Canada Revenue Agency Quarterly Financial Report (Revised)

For the quarter ended December 31, 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, Supplementary Estimates B, 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 and Supplementary Estimates B 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 efficiency 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, Supplementary Estimates B released on December 17, 2014 and 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 $389 million, or 9%, from $4,577 million in 2013-2014 to $4,188 million in 2014-2015. The components of this reduction are outlined below.

The Vote 1 Gross Operating Expenditure Authority decreased by $95 million, or 3%, from $3,631 million in 2013-2014 to $3,536 million in 2014-2015. This is mainly due to the net effect of the following factors:

• $111 million in efficiency measures (excluding contributions to employee benefit plans) identified as part of Budget 2012;
• $49 million in efficiency measures (excluding contributions to employee benefit plans) recognized as part of Budget 2013 which reviewed the CRA's internal operations in the National Capital Region;
• $19 million transferred to the Shared Services Canada (SSC) organization to acquire and provide end user software on behalf of the CRA as well as adjustments to funding previously transferred;
• $18 million adjustment in accommodation and real property services provided by Public Works and Government Services Canada as a result of a technical adjustment following the review of the Agency's multi-year occupancy requirements;
• $8 million planned funding adjustment for the implementation of the Harmonized Sales Tax (HST) for Ontario, British Columbia (BC) and the Affordable Living Tax Credit for Nova Scotia;
• $6 million for the return of funding previously provided for the ongoing administration of the Harmonized Sales Tax in British Columbia;
• $30 million increase in authorities available for use from the prior fiscal year;
• $27 million increase to implement and administer measures announced in Budget 2014, aimed at improving the integrity of the tax system as well as strengthening tax compliance;
• $20 million increase for a vote realignment from the Capital Expenditure Authority (Vote 5) to align the CRA's base spending authorities with planned acquisitions;
• $19 million increase for a wage settlement which came into effect between the operating budget freezes announced in Budget 2010 and Budget 2014;
• $14 million increase from Public Works and Government Services Canada related to the change in accommodations requirements;
• $11 million increase for the implementation of tax measures announced in Budget 2013, including enhancements to the Scientific Research and Experimental Development tax incentive program;
• $5 million increase for the implementation of tax measures announced in Budget 2012 including the extension of the Hiring Credit for Small Business and increased compliance activities; and
• $4 million increase for the implementation of tax measures, including the implementation of the intergovernmental agreement between the Canada and the United States to enhance the exchange of tax information, announced in Budget 2014.

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.

The Vote 5 Capital Expenditure Authority increased by $13 million, or 12%, from $110 million in 2013-2014 to $123 million in 2014-2015, as a result of the following adjustments:

• $19 million in incremental funding received for the redesign of the individual income tax processing system;
• $10 million increase in authorities available for use from the prior fiscal year;
• $4 million increase for the implementation of tax measures announced in both Budget 2013 and Budget 2014; and
• $20 million for the vote realignment which transferred funds from CRA's Capital Expenditure Authority to the Operating Expenditure Authority.

Total Budgetary Statutory Authorities are forecast to decrease by $318 million, or 21%, from $1,157 million in 2013-2014 to $839 million in 2014-2015. This reduction is attributable to the following:

• $283 million adjustment in the Department of Finance's forecast of the disbursements to provinces under the Softwood Lumber Products Export Charge Act, 2006. Following the upward adjustment of prices for softwood lumber no export charges are expected to be levied;
• $29 million change in the contributions to employee benefit plans;
• $14 million modification 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; and
• $8 million increase in payments under the Children's Special Allowances Act.

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 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 decreased by $22 million, or 2%, from $997 million in 2013-2014 to $975 million in 2014-2015. The components of this year-over-year change are discussed below.

The Agency's third quarter net Vote 1 Operating Expenditures have decreased by $16 million, or 2%, from $735 million in 2013-2014 to $719 million in 2014-2015. This reduction is primarily the result of a year-over-year decrease in the Agency's salary expenditures which is consistent with Government-wide decisions. Additionally, the cost of the Agency's accommodations and real property services, provided by Public Works and Government Services Canada, has been reduced as noted in the Analysis of Authorities section.

Third quarter Vote 5 Capital Expenditures are relatively consistent year-over-year, increasing by $1 million from $18 million in 2013-2014 to $19 million in 2014-2015.

Expenditures for Total Budgetary Statutory Authorities have decreased by $7 million, or 3%, from $244 million in 2013-2014 to $237 million in 2014-2015. This decrease is driven by reduced Softwood Lumber disbursements to the provinces of $26 million and lower contributions to employee benefit plans of $9 million. These reductions are partially offset by an increase in the collection of cost recovery revenues which are $27 million higher in the third quarter of 2014-2015 over 2013-2014. This is purely the result of timing differences as year-to-date cost recovery revenues remain consistent with last year.

