 2014-2015 to $13 million in 2015-2016. Fluctuations in capital expenditures are not unusual as the quarterly distribution may vary from year-to-year, depending on the status of major project investments and the timing of capital procurements.

Expenditures for Total Budgetary Statutory Authorities have decreased by $27 million, or 11%, from $237 million in 2014-2015 to $210 million in 2015-2016. This decrease is comprised of $41 million due to timing differences in the spending of revenues as previously mentioned; this amount is offset by an increase of $12 million that relates to a rise in payments under the Children's Special Allowances Act as the result of the implementation of the enhanced Universal Child Care Benefit (UCCB).

B) Expended in the Third Quarter by Standard Object

Personnel expenditures have decreased by $5 million, or 1%, from $784 million in 2014-2015 to $779 million in 2015-2016. The variance is considered to be immaterial and stems from normal fluctuations in expenditures from quarter to quarter related to maternity, severance, and overtime.

Professional and special services expenditures have increased by $5 million, or 6%, from $83 million in 2014-2015 to $88 million in 2015-2016. The variance is mainly attributable to timing in the payment of invoices for the Department of Justice as noted in the first and second quarter reports and will be resolved by year-end.

Rental expenditures have decreased by $22 million, or 24%, from $95 million in 2014-2015 to $73 million in 2015-2016. As noted in the second quarter report, $13 million of the decrease is primarily the result of an in-year change to a more detailed distribution of expenditures for accommodations and real property services from Standard Object "Rentals" to Standard Objects "Purchased repair and maintenance" and "Professional and special services". The remaining $9 million relates to a mid-year review conducted in Quarter 3 2014-2015 which re-classified the year-to-date software maintenance expenditures from Standard Object "Purchased, repair and maintenance".

Purchased repair and maintenance expenditures have increased by $18 million, from ($7 million) in 2014-2015 to $11 million in 2015-2016. The increase is related to the explanations noted above, of which $8 million of the variance pertains to a more detailed distribution of in-year expenditures while $9 million of the variance is due to the mid-year review and subsequent re-classification of expenditures that occurred last year.

Transfer payments have increased by $12 million, or 21%, from $58 million in 2014-2015 to $70 million in 2015-2016 and are attributable to the increased Children's Special Allowance payments explained earlier.

C) Year-to-Date Expenditures by Authority

As displayed in the Statement of Authorities, the year-to-date expenditures have decreased by $46 million, or 2%, from $2,992 million in 2014-2015 to $2,946 million in 2015-2016. The components of this year-over-year decrease are discussed below.

Net Vote 1 Operating year-to-date Expenditures have decreased by $91 million, or 4%, from $2,352 million in 2014-2015 to $2,261 million in 2015-2016. As noted in the first and second quarter reports, the majority of this decrease, $87 million, is attributable to the one-time transition payment which was made in May 2014 as a result of the Government of Canada’s new salary payment in arrears model.

Year-to-date Vote 5 Capital Expenditures have decreased by $3 million, or 8%, from $48 million in 2014-2015 to $45 million in 2015-2016. As previously mentioned, this fluctuation in expenditures is not unusual depending on the status of major project investments and the timing of capital procurements.

Total Budgetary Statutory Authorities have increased by $48 million, or 8%, from $592 million in 2014-2015 to $640 million in 2015-2016. The majority of the variance, $44 million, is due to increased Children's Special Allowance payments.

D) Year-to-Date Expenditures by Standard Object

For the third consecutive quarter, the CRA’s Personnel year-to-date expenditures have continued to remain relatively constant year-over-year. This is an indicator that efficiency savings have been offset by expenditures necessary to implement Federal Budget measures.

Transportation and communications expenditures have increased by $4 million, or 5%, from $91 million in 2014-2015 to $95 million in 2015-2016. The variance is primarily the result of increased postage costs due to Canada Post Corporation (CPC) stamp price increases as well as the Direct Deposit initiative in Public Services and Procurement Canada (PSPC) announced in Budget 2012, which is shifting postage related costs to the CRA that were previously funded by PSPC.

Professional and special services expenditures have increased by $22 million, or 9%, from $230 million in 2014-2015 to $252 million in 2015-2016. Most of the variance, $17 million, is due to timing in the payment of invoices for the administration of the Goods and Services Tax (GST) in the province of Québec and for legal services provided by the Department of Justice. The remainder of the variance mainly pertains to a more detailed distribution for accommodations and real property services by Standard Object.

