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Canada Revenue Agency Financial Statements – Agency Activities

INDEPENDENT AUDITOR'S REPORT

To the Board of Management of the Canada Revenue Agency and the Minister of National Revenue

I have audited the accompanying financial statements of the Agency Activities of the Canada Revenue Agency, which comprise the statement of financial position as at 31 March 2013, and the statement of operations and agency net financial position, statement of change in agency net debt and statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information.

Management's Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with Canadian public sector accounting standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditor's Responsibility

My responsibility is to express an opinion on these financial statements based on my audit. I conducted my audit in accordance with Canadian generally accepted auditing standards. Those standards require that I comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

I believe that the audit evidence I have obtained is sufficient and appropriate to provide a basis for my audit opinion.

Opinion

In my opinion, the financial statements present fairly, in all material respects, the financial position of the Agency Activities of the Canada Revenue Agency as at 31 March 2013, and the results of its operations, changes in its net debt, and its cash flows for the year then ended in accordance with Canadian public sector accounting standards.

Michael Ferguson, CPA, CA
FCA (New Brunswick)
Auditor General of Canada
26 August 2013
Ottawa, Canada

Contingent liabilities (note 13)

The accompanying notes form an integral part of these financial statements.

Approved by:

The accompanying notes form an integral part of these financial statements.

The accompanying notes form an integral part of these financial statements.

The accompanying notes form an integral part of these financial statements.

Notes to the Financial Statements – Agency Activities

1. Authority and objectives

The Canada Revenue Agency (CRA) is an agent of Her Majesty in right of Canada under the Canada Revenue Agency Act. The CRA is a departmental corporation named in Schedule II of the Financial Administration Act and reports to Parliament through the Minister of National Revenue.

The mandate of the CRA is to support the administration and enforcement of tax legislation and other related legislation. The CRA provides support, advice, and services by:

(a) supporting the administration and enforcement of program legislation;
(b) implementing agreements between the Government of Canada or the CRA and the government of a province, territory or other public body performing a function of government in Canada to carry out an activity or administer a tax or program;
(c) implementing agreements or arrangements between the CRA and departments or agencies of the Government of Canada to carry out an activity or administer a program; and
(d) implementing agreements between the Government of Canada and First Nations governments to administer a tax.

The CRA administers revenues, including income and sales taxes and employment insurance premiums, administers tax legislation, delivers a number of social benefit programs to Canadians for the federal, provincial, territorial, and First Nations governments, and administers other amounts, including Canada Pension Plan contributions, for other groups or organizations. It is responsible for administering and enforcing the following acts or parts of acts: the Air Travellers Security Charge Act, the Canada Revenue Agency Act, the Children's Special Allowances Act, Part V.1 of the Customs Act, section 2 of the Energy Costs Assistance Measures Act, the Excise Act, the Excise Tax Act (including the goods and services tax ( GST ) and the harmonized sales tax ( HST ) except for GST / HST on imported goods), the Excise Act, 2001, the Income Tax Act, the Softwood Lumber Products Export Charge Act, 2006, the Universal Child Care Benefit Act, and others including various provincial acts.

In delivering its mandate, the CRA operates under the following programs:

(a) Reporting compliance: Verifies complete and accurate disclosure by taxpayers of all required information to establish tax liabilities;
(b) Internal services: Provides internal services across the CRA, such as human resources management, financial management and information technology, to support the needs of programs and corporate obligations;
(c) Assessment of returns and payment processing: Processes and validates taxpayer returns; registers, establishes, and maintains taxpayer accounts; and, receives payments;
(d) Accounts receivable and returns compliance: Identifies and addresses non–compliance with taxpayer filing and remittance requirements;
(e) Taxpayer and business assistance: Assists taxpayers in meeting their obligations under the self–assessment;
(f) Appeals: Provides a dispute resolution process for taxpayers who disagree with decisions taken by the CRA;
(g) Benefit programs: Provides Canadians certain income–based benefits, credits and other services on behalf of federal, provincial (except Québec), and territorial governments;
(h) Taxpayers' Ombudsman: Addresses requests for reviews made by taxpayers and benefit recipients with respect to service matters.

