Canada Revenue Agency Quarterly Financial Report

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

For the quarter ended September 30, 2013

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, as well as Canada's Economic Action Plan ( Budget 2012 and Budget 2013 ).

Further details on the Canada Revenue Agency's (CRA) program activities can be found in the Report on Plans and Priorities and the 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 2013-2014 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 in the form of statutory spending authority for specific purposes.

As part of the Parliamentary business of supply, the Main Estimates must be tabled in Parliament on or before March 1 preceding the new fiscal year. Budget 2013 was tabled in Parliament on March 21, 2013, after the tabling of the Main Estimates on February 25, 2013. As a result, the measures announced in the Budget 2013 could not be reflected in the 2013-2014 Main Estimates. In fiscal year 2013-2014, frozen allotments will be established by Treasury Board authority in departmental votes to prohibit the spending of funds already identified as savings measures in Budget 2013.  In future years, the changes to departmental authorities will be implemented through the Annual Reference Level Update, as approved by Treasury Board, and reflected in the subsequent Main Estimates tabled in Parliament.

Budget 2012 was tabled in Parliament on March 29, 2012, after the tabling of the Main Estimates on February 28, 2012. As a result, the measures announced in the Budget 2012 could not be reflected in the 2012-2013 Main Estimates. In fiscal year 2012-2013, frozen allotments were established by Treasury Board authority in departmental votes to prohibit the spending of funds already identified as savings measures in Budget 2012. In 2013-2014, the changes to departmental authorities were reflected in the 2013-2014 Main Estimates tabled in Parliament.

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 of the current fiscal period in relation to the Main Estimates for which full supply was released on June 20, 2013, including authorities available for use from the prior fiscal year.

As shown in the Statement of Authorities, the CRA's total Budgetary Authorities available for use have decreased by $46 million, or 1%, from $4,623 million in 2012-2013 to $4,577 million in 2013-2014. The components of this reduction, which remain unchanged from the first quarter report, are outlined below.

The Vote 1 Gross Operating Expenditure Authority decreased by $55 million, or 1%, from $3,686 million in 2012-2013 to $3,631 million in 2013-2014. This is mainly due to the net effect of the following factors:

Revenues Credited to the Vote related to the administration of the Canada Pension Plan (CPP) and Employment Insurance (EI) programs decreased slightly from $322 million in 2012-2013 to $321 million in 2013-2014.

The Vote 5 Capital Expenditure Authority increased by $27 million, or 32%, from $83 million in 2012-2013 to $110 million in 2013-2014, as a result of the following adjustments:

Total Budgetary Statutory Authorities are forecasted to decrease by $19 million, or 2%, from $1,176 million in 2012-2013 to $1,157 million in 2013-2014. 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 second quarter net expenditures as at September 30 is presented in Figure 1.

Figure 1: Annual Authorities against Year-to-Date and Second Quarter Expenditures
2013-2014 2012-2013
Authorities 4576.7 4623.3
Year-to-Date Expenditures 1964.8 2082.7
Second Quarter Expenditures 1032.0 1040.4

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 Second Quarter by Authority

As displayed in the Statement of Authorities, the second quarter expenditures have decreased by $8 million, or 1%, from $1,040 million in 2012-2013 to $1,032 million in 2013-2014. The components of this year-over-year change are discussed below.

The Agency's second quarter net Vote 1 Operating Expenditures have increased by $21 million, or 3%, from $780 million in 2012-2013 to $801 million in 2013-2014. This is primarily driven by changes in personnel costs, where salary expenditures are higher in the second quarter in order to adjust for a temporary salary understatement which occurred in the first quarter. This increase is partially offset by a reduction in salary costs as Shared Services Canada (SSC) employees are no longer being paid by the CRA in 2013-2014.

Second quarter Vote 5 Capital Expenditures have increased by $1 million, or 10%, from $14 million in 2012-2013 to $15 million in 2013-2014. This fluctuation in expenditures is not unusual as the quarterly distribution of capital expenditures changes from year to year, depending on the status of major investment projects and the timing of capital procurements.

Expenditures for Total Budgetary Statutory Authorities have decreased by $31 million, or 13%, from $247 million in 2012-2013 to $216 million in 2013-2014. This is mainly caused by lower Softwood Lumber disbursements to the provinces, which are driven by various market conditions, and can fluctuate from year to year, along with lower contributions to employee benefit plans due to the transfer of employees to SSC. This reduction is partially offset by higher spending of cost recovery revenues received pursuant to Section 60 of the Canada Revenue Agency Act.

