Canada Revenue Agency Quarterly Financial Report

For the quarter ended June 30, 2018

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.

Further details on the Canada Revenue Agency’s (CRA) program activities can be found in the Departmental Plan and 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 2018-2019 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 of statutory spending authority for specific purposes.

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 for the current fiscal year in relation to the Main Estimates for which full supply was released on June 21, 2018, 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 $15 million, from $4,367 million in 2017-2018 to $4,352 million in 2018-2019. The components of the Vote 1 Gross Operating Expenditures Authority, Vote 5 Capital Expenditures Authority and Budgetary Statutory Authorities are outlined below.

The Vote 1 Gross Operating Expenditures Authority increased by $6 million, from $3,698 million in 2017-2018 to $3,704 million in 2018-2019. This is mainly due to the following factors:

• $88 million increase for the implementation of tax measures announced in Budget 2016 and Budget 2017, including cracking down on tax evasion and combatting tax avoidance, enhancing tax collections, and client-focused services for Canadians and Canadian businesses;
• $19 million increase as a result of tax measures announced in Budget 2018 to combat aggressive international tax avoidance and crack down on tax evasion and tax avoidance;
• $10 million increase to implement a taxation regime for cannabis Bill-C45. While funding for this initiative is included in the 2018-2019 Main Estimates, it was received through the Supplementary Estimates in 2017-2018;
• $6 million increase to fulfill administrative responsibilities in support of the Canada Pension Plan (CPP) and Employment Insurance (EI) program;
• $63 million decrease in authorities available for use from the prior fiscal year;
• $27 million decrease related to adjustments in accommodation and real property services provided by Public Services and Procurement Canada;
• $23 million decrease primarily as a result of a technical adjustment realigning the Operating Expenditure Authority (Vote 1) and the Capital Expenditure Authority (Vote 5) for the CRA Strategic Investment Plan (SIP). This change has no impact on the Agency’s overall authorities; and
• $4 million decrease for various initiatives announced in previous Federal Budgets.

In 2018-2019 the CRA expects to spend $348 million to fulfill its administrative responsibilities in support of the CPP and EI program, up from $342 million in 2017-2018. This $6 million increase in Vote 1 Gross Operating Expenditure Authority is offset by an equivalent increase in revenues recovered from the CPP and EI Accounts.

The Vote 5 Capital Expenditures Authority decreased by $4 million, from $81 million in 2017‑2018 to $77 million in 2018-2019. This decrease is primarily the result of the following factors:

• $15 million decrease in authorities available for use from the prior fiscal year;
• $7 million planned decrease in the spending profile for the redesign of the individual income tax processing system;
• $5 million planned decrease related to various tax measures announced in previous Federal Budgets; and
• $23 million offsetting increase, which results primarily from a vote realignment as mentioned previously to align the CRA Strategic Investment Plan’s (SIP) reference levels with planned expenditures.

Total Budgetary Statutory Authorities are forecasted to decrease by $11 million, from $930 million in 2017-2018 to $919 million in 2018-2019. This decrease is attributable to the following:

• $6 million decrease in cost recovery revenues primarily attributable to initiatives administered on behalf of the province of Ontario and the Canada Border Services Agency partially offset by increases in workload for the province of Alberta; and
• $5 million decrease in payments under the Children’s Special Allowances Act as a result of a technical change in the forecasting methodology.

Analysis of Expenditures

A two-year comparison of the CRA's annual net authorities available for use against first quarter net expenditures as at June 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 First Quarter by Authority

As displayed in the Statement of Authorities, the first quarter expenditures have increased by $169 million, or 15%, from $1,098 million in 2017-2018 to $1,267 million in 2018-2019. The components of this year-over-year change are discussed below.

The CRA’s first quarter net Vote 1 Operating Expenditures have increased by $159 million, or 18%, from $892 million in 2017-2018 to $1,051 million in 2018-2019. The increase is primarily the result of retroactive salary payments from the settlement of the Public Service of Canada, Audit, Financial and Scientific (PIPSC-AFS), and due to additional economic increases in the Public Service Alliance of Canada, Union of Taxation Employees (PSAC-UTE) collective agreements. Although these expenditures pertain to fiscal year 2017-2018, they have not yet been reversed. While efforts are presently underway to process the reversals, it is a voluminous workload and is expected only to be resolved by year-end.

In addition, timing related to the payment of invoices for the Department of Justice and Shared Services Canada has contributed to the increase in Vote 1 expenditures. These timing differences will be resolved by year-end.

Furthermore, expenditures related to tax measures announced in Budget 2016 and Budget 2017 including cracking down on tax evasion and combatting tax avoidance, enhancing tax collections, and client-focused services for Canadians and Canadian businesses have increased as part of the planned implementation schedule. Similarly, the increase is also attributable to the implementation of new initiatives announced in Budget 2018, to further combat aggressive international tax avoidance and crack down on tax evasion and tax avoidance.