2. Summary of significant accounting policies

For financial reporting purposes, the CRA's activities have been divided into two sets of financial statements: agency activities and administered activities. The Financial Statements – Agency Activities include those operational revenues and expenses which are managed by the CRA and utilized in running the organization. The Financial Statements – Administered Activities include those revenues and expenses that are administered on behalf of the federal, provincial, and territorial governments, First Nations, and other organizations. The purpose of the distinction between agency and administered activities is to facilitate, among other things, the assessment of the administrative efficiency of the CRA in achieving its mandate. Tax–related assets, liabilities, revenues and expenses are excluded from these financial statements because they can only accrue to a government, not to the tax agency that administers those transactions.

As required by the Canada Revenue Agency Act, the Financial Statements – Agency Activities have been prepared using accounting principles consistent with those applied in the preparation of the financial statements of the Government of Canada. The accounting principles used are based on Canadian public sector accounting standards. A summary of significant accounting policies follows:

(a) Changes in accounting policies

As of April 1, 2012, the CRA adopted the following standards issued by the Public Sector Accounting Board (PSAB): PS 1201 – Financial statement presentation, PS 2601 – Foreign currency translation and PS 3450 – Financial instruments.

PS 1201 – Financial statement presentation replaces PS 1200 and establishes general reporting principles and standards for the disclosure of information applicable to the financial statements. The adoption of this standard had no impact on the CRA's financial statements.

PS 2601 – Foreign currency translation replaces PS 2600 and establishes standards on how to account for and report transactions that are denominated in a foreign currency. The introduction of this standard eliminated the deferral of gains and losses arising on the translation of long–term foreign currency denominated monetary items. The adoption of this standard had no impact on the CRA's financial statements.

PS 3450 – Financial instruments establishes standards on how to account for and report all types of financial instruments including derivatives and embedded derivatives. Financial instruments are assigned to one of two measurement categories: (1) fair value and, (2) cost or amortized cost. The fair value category includes derivatives and portfolio investments in equity instruments quoted in an active market. The adoption of this standard had no impact on the recognition or measurement of financial instruments as the CRA does not have any derivatives, portfolio investments or other financial instruments measured at fair value. Disclosure requirements pertaining to this section are presented in note 14.

(b) Parliamentary appropriations

The CRA is financed by the Government of Canada through Parliamentary appropriations. Accounting for appropriations provided to the CRA does not parallel financial reporting according to Canadian public sector accounting standards, as they are based in large part on cash flow requirements. Consequently, items recognized in the Statement of Financial Position and the Statement of Operations and Agency Net Financial Position may be different from those provided through appropriations from Parliament. Note 4(b) provides a high–level reconciliation between the two bases of reporting. The planned results in the Statement of Operations and Agency Net Financial Position are the amounts reported in the Future–oriented Financial Statements – Agency Activities included in the 2012–2013 Report on Plans and Priorities.

(c) Net cash provided by the Government of Canada

The CRA operates within the Consolidated Revenue Fund CRF), which is administered by the Receiver General for Canada. All cash received by the CRA is deposited to the CRF and all cash disbursements made by the CRA are paid from the CRF. The net cash provided by government is the difference between all respendable cash receipts and all cash disbursements including transactions with departments and agencies.

(d) Expense recognition

Expenses are recognized when goods are received and/or services are rendered.

(e) Services provided without charge from other government agencies and departments

Estimates of the cost for services provided without charge from other government agencies and departments are recorded as expenses at their estimated cost.

(f) Revenue recognition

Non–tax revenue is recognized when the services are rendered by the CRA.

Non–tax revenues that are not available for spending cannot be used to discharge the CRA's liabilities. While management is expected to maintain accounting control, it has no authority regarding the disposition of non–respendable revenues. As a result, non–respendable revenues are considered to be earned on behalf of the Government of Canada and are therefore presented as a reduction of the CRA's gross revenues.

