Canada Revenue Agency Quarterly Financial Report (Revised)

For the quarter ended September 30, 2014

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

Erratum

Date: December 11, 2014
Location: Statement of Authorities (unaudited), Used during the quarter ended September 30, 2014, Vote 5 – Capital expenditures
Revision: “Vote 5 – Capital expenditures $28,774 thousand” replaces “Vote 5 – Capital expenditures $28,744 thousand”
Rationale for the revision: The Chief Financial Officer and Deputy Head approved document was not correctly reflected in the original web version.

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, which remain unchanged from the first quarter report, 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:

• $111 million reduction (excluding contributions to employee benefit plans) identified as part of the Budget 2012 Spending Review;
• $49 million reduction (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 decrease for transfers 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 decrease related to adjustments 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 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;
• $6 million decrease for the return of funding previously provided for the ongoing administration of the Harmonized Sales Tax in British Columbia;
• $2 million planned decrease in the spending profile for the redesign of the individual income tax processing system;
• $30 million increase in authorities available for use from the prior fiscal year;
• $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; and
• $5 million increase for the implementation of tax measures, including the extension of the Hiring Credit for Small Business and increased compliance activities, announced in the Federal Budget 2012.

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 $9 million, or 8%, from $110 million in 2013-2014 to $119 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; and
• $20 million decrease 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 $246 million, or 21%, from $1,157 million in 2013-2014 to $911 million in 2014-2015. This reduction is attributable to the following:

• $203 million decrease for the disbursements to provinces under the Softwood Lumber Products Export Charge Act, 2006, as the Department of Finance has modified the forecast from 2013-2014 following the rise of prices for softwood lumber which will result in fewer export charges being levied;
• $37 million decrease in the contributions to employee benefit plans;
• $14 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; 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 second quarter net expenditures as at September 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 Second Quarter by Authority

As displayed in the Statement of Authorities, the second quarter expenditures have decreased by $61 million, or 6%, from $1,032 million in 2013-2014 to $971 million in 2014-2015. The components of this year-over-year change are discussed below.

The Agency's second quarter net Vote 1 Operating Expenditures have decreased by $38 million, or 5%, from $801 million in 2013-2014 to $763 million in 2014-2015. Last year, there was an understatement of the salaries accrued to the end of the first quarter which was subsequently adjusted in the second quarter of 2013-2014. This technical adjustment, which increased personnel costs in the second quarter of 2013-2014, is the primary driver of the year-over-year decrease of Vote 1 Operating Expenditures.

Second quarter Vote 5 Capital Expenditures have increased by $14 million from $15 million in 2013-2014 to $29 million in 2014-2015. As discussed in the first quarter report, the settlement of Capital Expenditures was delayed pending a planned system improvement. The year-over-year increase relates to the first quarter Capital expenditures being settled in the second quarter of 2014-2015. Note that the Agency's year-to-date Capital Expenditures remain comparable.

Expenditures for Total Budgetary Statutory Authorities have decreased by $37 million, or 17%, from $216 million in 2013-2014 to $179 million in 2014-2015. This is mainly the result of timing differences in the collection of cost recovery revenues which are $23 million less in the second quarter of 2014-2015 over 2013-2014. Also contributing to the reduction in Statutory Authorities are lower contributions to employee benefit plans of $9 million and reduced Softwood Lumber disbursements to the provinces, which are driven by various market conditions, $3 million.

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 decreased by $65 million, or 8%, from $840 million in 2013-2014 to $775 million in 2014-2015. As mentioned above, personnel costs in the second quarter of 2013-2014 were higher in order to adjust for an understatement of the salary accruals in the first quarter. Furthermore, cost recovery revenues collected have decreased by $15 million in the second quarter of 2014-2015 which, as noted above, results from timing differences.

Transportation and Communications have increased by $3 million, or 11%, from $32 million in 2013-2014 to $35 million in 2014-2015, relating to higher volumes in mail outs and increased postage rates.

Rental expenditures have decreased by $5 million, or 6%, from $88 million in 2013-2014 to $83 million in 2014-2015 as a 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.

Transfer payments have decreased by $4 million, or 7%, from $63 million in 2013-2014 to $59 million in 2014-2015, 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 the Statement of Authorities, the year-to-date expenditures have increased by $52 million, or 3%, from $1,965 million in 2013-2014 to $2,017 million in 2014-2015. The components of this year-over-year decrease are discussed below.

Net Vote 1 Operating year-to-date Expenditures have increased by $97 million, or 6%, from $1,535 million in 2013-2014 to $1,632 million in 2014-2015. As noted in the first quarter report, 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. A year-over-year change of $11 million relates to Revenues Credited to the Vote, as discussed in the Analysis of Authorities section.

Year-to-date Vote 5 Capital Expenditures have increased by $4 million, or 16%, from $25 million in 2013-2014 to $29 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 $49 million, or 12%, from $405 million in 2013-2014 to $356 million in 2014-2015. As previously noted, this change is the result of a decrease in cost recovery revenue collected, a reduction in employee benefit plan contributions and lower Softwood Lumber disbursements.

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 $52 million is primarily associated with an increase in Other Subsidies and payments of $89 million which relates to the one-time transition payment noted above, offset by reductions in Personnel of $26 million and Rentals of $10 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. The CRA has supported 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. Although not reflected in the authorities at the second quarter, for fiscal year 2014-2015, the CRA has requested 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. Although not reflected in the authorities at the second quarter, the CRA has requested supplementary funding through Supplementary Estimates 'B'. 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 have been 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 throughout the year, and a reduction to the CRA accommodations footprint.

Over the last couple of years, in anticipation of budget restraint measures, the CRA had 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 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:

Ottawa, Canada
Date: November 14, 2014