The above increases in Vote 1 Operating Expenditures are offset by a reduction for severance payments pertaining to PSAC-UTE employees, which took place in Q1 of 2017-2018.

The CRA’s first quarter Vote 5 Capital Expenditures have remained relatively stable year over year, decreasing $0.2 million or 2%, from $10.0 million in 2017-2018 to $9.8 million in 2018-2019.

Expenditures for Total Budgetary Statutory Authorities have increased by $10 million, or 5%, from $197 million in 2017-2018 to $207 million in 2018-2019. This increase is attributable to timing differences in the spending of revenues. The annual revenue forecast for 2018-2019 is relatively consistent with that of 2017-2018 and as such, the variance will be resolved by year-end.

B) Expended in the First Quarter by Standard Object

As illustrated in the Departmental Budgetary Expenditures by Standard Object table, the CRA’s personnel expenditures have increased by $121 million, or 13%, from $907 million in 2017-2018 to $1,028 million in 2018-2019. As noted above, the main contributing reasons for the increase include the settlement of the PIPSC-AFS and PSAC-UTE collective agreements, the implementation of tax measures announced in Budget 2016 and Budget 2017, and initiatives recently announced in Budget 2018. These increases are offset by a reduction for the payment of severance to PSAC-UTE employees.

Professional and special services expenditures have increased by $42 million, or 55%, from $75 million in 2017-2018 to $117 million in 2018-2019. The increase is the result of timing differences in the payment of invoices for the Department of Justice and Shared Services Canada as compared to 2017-2018.

Other subsidies and payments expenditures have increased by $6 million, from less than one million in 2017-2018 to $6 million in 2018-2019 primarily as the result of an in-year change in 2018-2019 to a more detailed distribution of expenditures for various salary advance accounts from Standard Object “Personnel” to Standard Object “Other subsidies and payments”.

Acquisition of machinery and equipment expenditures have increased by $5 million, from $2 million in 2017-2018 to $7 million in 2018-2019. The increase is mainly attributable to deferred acquisition of computer hardware and software initially planned for the fourth quarter of 2017-2018.

Rentals expenditures have decreased by $8 million, or 10%, from $75 million in 2017-2018 to $67 million in 2018-2019. In addition, purchased repair and maintenance expenditures have decreased by $2 million, or 20%, from $11 million in 2017-2018 to $9 million in 2018-2019. These decreases are both in line with the reduction in authorities following the review of the Agency’s multi-year occupancy requirements.

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 exposure to these risks and the associated financial impacts.

With the implementation of the government-wide Pay Modernization Project (Phoenix), departments and individuals across government have been affected. One of the CRA’s main issues relates to the additional manual work that has been transferred to the Agency following the introduction of the Phoenix pay system. The CRA’s compensation team has worked closely with the Phoenix project team to implement interim solutions and address system issues, which has minimized the impact. The CRA’s Compensation Client Services Centre has established a tactical team to process outstanding service requests as quickly as possible. Additional resources have been hired since implementation and the inventory of outstanding issues is decreasing.  

Budget 2018 proposes $5.5 million over two years, starting in 2017-2018 for the CRA to process federal government employee income tax reassessments required due to Phoenix pay issues, and to handle related telephone enquiries.

Significant changes in relation to operations, personnel and programs

Budget 2018 proposes $515.0 million over five years and $83.5 million in ongoing funding to address the following key areas:

• Cracking down on tax evasion and combatting tax avoidance;
• Improving client services at the CRA;
• Combatting aggressive international tax avoidance;
• Enhancing the security of taxpayer information;
• Improving access to the Canada Workers Benefit;
• Stabilizing and future transformation of the federal government’s pay administration

Further to Budget 2018, the Government of Canada announced that it would undertake a comprehensive review of the CRA service model. An Agency Review Team has been established to examine the CRA’s internal decision making processes, compliance, collection and service activities, the existing service model, and the partnerships that support the delivery of services. In addition, a Service External Panel comprised of senior members from both the public and private sectors will support the CRA by helping to identify service and digital service investment opportunities that best serve Canadians. The review will be a key element to help strengthen Canadians’ trust in Canada’s tax system, by highlighting the CRA’s commitment and activities related to delivering excellent service and to promoting the integrity of compliance activities. It will help transform the CRA into a more modern, client-centric organization.

The CRA’s internally driven Service Renewal Initiative is well underway and continues to change how the CRA operates to improve service to Canadians. It is modernizing collections and verification capacity, optimizing the workforce to best meet priorities, and ensuring the CRA maintains a continued presence in all regions.

There are no significant financial or non-financial impacts to report at this time.

Approval by Senior Officials

Approved by:  

Ottawa, Canada

Date: August 28, 2018