B) Expended in the Second Quarter by Standard Object

As illustrated in the Departmental Budgetary Expenditures table, the CRA's personnel expenditures in the second quarter have increased by $38 million, or 5%, from $802 million in 2012-2013 to $840 million in 2013-2014. As mentioned above, personnel costs in the second quarter are higher in order to adjust for a temporary understatement which took place in the first quarter. This amount is partially offset by a reduction in personnel costs as the CRA is no longer responsible for administering the pay and benefits of SSC employees in 2013-2014.

Professional and special services expenditures have increased by $4 million, or 5%, from $76 million in 2012-2013 to $80 million in 2013-2014. This is mainly related to higher legal services costs as well as other increases resulting from timing differences that are expected to be resolved by the end of the fiscal year.

Transfer payments have decreased by $49 million, or 44%, from $112 million in 2012-2013 to $63 million in 2013-2014, primarily due to a reduction in Softwood Lumber disbursements made to the provinces. As per the Softwood Lumber agreement and the underlying Softwood Lumber Act, the disbursements are driven by various market conditions and can fluctuate from year to year.

C) Year-to-Date Expenditures by Authority

As displayed in in the Statement of Authorities, the year-to-date expenditures have decreased by $118 million, or 6%, from $2,083 million in 2012-2013 to $1,965 million in 2013-2014. The components of this year-over-year decrease are discussed below.

Net Vote 1 Operating year-to-date Expenditures have decreased by $24 million, or 2%, from $1,559 million in 2012-2013 to $1,535 million in 2013-2014. This decrease is mainly associated with reduced salary expenditures from the transfer of employees to SSC, partially offset by higher non-personnel costs which, for the most part, is attributable to differences in the timing of expenditures.

Year-to-date Vote 5 Capital Expenditures have increased by $9 million from $16 million to $25 million. This variance is the result of year over year changes in the timing and nature of the CRA's planned investments.

Year-to-date expenditures for Total Budgetary Statutory Authorities have decreased by $103 million, or 20%, from $508 million in 2012-2013 to $405 million in 2013-2014. As previously noted, this decrease is the result of lower Softwood Lumber disbursements and lower employee benefit plans contributions.

D) Year-to-Date Expenditures by Standard Object

As illustrated in the Departmental Budgetary Expenditures table, the reduction in year-to-date expenditures of $118 million is primarily associated with decreases in Transfer payments of $105 million, Personnel of $23 million and Purchased repair and maintenance of $15 million, partially offset by an increase in Professional and special services of $21 million and Transportation and communications of $3 million.

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 Agency from the exposure to these risks and the associated financial impacts.

The collective agreement between the CRA and the Public Service Alliance of Canada (PSAC) expired in October 2012, and contract negotiations between the two parties are ongoing.

Significant changes in relation to operations, personnel and programs

In August 2011, the Government of BC announced that the province would eliminate the HST and return to a provincial sales tax in conjunction with the goods and services tax (GST).  The return to the GST in BC occurred on April 1, 2013. The CRA worked with both the Department of Finance Canada and the BC Ministry of Finance to identify the administrative steps and processes necessary to facilitate the province's transition out of the HST. BC agreed to make job offers to its former employees who had already transitioned to the CRA. Thirty employees resumed employment with BC in April 2013, and 71 employees are expected to transition back to the province by April 1, 2014. As a result of this decision, $16 million (excluding employee benefit plans and accommodations) in funding associated with the administration of HST in BC was returned to the Treasury Board for the 2013-2014 fiscal year.

In 2011-2012, the Government of Canada announced the creation of SSC, a new organization which represents a government-wide approach to managing information technology. For fiscal year 2013-2014, $150 million (excluding employee benefit plans and accommodations) have been transferred to SSC, along with some 700 FTEs (full-time equivalents) responsible for e-mail, data centres and network services. Due to system limitations and complexities arising from the CRA's separate employer status, SSC was not in a position to begin administering the pay files of these transferred CRA employees as of April 1, 2013. The CRA therefore continued to administer the pay and benefits for these employees until the fourth quarter of 2012-2013 and recovered the associated expenditures from SSC throughout the year.

In April 2013, an Order in Council provided SSC with a new mandate to acquire and provide end-user software and hardware to departments and agencies. In 2013-2014, all funding intended for software purchases will be placed in frozen allotments ($12 million for the CRA) and such expenditures incurred during the year will be transferred to SSC in the fourth quarter. The transfer of funding and expenditures associated with end-user hardware acquisitions is expected to take place next fiscal year.

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) and, as a result, has identified additional 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 organization to conduct business more efficiently, will not impact the CRA's service levels, compliance activities, or the security of taxpayer information. The savings can be categorized under three broad themes – streamlining internal services, optimizing IT resources, and improving organizational alignment. Of the 600 positions to be eliminated in the NCR, approximately 70% will be achieved through existing vacancies and other forms of attrition. There are approximately 10,000 CRA employees within the NCR, and between 500 to 600 leave voluntarily each year. Given this environment, the CRA is well positioned to support its employees through this change.

In addition, Budget 2013 proposes a number of tax measures to close tax loopholes, address aggressive tax planning, reduce international tax evasion and aggressive tax avoidance, along with improving the integrity of the tax system. The required incremental funding for implementing and administering the various Budget 2013 tax measures is the subject of ongoing discussions with officials of the Department of Finance and the Treasury Board Secretariat. There are no material financial nor non-financial impacts to report at this time.

Budget 2012 Implementation

This section provides an overview of the savings measures announced in Budget 2012 that are being implemented in order to refocus government and programs: make it easier for Canadians and businesses to deal with their government; and modernize and reduce the back office.

The Government of Canada has set out a clear commitment to reduce the deficit and, as one of the federal government's largest institutions; the CRA will be a significant contributor, with planned savings of $253 million at maturity, and the elimination of 2,568 FTEs. The CRA has committed to modernizing its operations and reducing red tape to enhance services to Canadians while reducing its overall costs. There are no financial risks or uncertainties associated with the announced measures which would affect the CRA's financial plan for the current quarter.

As previously noted, the prior year's authorities do not incorporate measures announced in Budget 2012, which was tabled in Parliament after the tabling of the 2012-2013 Main Estimates. Instead, frozen allotments were established by Treasury Board to prohibit the spending of funds already identified as savings measures. The 2013-2014 Main Estimates reflect a reduction in authorities of $59 million for Budget 2012 savings initiatives.

In 2012-2013, the CRA achieved savings of $28 million and eliminated 399 FTEs. Initial savings primarily focused on encouraging taxpayers and benefit recipients to increase their use of electronic channels when interacting with the CRA. As part of the modernization of its service offerings, the CRA replaced payment and enquiry counter services at 28 offices with online service options and adjusted its outreach services to an improved suite of self-service options. Furthermore, in June 2012, Parliament passed the Jobs, Growth and Long-Term Prosperity Act, which implemented many of the measures announced in Budget 2012 , and contained two areas of cost reduction for the CRA: the authority for the CRA to use regular mail instead of registered mail when reminding Canadians, who have not filed their income tax and benefit returns on time, of their obligations; and the requirement that tax preparers, who prepare more than 10 returns for a fee, file those returns electronically.

In 2013-2014, the CRA will achieve savings of $59 million and will eliminate 797 FTEs. This represents an increase of $31 million over the prior year, and is related to a number of initiatives, including the centralization of a virtually managed national intranet publishing model, the e-Filing of tax returns by tax preparers, and e-Payments.  In addition, a new knowledge and research program has been implemented, and the forms and publications ordering workloads were transferred to the CRA's general enquiries call centres, which has allowed the CRA to build upon its call centre activities. This also provides clients with a single window into the CRA for all enquiries.

At Quarter 2, the year-over-year change in expenditures attributable to Budget 2012 savings measures is not significant. Over the last couple of years, in anticipation of budget restraint measures, the CRA had already significantly reduced new hiring, and has taken advantage of vacancies created by the retirement of approximately 1,300 employees across the country every year. The CRA has developed a multi-year human resources plan to manage reductions through attrition, vacancy management, decreases in new hiring, and the management of term employment, as well as workforce adjustment of affected employees when necessary. The majority of the employees impacted by Budget 2012 savingsmeasures have either been placed in other positions within the CRA, or have left the organization on a voluntary basis.

A number of tax measures were introduced as part of Budget 2012. For fiscal year 2012-2013, the implementation and administration costs of $13 million (excluding employee benefit plans and accommodations) associated with those measures were managed within the CRA's existing Parliamentary appropriations. For fiscal year 2013-2014, the CRA is seeking supplementary funding of $6 million (excluding employee benefit plans and accommodations) for the following Budget 2012 tax measures: the Extension of Hiring Credit for Small Business; Enhancing Transparency and Accountability for Charities; and Pooled Registered Pension Plans. The remaining tax measures, which are associated with improvements to both the Scientific Research and Experimental Development program and the Registered Disability Savings Plans program, will be internally managed within the CRA. There are no financial nor non-financial impacts to report at this time.

Approval by Senior Officials

Approved by:

[original signed by]                                      [original signed by]
___________________________                    _______________________________
Andrew Treusch, Commissioner                       Roch Huppé, Chief Financial Officer

Ottawa, Canada
Date: November 29, 2013

Statement of Authorities (unaudited) - Fiscal year 2013-2014
(in thousands of dollars)
  Total available for use for the year ending March 31, 2014 Footnote 1 , Footnote 2 Used during the quarter ended
September 30, 2013
Year to date used at quarter-end
Vote 1 - Operating expenditures
Gross Operating expenditures 3,630,786 884,019 1,700,349
Revenues netted against expenditures minus (321,558) minus (82,596) minus (165,192)
Net Vote 1 - Operating expenditures 3,309,228 801,423 1,535,157
Vote 5 - Capital expenditures 110,012 14,882 24,889
Budgetary Statutory Authorities
Contributions to employee benefit plans 442,552 110,638 221,276
Disbursements to provinces under the Softwood Lumber Products Export Charge Act, 2006 283,000 3,472 6,070
Children's Special Allowance payments (Children's Special Allowances Act) 238,000 59,455 119,474
Spending of revenues received through the conduct of its operations pursuant to section 60 of the Canada Revenue Agency Act 193,779 41,936 57,374
Minister's salary and motor car allowance 79 20 39
Court awards - Tax Court of Canada - 101 438
Spending of proceeds from the disposal of surplus Crown assets - 82 106
Payments under the Energy Costs Assistance Measures Act - - 1
Total Budgetary Statutory Authorities 1,157,410 215,704 404,778
Total Budgetary Authorities 4,576,650 1,032,009 1,964,824
Statement of Authorities (unaudited) - Fiscal year 2012-2013
(in thousands of dollars)
  Total available for use for the year ending March 31, 2013 Footnote 1 , Footnote 3 Used during the quarter ended
September 30, 2012
Year to date used at quarter-end
Vote 1 - Operating expenditures
Gross Operating expenditures 3,685,918 860,163 1,720,382
Revenues netted against expenditures minus (322,368) minus (80,620) minus (161,239)
Net Vote 1 - Operating expenditures 3,363,550 779,543 1,559,143
Vote 5 - Capital expenditures 83,433 13,512 15,469
Budgetary Statutory Authorities
Contributions to employee benefit plans 456,440 114,110 228,220
Disbursements to provinces under the Softwood Lumber Products Export Charge Act, 2006 280,000 51,379 111,216
Children's Special Allowance payments (Children's Special Allowances Act) 233,000 60,411 119,081
Spending of revenues received through the conduct of its operations pursuant to section 60 of the Canada Revenue Agency Act 206,769 21,294 48,909
Minister's salary and motor car allowance 78 19 39
Court awards - Tax Court of Canada - 140 583
Spending of proceeds from the disposal of surplus Crown assets - 25 44
Payments under the Energy Costs Assistance Measures Act - - 1
Total Budgetary Statutory Authorities 1,176,287 247,378 508,093
Total Budgetary Authorities 4,623,270 1,040,433 2,082,705
Departmental Budgetary Expenditures by Standard Objects (unaudited)
Fiscal year 2013-2014

(in thousands of dollars)
  Planned expenditures for the year ending March 31, 2014 Footnote 4 Expended during the quarter ended September 30, 2013 Year to date used at quarter-end
Expenditures:
Personnel 3,127,862 840,232 1,588,886
Transportation and communications 231,610 32,016 60,720
Information 11,029 685 1,014
Professional and special services 376,412 79,784 152,647
Rentals 362,840 88,095 175,217
Purchased repair and maintenance 150,271 4,193 10,578
Utilities, materials and supplies 48,252 3,725 7,672
Acquisition of machinery and equipment 63,417 2,807 7,364
Transfer payments 521,000 62,927 125,545
Other subsidies and payments 5,515 141 373
Total Gross Budgetary Expenditures 4,898,208 1,114,605 2,130,016
Less: Revenues netted against expenditures 321,558 82,596 165,192
Total Net Budgetary Expenditures 4,576,650 1,032,009 1,964,824
Departmental Budgetary Expenditures by Standard Objects (unaudited)
Fiscal year 2012-2013

(in thousands of dollars)
  Planned expenditures for the year ending March 31, 2013 Footnote 5 Expended during the quarter ended September 30, 2012 Year to date used at quarter-end
Expenditures:
Personnel 3,192,062 801,740 1,611,530
Transportation and communications 204,992 31,108 57,215
Information 11,818 831 1,486
Professional and special services 364,390 76,173 131,602
Rentals 399,898 86,509 172,771
Purchased repair and maintenance 132,251 5,071 25,628
Utilities, materials and supplies 42,210 3,639 7,545
Acquisition of machinery and equipment 76,252 4,195 5,415
Transfer payments 516,760 111,789 230,297
Other subsidies and payments 5,005 (2) 455
Total Gross Budgetary Expenditures 4,945,638 1,121,053 2,243,944
Less: Revenues netted against expenditures 322,368 80,620 161,239
Total Net Budgetary Expenditures 4,623,270 1,040,433 2,082,705

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