Canada Revenue Agency Quarterly Financial Report

For the quarter ended June 30, 2016

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.

Further details on the Canada Revenue Agency’s (CRA) program activities can be found in the Report on Plans and Priorities, and Main 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 2016-2017 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 23, 2016, including authorities available for use from the prior fiscal year and technical adjustments.

As shown in the Statement of Authorities, the CRA’s total Budgetary Authorities available for use have increased by $297 million, or 7%, from $4,066 million in 2015-2016 to $4,363 million in 2016-2017. The components of this growth are outlined below.

The Vote 1 Gross Operating Expenditure Authority increased by $133 million, or 4%, from $3,433 million in 2015-2016 to $3,566 million in 2016-2017. This is mainly due to the effect of the following factors:

• $70 million planned increase for the implementation of tax measures announced in Budget 2015, including $47 million aimed at enhancing compliance measures and $23 million for various legislative measures. Funding is included in 2016-2017 Main Estimates but was received through Supplementary Estimates in 2015-2016 and therefore not included in this Q1 comparison;
• $59 million increase related to adjustments in accommodation and real property services provided by Public Services and Procurement Canada (PSPC), including $20 million as a result of a technical adjustment following the review of the Agency’s multi-year occupancy requirements;
• $52 million increase through a vote realignment, which transferred funding in 2016-2017 to the Operating Expenditure Authority (Vote 1) to better align the CRA Strategic Investment Plan (SIP) reference levels with planned expenditures; this adjustment is technical in nature and does not represent a change in the Agency’s planned acquisitions or overall authorities;
• $13 million increase in authorities available for use from the prior fiscal year;
• $12 million decrease as a result 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;
• $9 million transfer to the Canada School of Public Service for its new funding model;
• $9 million decrease in funding received in 2015-2016 for the administration of the Softwood Lumber Products Export Charge Act, 2006;
• $6 million decrease in funding associated with adjustments for government advertising programs, a multi-departmental submission led by the Privy Council Office; and
• $8 million decrease as a result of changes in funding profiles for various initiatives announced in previous Federal Budgets (2011-2014).

In 2016-2017 the CRA expects to spend $306 million to fulfill its administrative responsibilities in support of the Canada Pension Plan (CPP) and Employment Insurance (EI) program, down from $319 million in 2015-2016. This $13 million decrease in Vote 1 Gross Operating Expenditure Authority is offset by an equivalent decrease in revenues recovered from the CPP and EI Accounts.

The Vote 5 Capital Expenditure Authority decreased by $41 million, or 32%, from $128 million in 2015-2016 to $87 million in 2016-2017. This decrease is primarily due to the following factors:

• $52 million decrease, through a vote realignment, which, as previously mentioned, transferred funding in 2016-2017 from the Capital Expenditure Authority (Vote 5) to better align the CRA Strategic Investment Plan (SIP) reference levels with planned expenditures; this adjustment is technical in nature and does not represent a change in the Agency’s planned acquisitions or overall authorities;
• $5 million increase for the implementation of common reporting standard for the automatic exchange of tax information announced in Budget 2015;
• $4 million increase as a result of Budget 2014, to Reduce the Administrative Burden on Charities; and
• $3 million increase in authorities available for use from the prior fiscal year.

Total Budgetary Statutory Authorities are forecasted to increase by $192 million, or 23%, from $825 million in 2015-2016 to $1,017 million in 2016-2017. This increase is attributable to the following:

• $128 million increase for the disbursements to provinces under the Softwood Lumber Products Export Charge Act, 2006;
• $52 million increase in payments under the Children’s Special Allowances Act due to an increase due to the recently implemented Enhanced Universal Child Care Benefit (UCCB) program and to an enrichment to the base Children's Special Allowance (CSA) benefit and supplements for the 2014 benefit year (July 2015 to June 2016);
• $14 million increase in the contributions to employee benefit plans; and
• $3 million decrease in cost recovery revenues to be received through the conduct of CRA operations, primarily attributable to initiatives administered on behalf of the Canada Border Services Agency and the Province of Ontario.