(g) Vacation pay and compensatory leave

Vacation pay and compensatory leave are expensed as the benefits accrue to employees under their respective terms of employment. The liability for vacation pay and compensatory leave is calculated at the salary levels in effect at the end of the year for all unused vacation pay and compensatory leave benefits accruing to employees.

(h) Employee benefits

(i) Post–employment benefits

i.1) Pension benefits

All eligible employees participate in the Public Service Pension Plan administered by the Government of Canada. The CRA's contributions reflect the full cost as employer. These amounts are currently based on a multiple of an employee's required contributions and may change over time depending on the experience of the Plan. The CRA's contributions are expensed during the year in which the services are rendered and represent the total pension obligation of the CRA. Current legislation does not require the CRA to make contributions with respect to any actuarial deficiencies of the Public Service Pension Plan.

i.2) Severance benefits

Some employees are entitled to severance benefits, as provided for under labour contracts and conditions of employment. The cost of these benefits is accrued as employees render the services necessary to earn them. These benefits represent an obligation of the CRA that entails settlement by future payments. The obligation resulting from the benefits earned by employees is calculated using information derived from the results of the actuarially determined liability for employee severance benefits for the CRA.

(ii) Other benefits

ii.1) Health and dental benefits

The Government of Canada sponsors an employee benefit plan (health and dental) in which the CRA participates. Employees are entitled to health and dental benefits, as provided for under labour contracts and conditions of employment. The CRA's contributions to the plan, which are provided without charge by the Treasury Board Secretariat, are recorded at cost based on a percentage of the salary expenses and charged to personnel expenses in the year incurred. They represent the CRA's total obligation to the plan. Current legislation does not require the CRA to make contributions for any future unfunded liabilities of the plan.

ii.2) Sick leave benefits

Employees are eligible to accumulate sick leave benefits until retirement or termination according to their terms of employment. Sick leave benefits are earned based on employee services rendered and are paid upon an illness or injury related absence. These are accumulating non–vesting benefits that can be carried forward to future years, but are not eligible for payment on retirement or termination, nor can these be used for any other purpose. An obligation is recorded for sick leave balances expected to be used in future years in excess of future allotments using an actuarial valuation. The cost of sick leave benefits represents the year over year net variance in the actuarial value of the unused sick leave credits expected to be used in the future.

(i) Due from the Consolidated Revenue Fund (CRF)

Amounts due from the CRF are the result of timing differences between when a transaction affects authorities and when it is processed through the CRF. Amounts due from the CRF represent the net amount of cash that the CRA is entitled to draw from the CRF without further authorities to discharge its liabilities.

(j) Accounts receivable and advances

Accounts receivable and advances are stated at the lower of cost and net recoverable value. An allowance for doubtful accounts is recorded where recovery is considered uncertain.

(k) Tangible capital assets

All initial costs of $10,000 or more incurred by the CRA to acquire or develop tangible capital assets are capitalized and amortized over the useful lives of the assets. Similar items under $10,000 are expensed.

Tangible capital assets are amortized on a straight–line basis over the estimated useful lives of assets as follows:

Assets under construction/development are recorded as costs are incurred and are not amortized until completed and put into operation.

(l) Contingent liabilities

Contingent liabilities are potential liabilities that may become actual liabilities when one or more future events occur or fail to occur. To the extent that the future event is likely to occur or fail to occur, and a reasonable estimate of the loss can be made, an estimated liability is accrued and an expense recorded. If the likelihood is not determinable, the CRA's best estimate of the contingency is disclosed in the notes to the financial statements.

(m) Foreign currency translation

Transactions involving foreign currencies are translated into Canadian dollars by applying the exchange rate in effect at the time of those transactions. Realized foreign exchange gains and losses resulting from foreign currency transactions are included in the other services and expenses category in note 9 – Segmented information – Expenses.

(n) Financial instruments

The CRA uses non–derivative financial instruments in the course of its operations. Those financial instruments gave rise to the following financial assets and financial liabilities that are measured at cost or amortized cost, as per the table below.

