Canada Revenue Agency Quarterly Financial Report

For the quarter ended June 30, 2014

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, as well as Canada's Economic Action Plan (Budget 2012, Budget 2013 and Budget 2014).

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 2014-2015 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 Budget 2013 could not be reflected in the 2013-2014 Main Estimates. In fiscal year 2013-2014, frozen allotments were established by Treasury Board authority in departmental votes to prohibit the spending of funds already identified as savings measures in Budget 2013. In 2014-2015, the changes to departmental authorities have been implemented through the Annual Reference Level Update, as approved by Treasury Board, and reflected in the subsequent 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, 2014, 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 $376 million, or 8%, from $4,577 million in 2013-2014 to $4,201 million in 2014-2015. The components of this reduction are outlined below.

The Vote 1 Gross Operating Expenditure Authority decreased by $150 million, or 4%, from $3,630 million in 2013-2014 to $3,480 million in 2014-2015. 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 from $321 million in 2013-2014 to $310 million in 2014-2015. This $11 million decrease is offset by an equivalent decrease under the Vote 1 Operating Expenditure Authority and is primarily the result of a technical adjustment associated with the administration of employee benefit plans.

The Vote 5 Capital Expenditure Authority increased by $9 million, or 8%, from $110 million in 2013-2014 to $119 million in 2014-2015, as a result of the following adjustments:

Total Budgetary Statutory Authorities are forecast to decrease by $246 million, or 21%, from $1,157 million in 2013-2014 to $911 million in 2014-2015. 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 net expenditures as at June 30 is presented in Figure 1.

Figure 1: Annual Authorities against Year-to-Date Expenditures (in millions of dollars)
2014-2015 2013-2014
Authorities 4200.5 4576.7
First Quarter expenditures 1046.6 932.8

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 First Quarter by Authority

As displayed in the Statement of Authorities, the first quarter expenditures have increased by $114 million, or 12%, from $933 million in 2013-2014 to $1,047 million in 2014-2015. The components of this year-over-year change are discussed below.

At Quarter 1, the CRA's net Vote 1 Operating Expenditures have increased by $135 million, or 18%, from $734 million in 2013-2014 to $869 million in 2014-2015.

The Agency's Vote 5 Capital Expenditures have decreased year-over-year by $10 million due to the delay of the capital settlement process noted above. This decrease is temporary and it is anticipated that the Agency's annual Capital Expenditures will be consistent with 2013-2014 results.

Expenditures for Total Budgetary Statutory Authorities have decreased by $12 million, or 6%, from $189 million in 2013-2014 to $177 million in 2014-2015. This is primarily attributable to a $9 million decrease in contributions to employee benefit plans due to a rate change and fewer FTEs. Additionally, Softwood Lumber disbursements to the provinces decreased as a result of a change in market conditions.

B) Expended in the First Quarter by Standard Object

As illustrated in the Departmental Budgetary Expenditures table, the CRA's personnel expenditures in the first quarter have increased by $39 million, or 5%, from $749 million in 2013-2014 to $788 million in 2014-2015. This increase relates to the temporary understatement of salary accruals in 2013-2014 which is partially offset by a reduction in contributions to employee benefit plans.

Professional and special services expenditures have decreased by $6 million, or 8%, from $73 million in 2013-2014 to $67 million in 2014-2015. The decrease is partially attributable to fluctuations in the monthly distribution of payments made for the administration of GST in the province of Québec in 2013-2014, $4 million. Furthermore, a $1 million decrease is attributable to the timing of first quarter invoices for protection services.

Rental expenditures have decreased by $4 million, or 5%, from $87 million in 2013-2014 to $83 million in 2014-2015 as the result of an adjustment to the Agency's accommodations and real property services provided by Public Works and Government Services Canada. This reduction is consistent with the decrease in authorities previously noted and stems from the review of the Agency's multi-year occupancy requirements.

Purchased repair and maintenance expenditures have increased by $3 million, or 41%, from $6 million in 2013-2014 to $9 million in 2014-2015, the result of timing differences as information technology contracts for middleware were expensed earlier this fiscal year. These contracts remain consistent year-over-year and expenditures are expected to normalize over the remaining quarters.