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 $6 million, or 1%, from $790 million in 2013-2014 to $784 million in 2014-2015. This decrease is the accumulation of reduced operating salary expenditures and contributions to employee benefit plans offset by an increase in the collection of cost recovery revenues.

Transportation and communications have increased by $4 million, or 17%, from $22 million in 2013-2014 to $26 million in 2014-2015, relating to higher volumes in mail outs and increased postage rates as noted in the second quarter report.

Rental expenditures have increased by $8 million, or 10%, from $87 million in 2013-2014 to $95 million in 2014-2015. This increase is primarily the result of a mid year review which re-classified $12 million in year-to-date expenditures from Standard Object Purchased, repair and maintenance. This is partially offset by a reduction in the Agency's accommodation and real property services of $5 million.

Purchased, repair and maintenance expenditures have decreased by $12 million, from $5 million in 2013-2014 to negative $7 million in 2014-2015 as a result of the re-classified expenditures noted above.

Transfer payments have decreased by $26 million, or 32%, from $84 million in 2013-2014 to $58 million in 2014-2015, 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 the Statement of Authorities, the year-to-date expenditures have increased by $31 million, or 1%, from $2,961 million in 2013-2014 to $2,992 million in 2014-2015. The components of this year-over-year increase are discussed below.

Net Vote 1 Operating year-to-date expenditures have increased by $82 million, or 4%, from $2,270 million in 2013-2014 to $2,352 million in 2014-2015. As noted in previous reports, the majority of this increase is attributable to the one-time transition payment which was made as a result of the Government of Canada's new salary payment in arrears model.

Year-to-date Vote 5 Capital Expenditures have increased by $5 million, or 12%, from $43 million in 2013-2014 to $48 million in 2014-2015. This fluctuation in expenditures is not unusual as the quarterly distribution of capital expenditures may vary from year-to-year, depending on the status of major investment projects and the timing of capital procurements.

Year-to-date expenditures for Total Budgetary Statutory Authorities have decreased by $56 million, or 9%, from $648 million in 2013-2014 to $592 million in 2014-2015. This change is the result of lower Softwood Lumber disbursements and a reduction in employee benefit plan contributions.

D) Year-to-Date Expenditures by Standard Object

As illustrated in the Departmental Budgetary Expenditures table, the increase in year-to-date net expenditures of $31 million is primarily associated with an increase in Other Subsidies and payments of $91 million which relates to the one-time transition payment noted above, offset by reductions in Transfer payments of $34 million and Personnel of $32 million.

As noted in the previous section, variances under the Rentals and Purchased, repair and maintenance Standard Objects are the result of the $12 million transfer of expenditures between the two. Under Standard Object Rentals, the increase is offset by the reduction in the Agency’s accommodation and real property services of $13 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) expired in December 2014, and contract negotiations between the two parties have begun.

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 efficiencies totalling approximately $58 million in 2014-2015, growing to $61 million in 2015-2016. These efficiencies 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 measures can be categorized under three broad themes - streamlining internal services, optimizing IT resources, and improving organizational alignment.

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 these measures were managed within the CRA's existing Parliamentary appropriations. For fiscal year 2014-2015, the CRA obtained funding through Supplementary Estimates B of $13 million (excluding employee benefit plans and accommodations). 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. The CRA received funding of $27 million (excluding employee benefit plans and accommodations) through Supplementary Estimates B to administer initiatives related to: Registered Retirement Savings Plan (RRSP) Excess Contributions and T1-OVP (individual tax return form for RRSP excess contributions); 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.

A number of other tax measures were also introduced as part of Budget 2014. For fiscal year 2014-2015, the CRA received $6 million (excluding employee benefit plans and accommodations) to administer these announced tax measures including; investments to modernize the information technology system to enable charities to apply for registration and file returns electronically, strengthening compliance with GST/HST registration and the implementation of the intergovernmental agreement between the United States and Canada which will enhance the exchange of tax information. There are no material financial or non financial impacts to report at this time.

Budget 2012 Efficiency Measures Implementation

This section provides an overview of the efficiency 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 return to a balanced budget and, as one of the federal government's largest institutions; the CRA is a significant contributor, with planned efficiencies of $253 million at maturity, representing 2,568 full time equivalents (FTEs). In realizing these efficiencies, 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.

In 2014-2015, as a result of Budget 2012 efficiency measures, the CRA's spending authorities have been adjusted by $182 million, representing 1,681 FTEs. This change of $123 million and 884 FTEs from 2013-2014 has been 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 throughout the year, and a reduction to the CRA accommodations footprint.

Over the last couple of years, the CRA placed 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 the required expertise remains within the Agency. This plan utilizes 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 efficiency 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, are being internally managed within the CRA. There are no financial or non financial impacts to report at this time.

Approval by Senior Officials

Approved by:

Ottawa, Canada
Date: February 26, 2015