(o) Measurement uncertainty

The preparation of these financial statements in accordance with Canadian public sector accounting standards requires management to make estimates and assumptions that affect the reported amounts of liabilities, assets, revenues, expenses and related disclosure reported on the financial statements. At the time of preparation of these statements, management believes the estimates and assumptions to be reasonable. Employee severance benefits, employee sick leave benefits, contingent liabilities, the useful life of tangible capital assets, services provided without charge and the allowance for doubtful accounts are the most significant items where estimates and assumptions are used. Actual results could differ significantly from the current estimates. Management's estimates are reviewed periodically and, as adjustments become necessary, they are recorded in the financial statements in the period in which they become known.

3. Restatement

The CRA has reviewed its approach for the evaluation, accounting and reporting of employee sick leave benefits. In fiscal year 2013, the CRA used an actuarial valuation to measure the obligation and the benefits expenses for the accumulating non–vesting employee sick leave benefits based on the expected future use of the benefits.

In the past, the CRA recognized benefit expenses equal to its payments and no liability for employee sick leave benefits was recorded in the financial statements. With the actuarial analysis performed this year using historical data concerning the CRA's sick leave use, the agency net debt and liabilities of fiscal year 2012 have been increased by $234,700,000.

The following table presents the impact of this restatement on the 2012 financial statements. The cumulative impact of this restatement on fiscal years prior to 2012 has been reflected in the opening balance of the agency net financial position.

4. Parliamentary appropriations

The CRA receives most of its funding through annual Parliamentary appropriations. Items recognized in the Statement of Financial Position and the Statement of Operations and Agency Net Financial Position in one year may be funded through Parliamentary appropriations in prior, current, or future years. Accordingly, the CRA has different net results of operations for the year on a government funding basis than on an accrual accounting basis. These differences are reconciled below.

a) Reconciliation of Parliamentary appropriations provided and used:

b) Reconciliation of net cost of operations before government funding and transfers to current year Parliamentary appropriations used:

5. Accounts payable and accrued liabilities

Accounts payable and accrued liabilities are measured at cost, the majority of which are due within 30 days of year–end.

6. Employee benefits

a) Post–employment benefits

(i) Pension benefits

The CRA and all eligible employees contribute to the Public Service Pension Plan, which is sponsored and administered by the Government of Canada. Pension benefits accrue up to a maximum period of 35 years at a rate of two percent per year of pensionable service, times the average of the best five consecutive years of earnings. The benefits are integrated with Canada/Québec pension plans benefits and they are indexed to inflation.

Both the CRA and the employees contribute to the Public Service Pension Plan. The current year expense for the CRA's contributions represents approximately 1.7 times the contributions by employees. The contributions to the Public Service Pension Plan for the year were as follows:

The CRA's responsibility with regard to this plan is limited to its contributions. Actuarial surpluses or deficiencies are recognized in the financial statements of the Government of Canada.

(ii) Severance benefits

The CRA provides severance benefits to its employees based on eligibility, years of service and salary upon termination of employment. These severance benefits are unfunded. Benefits will be paid from future appropriations.

Annually, as at March 31st of each year, the CRA obtains an actuarial valuation of the employee severance obligation for accounting purposes using actuarial assumptions including the discount rate and the yearly salary increase. These assumptions are reviewed at each valuation date and are based on management's best estimate. As at March 31, 2013, a discount rate and yearly salary increase of 2.68% and 2.6% – 2.7% respectively (2.75% and 2.3% – 2.7% as at March 31, 2012) were used in the actuarial valuation.

Information about the severance benefits, measured as at March 31, is as follows:

As part of changes to conditions of employment of certain employee groups effective October 1, 2011 and July 10, 2012, the accumulation of severance benefits ceased for those employees. They have been given the option to be immediately paid the full or partial value of benefits earned to date or collect the full or remaining value of benefits on termination from the public service. These changes have been reflected in the calculation of the outstanding severance benefit obligation.

b) Other benefits

(i) Health and dental benefits

The CRA contributes for all eligible employees to the Public Service Health Care Plan and Public Service Dental Care Plan, which are sponsored by the Government of Canada.