Acquisition of machinery and equipment expenditures have decreased by $3 million, or 65%, from $5 million in 2013-2014 to $2 million in 2014-2015 as a result of the new mandate for Shared Services Canada (SSC) to acquire and provide end user software to departments and agencies. In 2013-2014, the CRA incurred expenditures for software purchases which were subsequently transferred to SSC in the fourth quarter, a total of $5 million.

Transfer payments have decreased by $4 million, or 6%, from $63 million in 2013-2014 to $59 million in 2014-2015, primarily due to reductions in Softwood Lumber disbursements made to the provinces, $2 million, and Children's Special Allowance payments, $1 million. 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. Similarly, the Children's Special Allowance payments fluctuate as the number of eligible children varies from one year to the next.

Other subsidies and payments have increased by $88 million, primarily the result of the implementation of the Government of Canada's new salary payment in arrears model. As noted above, a one-time transition payment was accounted for in May 2014, totaling $86 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 CRA from the 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. Operating budgets for all government departments and agencies have been frozen at 2014-2015 levels and are in effect until March 31, 2016. As a result, departments and agencies are required to absorb the cost of wage increases that take effect after April 1, 2014.

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.

The collective agreement between the CRA and the Professional Institute of the Public Service of Canada (PIPSC) is in the final contract year, expiring in December 2014.

Significant changes in relation to operations, personnel and programs

As part of Budget 2013, the CRA was one of two government organizations asked to review its internal operations in the National Capital Region (NCR). Through this exercise, the Agency identified savings totalling approximately $58 million in 2014-2015, growing to $61 million in 2015-2016. These savings come from corporate service changes that reduce duplication of effort and allow the organization to conduct business more efficiently. They 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 associated 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 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 were managed within the CRA's existing Parliamentary appropriations. For fiscal year 2014-2015, the CRA will request supplementary funding through Supplementary Estimates ‘B'. There are no material financial or non financial impacts to report at this time.

Through Budget 2014 the Government announced several new initiatives to improve the integrity of the tax system and strengthen tax compliance. CRA will administer initiatives related to Registered Retirement Savings Plan (RRSP) Excess Contributions and T1-OVP, Employer and Goods and Services Tax / Harmonized Sales Tax (GST/HST) Delinquent Filers program, Non-Filer program, and the T1 Processing Review. There are no material financial or 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 programs to make it easier for Canadians and businesses to deal with their government and to modernize and reduce the corporate service functions.

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 is a significant contributor, with planned savings of $253 million at maturity, and the elimination of 2,568 FTEs. In realizing these savings, the CRA has committed to modernizing its operations and reducing red tape to enhance services to Canadians. 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 a result of Budget 2012, CRA's spending authorities were reduced by $28 million in 2012-2013 and $59 million in 2013-2014. Initial savings primarily focused on encouraging taxpayers and benefit recipients to increase their use of electronic channels when interacting with the CRA and replaced payment and enquiry counter services with online service options. Further savings were achieved through a number of administrative efficiencies, including accounts payable and travel efficiencies, centralization of a virtually managed national intranet publishing model, and implementation of a new knowledge and research program. In June 2012, Parliament passed the Jobs, Growth and Long-Term Prosperity Act, which implemented many of the measures announced in Budget 2012. For the CRA, the Act granted authority to use regular mail instead of registered mail when corresponding with Canadians who have not filed their income tax and benefit returns on time, and introduced the requirement that tax preparers, who prepare more than 10 returns for a fee, must file those returns electronically.

In 2014-2015, the CRA's spending authorities will be reduced by $182 million, representing 1,681 FTEs. This represents an increase of $123 million and 884 FTEs over 2013-2014 and will be achieved through a number of initiatives, including: the introduction of a new storage model for the management of CRA records, the consolidation of the management function for some of the tax services offices, tailoring call centre hours to service demands, and a reduction to the CRA accommodations footprint.

Over the last couple of years, in anticipation of budget restraint measures, the CRA had already placed stringent controls over 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 ensure required expertise within the Agency while managing reductions through attrition, vacancy management, controls on 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 2014-2015, the CRA has received supplementary funding of $5 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 or non financial impacts to report at this time.