Rental expenditures have decreased by $39 million, or 15%, from $260 million in 2014-2015 to $221 million in 2015-2016. This decrease was noted earlier and is primarily the result of a more detailed distribution of expenditures in-year for accommodations and real property services.

This decrease has been offset by a $23 million increase in purchased repair and maintenance expenditures, from $7 million in 2014-2015 to $30 million in 2015-2016 stemming from the above explanation.

Transfer payments have increased by $44 million, or 25%, from $175 million in 2014-2015 to $219 million in 2015-2016 as a result of increased Children's Special Allowance payments consistent with the third quarter’s variance explanation.

Other subsidies and payments have decreased by $90 million from $91 million in 2014-2015 to $1 million in 2015-2016. The majority of the variance, $87 million, is attributable to implementing the Government of Canada’s new salary payment in arrears model mentioned earlier.

Risks and Uncertainties

The CRA maintains a corporate risk inventory to identify and address organizational risks. Mitigation strategies have been put in place to protect the CRA from exposure to these risks and the associated financial impacts.

In a continuing effort to contain administrative costs across the government, Budget 2014 reintroduced a two year operating budget freeze, in effect until March 31, 2016. Operating budgets for all government departments and agencies are frozen at 2014-2015 levels and as a result, departments and agencies are required to absorb the cost of wage increases that take effect after April 1, 2014.

The collective agreements between the CRA and both the Public Service Alliance of Canada (PSAC) and Professional Institute of the Public Service of Canada (PIPSC) expired in October 2012 and December 2014, respectively. Contract negotiations between each party and the CRA are ongoing.

Significant changes in relation to operations, personnel and programs

As a result of the Budget 2014 operating budget freeze mentioned above, the CRA has reviewed its plans and priorities and established a provision for collective bargaining increases, given these costs represent a significant liability.

Through Budget 2015, the Government announced several legislative and enhanced compliance measures to improve the fairness and integrity of the tax system as well as strengthen tax compliance. Among these legislated changes, the CRA has begun to administer enhanced Universal Child Care Benefits (UCCB), the Family Tax Cut, and will implement the Organization for Economic Cooperation and Development’s (OECD) common reporting standard for automatic exchange of certain tax information between financial institutions and the CRA.

Initiatives to support the CRA’s efforts to ensure taxpayer compliance include enhanced underground economy audit efforts through the introduction of additional underground economy specialist teams; an expansion of the CRA’s offshore compliance activities through the use of improved risk assessment systems and business intelligence as well as the hiring of additional auditors; and combatting tax avoidance by the largest and most complex business entities.

The CRA is internally risk managing its Budget 2015 initiatives and is seeking incremental funding through Supplementary Estimates C.

There are no significant financial or non-financial impacts to report at this time.

Budget 2012 Efficiency Measures Implementation

This section provides a summary of the 2015-2016 budgetary impact of efficiencies announced in Budget 2012, which aimed to refocus tax and benefit programs, reduce administrative costs through modernization, and make it easier for individual Canadians and businesses to deal with the CRA. As one of the federal government’s largest institutions, the CRA is a significant contributor to this initiative, with planned efficiencies of $253 million at maturity and commitments of $208 million in 2015-2016.

The CRA has a multi-year human resources plan to ensure required expertise within the Agency is maintained. Budget 2012 staffing reductions have been managed through attrition, controls on new hiring, taking advantage of vacancies from retiring employees (approximately 1,300 per year), tighter management of term employment, and workforce adjustment when necessary. The vast majority of the 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.

Approval by Senior Officials

Approved by:

[original signed by]

________________________
Andrew Treusch, Commissioner

[original signed by]

________________________
Roch Huppé, Chief Financial Officer

Ottawa, Canada
Date:
 February 29, 2016

Statement of Authorities (unaudited) - Fiscal year 2015-2016
(in thousands of dollars)
  Total available for use for the year ending March 31, 2016 Footnote 1 Used during the quarter ended
December 31, 2015
Year to date used at quarter-end
Vote 1 - Operating expenditures      
Gross Operating expenditures 3,435,654 836,231 2,501,560
Revenues netted against expenditures minus (322,404) minus (79,873) minus (239,618)
Net Vote 1 - Operating expenditures 3,113,250 756,358 2,261,942
Vote 5 - Capital expenditures 127,620 12,668     44,516
Budgetary Statutory Authorities      
Contributions to employee benefit plans 419,282 104,718 314,154
Children's Special Allowance payments (Children's Special Allowances Act) 237,000 69,572 219,386
Spending of revenues received through the conduct of its operations pursuant to section 60 of the Canada Revenue Agency Act 169,466 34,801 104,825
Disbursements to provinces under the Softwood Lumber Products Export Charge Act, 2006 - - -
Minister's salary and motor car allowance 82 15 56
Court awards - Tax Court of Canada - 411 1,178
Spending proceeds from the disposal of surplus Crown Assets - 18 45
Energy Cost Benefit - - 1
Total Budgetary Statutory Authorities 825,830 209,535 639,645
Total Budgetary Authorities 4,066,700 978,561 2,946,103
Statement of Authorities (unaudited) - Fiscal year 2014-2015
(in thousands of dollars)
  Total available for use for the year ending March 31, 2015 Footnote 1 Used during the quarter ended
December 31, 2014
Year to date used at quarter-end
Vote 1 - Operating expenditures      
Gross Operating expenditures 3,535,875 796,786 2,584,276
Revenues netted against expenditures minus (310,273) minus (77,568) minus (232,704)
Net Vote 1 - Operating expenditures 3,225,602 719,218 2,351,572
Vote 5 - Capital expenditures 123,414 19,431 48,308
Budgetary Statutory Authorities      
Contributions to employee benefit plans 413,195 101,479 304,436
Children's Special Allowance payments (Children's Special Allowances Act) 246,000 57,609 175,306
Spending of revenues received through the conduct of its operations pursuant to section 60 of the Canada Revenue Agency Act 179,309 76,002 109,412
Disbursements to provinces under the Softwood Lumber Products Export Charge Act, 2006 - - 116
Minister's salary and motor car allowance 80 20 60
Court awards - Tax Court of Canada - minus 1,322 2,967
Spending proceeds from the disposal of surplus Crown Assets - 19 101
Energy Cost Benefit - -  1
Total Budgetary Statutory Authorities 838,584 236,451 592,399
Total Budgetary Authorities 4,187,600 975,100 2,992,279
Departmental Budgetary Expenditures by Standard Objects (unaudited)
Fiscal year 2015-2016

(in thousands of dollars)
  Planned expenditures for the year ending March 31, 2016 Expended during the quarter ended December 31, 2015 Year to date used at quarter-end
Expenditures:      
Personnel 3,048,931 778,560 2,344,979
Transportation and communications 169,911 27,167 94,633
Information 9,970 1,490 3,141
Professional and special services 409,176 88,079 251,848
RentalsFootnote 328,141 72,593 221,084
Purchased repair and maintenanceFootnote 76,578 11,370 29,788
Utilities, materials and supplies 35,035 3,856 10,918
Acquisition of machinery and equipment 71,316 5,273 8,609
Transfer payments 237,000 69,572 219,388
Other subsidies and payments 3,046 474 1,333
Total Gross Budgetary Expenditures 4,389,104 1,058,434 3,185,721
Less: Revenues netted against expenditures 322,404 79,873 239,618
Total Net Budgetary Expenditures 4,066,700 978,561 2,946,103
Departmental Budgetary Expenditures by Standard Objects (unaudited)
Fiscal year 2014-2015

(in thousands of dollars)
  Planned expenditures for the year ending March 31, 2015 Expended during the quarter ended December 31, 2014 Year to date used at quarter-end
Expenditures:      
Personnel 3,012,643 784,351 2,347,333
Transportation and communications 202,075 25,735 90,547
Information 12,933 1,860 2,259
Professional and special services 477,815 82,908 230,131
Rentals 324,933 95,061 260,300
Purchased repair and maintenance 96,996 (6,541) 6,543
Utilities, materials and supplies 42,032 4,936 11,513
Acquisition of machinery and equipment 79,213 4,801 9,994
Transfer payments 246,000 57,610 175,423
Other subsidies and payments 3,233 1,947 90,940
Total Gross Budgetary Expenditures 4,497,873 1,052,668 3,224,983
Less: Revenues netted against expenditures 310,273 77,568 232,704
Total Net Budgetary Expenditures 4,187,600 975,100 2,992,279
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