Analysis of Expenditures

A two-year comparison of the CRA's annual net authorities available for use against first quarter net expenditures as at June 30 is presented in Figure 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 First Quarter by Authority

As displayed in the Statement of Authorities, the first quarter expenditures have increased by $80 million, from $969 million in 2015-2016 to $1,049 million in 2016-2017. The components of this year-over-year change are discussed below.

The CRA’s first quarter net Vote 1 Operating Expenditures have increased by $34 million, or 4%, from $777 million in 2015-2016 to $811 million in 2016-2017. Timing differences account for the majority of the variance; timing in payment of invoices for the Department of Justice which introduced a new government wide approach to billing, requiring they collect 50% in advance, accounts for $23 million, and timing in the spending of revenues account for $12 million and is offset by an equivalent decrease of expenditures under Total Budgetary Statutory Authorities. The annual revenue forecast for 2016-2017 is consistent with that of 2015-2016 and both variances will be resolved by year-end.

The CRA’s first quarter Vote 5 Capital Expenditures have decreased by $1 million from $12 million in 2015-2016 to $11 million in 2016-2017. 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 increased by $47 million, or 26%, from $181 million in 2015-2016 to $228 million in 2016-2017. This increase is largely attributable to a $45 million increase in disbursements to provinces under the Softwood Lumber Products Export Charge Act, 2006.

B) Expended in the First Quarter by Standard Object

As illustrated in the Departmental Budgetary Expenditure tables, the CRA’s personnel expenditures have decreased by $18 million, or 2%, from $788 million in 2015-2016 to $770 million in 2016-2017. The variance stems from normal fluctuations in expenditures from quarter to quarter as well as a $14 million decrease in severance payments.

Professional and special services expenditures have increased by $27 million, or 36%, from $76 million in 2015-2016 to $103 million in 2016-2017. The variance is mainly attributable to timing in the payment of invoices for the Department of Justice which introduced a new government wide approach to billing, requiring they collect 50% in advance. The variance will be resolved by year-end.

Purchased repair and maintenance expenditures have increased by $10 million, from $8 million in 2015-2016 to $18 million in 2016-2017. The increase is primarily the result of an in-year change in 2015-2016 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".

Transfer payments have increased by $55 million, or 93%, from $60 million in 2015-2016 to $115 million in 2016-2017. The increase is attributable to an increase of $11 million in Children's Special Allowance payments due to an enrichment to the base benefit and supplements for the 2014 benefit year (July 2015 to June 2016) as well as an increase of $45 million in disbursements to provinces under the Softwood Lumber Export Charge Act, 2006.

Transportation expenditures have increased by $6 million, or 19% from $34 million in 2015-2016 to $40 million in 2016-2017. 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. In addition, various notices were released early in order to mitigate the impact of a possible postal disruption.

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 introduced a two year operating budget freeze which was in effect until March 31, 2016. Operating budgets for all government departments and agencies were frozen at 2014-2015 levels and as a result, departments and agencies were required to absorb the cost of wage increases that took 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. A tentative agreement was reached between CRA and PSAC and remains to be ratified. Contract negotiations between PIPSC and the CRA are ongoing. The CRA established a provision to cover the entire amount for collective bargaining increases, therefore mitigating any risk to the Agency.

Significant changes in relation to operations, personnel and programs

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 which the CRA has implements and administered.

The CRA is internally risk managing its Budget 2016 initiatives and is seeking incremental funding through Supplementary Estimates B and C. Budget 2016 is focused on cracking down on tax evasion and combatting tax avoidance, enhancing tax collections, client focused services for Canadians and Canadian businesses, and the implementation and administration of various tax measures.

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 2016-2017 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 $210 million at maturity in 2016-2017.

Approval by Senior Officials

Approved by:

[original signed by]

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Bob Hamilton, Commissioner

[original signed by]

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Roch Huppé, Chief Financial Officer

Ottawa, Canada
Date: