Canada Revenue Agency Quarterly Financial Report

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

For the quarter ended December 31, 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 have been 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 second 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:

• A reduction identified as part of the Budget 2012 Spending Review, $56 million (excluding contributions to employee benefit plans);
• A planned decrease in funding for the implementation of the Harmonized Sales Tax (HST) for Ontario, British Columbia (BC) and the Affordable Living Tax Credit for Nova Scotia, $28 million;
• The return of funding previously provided for the ongoing administration of the Harmonized Sales Tax in British Columbia, $16 million;
• A transfer to the Capital Expenditure Authority (Vote 5) to align the CRA's base spending authorities with the planned acquisitions, $12 million;
• A decrease in funding for government advertising programs, $2 million;
• An increase in authorities available for use from the prior fiscal year, $43 million;
• Incremental funding received for the redesign of the personal income tax processing system, $8 million; and
• An increase related to adjustments in accommodation and real property services provided by Public Works and Government Services, $11 million.

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:

• An increase in authorities available for use from the prior fiscal year, $9 million;
• The above-noted vote realignment, which transferred $12 million from the CRA's Operating Expenditure Authority; and
• Incremental funding received for the redesign of the personal income tax processing system, $6 million.

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:

• A decrease in the contributions to employee benefit plans, $14 million;
• A 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, $13 million;
• An increase for disbursements to provinces under the Softwood Lumber Products Export Charge Act , 2006, $3 million; and
• An increase in payments under the Children's Special Allowances Act, $5 million.

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.

Certain components of the quarterly year-over-year expenditure variances are attributable to timing differences in payments, 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 decreased by $58 million, or 6%, from $1,055 million in 2012-2013 to $997 million in 2013-2014. The components of this year-over-year change are discussed below.

At Quarter 3, the CRA's net Vote 1 Operating Expenditures have decreased by $44 million, or 6%, from $779 million in 2012-2013 to $735 million in 2013-2014. This reduction is primarily related to the one-time severance cashouts, totalling some $30 million, paid to employees affiliated with the Professional Institute of the Public Service Canada (PIPSC) in the previous fiscal year. In addition, legal services costs in the third quarter decreased by $8 million year-over-year due to timing differences in billing.

Third quarter Vote 5 Capital Expenditures have increased by $5 million, from $13 million in 2012-2013 to $18 million in 2013-2014. This increase is the result of year-over-year changes in the nature of the CRA's planned investments. In fiscal year 2013-2014, CRA has a number of large-scale projects, one of them being the redesign of the personal income tax processing system, that require substantial investments in the development of an information technology system to facilitate an efficient program delivery.

Expenditures for Total Budgetary Statutory Authorities have decreased by $20 million, or 8%, from $264 million in 2012-2013 to $244 million in 2013-2014. This is mainly caused by lower Softwood Lumber disbursements to the provinces, which can fluctuate from year to year depending on market conditions.

B) Expended in the Third Quarter by Standard Object

As illustrated in the Departmental Budgetary Expenditures table, the CRA's personnel expenditures in the third quarter have decreased by $22 million, or 3%, from $812 million in 2012-2013 to $790 million in 2013-2014. This reduction is primarily associated with the one-time severance payments made to PIPSC members in the prior fiscal year, partially offset by wage increases in 2013-14.

Professional and special services expenditures have decreased by $11 million, or 12%, from $92 million in 2012-2013 to $81 million in 2013-2014. This is mainly related to the timing of legal services costs, as expenditures were incurred earlier in 2013-2014 than in the previous fiscal year.

Transfer payments have decreased by $19 million, or 18%, from $103 million in 2012-2013 to $84 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 Softwood Lumber Products Export Charge Act, the disbursements are driven by market conditions and can fluctuate from year to year.

C) Year-to-Date Expenditures by Authority

As displayed in the Statement of Authorities, the year-to-date expenditures have decreased by $177 million, or 6%, from $3,138 million in 2012-2013 to $2,961 million in 2013-2014. The components of this year-over-year decrease are discussed below.

Year-to-date Net Vote 1 Operating Expenditures have decreased by $68 million, or 3%, from $2,338 million in 2012-2013 to $2,270 million in 2013-2014. The one-time disbursements related to the elimination of severance benefits in the previous fiscal year for employees affiliated with PIPSC account for the majority of this decrease, along with the transfer of employees to Shared Services Canada (SSC).

Year-to-date Vote 5 Capital Expenditures have increased by $15 million from $28 million to $43 million. This is primarily due to an increase in CRA's planned investments in information technology systems in fiscal year 2013-2014.

Year-to-date expenditures for Total Budgetary Statutory Authorities have decreased by $123 million, or 16%, from $772 million in 2012-2013 to $649 million in 2013-2014. This is the result of lower Softwood Lumber disbursements, partially offset by higher spending under Section 60 of the Canada Revenue Agency Act, for cost recovery revenues received.

D) Year-to-Date Expenditures by Standard Object

As illustrated in the Departmental Budgetary Expenditures table, year-to-date personnel expenditures have decreased by $44 million, or 2%, from $2,423 million to $2,379 million. As previously noted, this reduction is primarily associated with the severance benefits paid to PIPSC employees in the previous fiscal year, as well as the transfer of employees to SSC.

Professional and special services expenditures have grown by $11 million, from $223 million to $234 million, with this increase primarily attributable to timing differences in payments that are expected to be resolved by the end of the fiscal year.

Purchased repair and maintenance year-to-date expenditures have decreased by $13 million from $29 million to $16 million mainly related to the acquisition of multi-year software licenses in 2012-2013; a similar purchase will not take place this year.

Year-to-date transfer payments have decreased by $123M, from $333 million to $210 million, due to lower Softwood Lumber disbursements to the provinces.

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 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 68 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 introduced 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. For fiscal year 2013-2014, the implementation and administration costs of $12 million (excluding employee benefit plans and accommodations) associated with those measures are being managed within the CRA's existing Parliamentary appropriations. 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 to make it easier for Canadians and businesses to deal with their government and to 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 did not incorporate measures announced in Budget 2012, which was presented to 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 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, and increasing internet filing of individual returns by tax preparers. 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 existing call centre activities. This also provides clients with a single window into the CRA for all enquiries.

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 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.

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: 2014-02-27