Approval by Senior Officials

Approved by:

[original signed by]

________________________
Andrew Treusch, Commissioner

[original signed by]

________________________
Roch Huppé, Chief Financial Officer

Ottawa, Canada
Date:
August 20, 2014

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
June 30, 2014
Year to date used at quarter-end
Vote 1 - Operating expenditures      
Gross Operating expenditures 3,480,291 951,707 951,707
Revenues netted against expenditures minus (310,273) minus (82,595) minus (82,595)
Net Vote 1 - Operating expenditures 3,170,018 869,112 869,112
Vote 5 - Capital expenditures 119,159 103 103
Budgetary Statutory Authorities      
Contributions to employee benefit plans 405,915 101,479 101,479
Children's Special Allowance payments (Children's Special Allowances Act) 246,000 58,856 58,856
Spending of revenues received through the conduct of its operations pursuant to section 60 of the Canada Revenue Agency Act 179,309 14,803 14,803
Disbursements to provinces under the Softwood Lumber Products Export Charge Act, 2006 80,000 116 116
Minister's salary and motor car allowance 80 20 20
Court awards - Tax Court of Canada - 2,089 2,089
Spending proceeds from the disposal of surplus Crown Assets - 13 13
Total Budgetary Statutory Authorities 911,304 177,376 177,376
Total Budgetary Authorities 4,200,481 1,046,591 1,046,591
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
June 30, 2013
Year to date used at quarter-end
Vote 1 - Operating expenditures      
Gross Operating expenditures 3,630,786 816,332 816,332
Revenues netted against expenditures minus (321,558) minus (82,596) minus (82,596)
Net Vote 1 - Operating expenditures 3,309,228 733,736 733,736
Vote 5 - Capital expenditures 110,012 10,007 10,007
Budgetary Statutory Authorities      
Contributions to employee benefit plans 442,552 110,638 110,638
Children's Special Allowance payments (Children's Special Allowances Act) 238,000 60,020 60,020
Spending of revenues received through the conduct of its operations pursuant to section 60 of the Canada Revenue Agency Act 193,779 15,438 15,438
Disbursements to provinces under the Softwood Lumber Products Export Charge Act, 2006 283,000 2,599 2,599
Minister's salary and motor car allowance 79 20 20
Court awards - Tax Court of Canada - 337 337
Spending proceeds from the disposal of surplus Crown Assets - 24 24
Total Budgetary Statutory Authorities 1,157,410 189,076 189,076
Total Budgetary Authorities 4,576,650 932,819 932,819
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 June 30, 2014 Year to date used at quarter-end
Expenditures:      
Personnel 2,968,960 788,085 788,085
Transportation and communications 199,974 29,390 29,390
Information 12,798 206 206
Professional and special services 472,849 66,926 66,926
Rentals 311,000 82,635 82,635
Purchased repair and maintenance 95,988 9,006 9,006
Utilities, materials and supplies 41,595 3,855 3,855
Acquisition of machinery and equipment 78,390 1,606 1,606
Transfer payments 326,000 58,972 58,972
Other subsidies and payments 3,200 88,505 88,505
Total gross budgetary expenditures 4,510,754 1,129,186 1,129,186
Less: Revenues netted against expenditures 310,273 82,595 82,595
Total net budgetary expenditures 4,200,481 1,046,591 1,046,591
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 3 Expended during the quarter ended June 30, 2013 Year to date used at quarter-end
Expenditures:      
Personnel 3,127,862 748,656 748,656
Transportation and communications 231,610 28,705 28,705
Information 11,029 329 329
Professional and special services 376,412 72,864 72,864
Rentals 362,840 87,122 87,122
Purchased repair and maintenance 150,271 6,385 6,385
Utilities, materials and supplies 48,252 3,946 3,946
Acquisition of machinery and equipment 63,417 4,557 4,557
Transfer payments 521,000 62,619 62,619
Other subsidies and payments 5,515 232 232
Total gross budgetary expenditures 4,898,208 1,015,415 1,015,415
Less: Revenues netted against expenditures 321,558 82,596 82,596
Total net budgetary expenditures 4,576,650 932,819 932,819

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