The CRA's responsibility with regard to these plans is limited to its contributions (refer to note 11). Actuarial surpluses or deficiencies are recognized in the financial statements of the Government of Canada.

(ii) Sick leave benefits

Employees are credited, based on service, a maximum of 15 days annually for use as paid absences, due to illness or injury. Employees are allowed to accumulate unused sick leave credits each year. Accumulated credits may be used in future years to the extent that the employee's illness or injury exceeds the current year's allocation of credits. The use of accumulated sick leave balance for sick–leave compensation ceases on termination of employment. These sick leave benefits are unfunded. They will be paid from future appropriations.

Information about the sick leave benefits obligation and expense, measured as at March 31, is presented in the following table:

For accounting purposes, the CRA obtained an actuarial valuation of its employee sick leave benefits as at March 31, 2013 and 2012, based on the projected benefit method prorated on services. The actuarial valuation used a discount rate of 2.68% and a salary growth of 2.6% – 2.7% as at March 31, 2013 (2.75% and 2.7% – 2.9% respectively for March 31, 2012) which were based on management's best estimate.

7. Accounts receivable and advances

8. Tangible capital assets

The cost of software in development, which is not amortized, is $59,055,301 as at March 31, 2013 ($86,835,856 as at March 31, 2012).

9. Segmented information – Expenses

The following table presents the expenses by program and expense category as described in note 1 of these financial statements.

10. Segmented information– Non–tax revenues

The following table presents the revenues generated by program and revenue category as described in note 1 of these financial statements.

11. Related party transactions

The CRA is related in terms of common ownership to all Government of Canada departments, agencies, and Crown corporations. Transactions with Crown corporations entered into by the CRA are in the normal course of business and on normal trade terms applicable to all individuals and enterprises. Transactions with other Government of Canada departments and agencies are conducted on a cost recovery basis, except for transfers of tangible capital assets that are carried out at net book value.

During the year, the CRA received various services without charge from other government agencies and departments. The estimated costs for significant services provided without charge that have been recorded include:

12. Board of Management

Pursuant to the Canada Revenue Agency Act, a Board of Management is appointed to oversee the organization and administration of the CRA and the management of its resources, services, property, personnel and contracts. The expenses relating to the board's activities for the year included in the net cost of operations were as follows:

13. Contingent liabilities

The CRA is a defendant in certain cases of pending and threatened litigation which arose in the normal course of business of agency activities as defined in note 2. The current best estimate of the amount to be paid in respect of the cases identified as likely to be lost has been recorded in accounts payable and accrued liabilities. All other cases, excluding those assessed as unlikely to be lost, are considered contingent liabilities and the related amounts are disclosed whenever the amount of the contingency can be reasonably estimated. As at March 31, 2013, contingent liabilities for claims and pending and threatened litigation have been estimated by management at $9,882,645 ($36,772,645 as at March 31, 2012).

14. Financial risk management

The CRA uses non–derivative financial instruments in the course of its operations that give rise to financial assets and financial liabilities. Those financial liabilities comprise accrued salaries, accounts payable and accrued liabilities, vacation pay and compensatory leave. Cash, accounts receivables and advances represent those financial assets.

The CRA is exposed to credit risk, liquidity risk and market risk in connection with its financial instruments.

The credit risk is the risk that another party owing money to the CRA would fail to discharge its obligation creating a financial loss for the CRA. The maximum exposure of the CRA to the credit risk amounted to $37,347,968 as of March 31, 2013 ($8,381,847 as of March 31, 2012), which is equal to the carrying value of its accounts receivable and advances. As the vast majority of the CRA's accounts receivable and advances are either with other government departments or employees, the credit risk is low.

The liquidity risk is the risk that the CRA would encounter difficulty in meeting its obligations associated with its financial liabilities. The CRA's liquidity risk is minimal given that the CRA receives most of its funding through annual Parliamentary appropriations and maintains strong controls over expenditure management.

The market risk is defined as the risk that future cash flows of a financial instrument would fluctuate because of changes in currency rates, interest rates and/or other rates. The CRA's exposure to market risk is limited to fluctuations in the currency rates and the impact of such variations on CRA's cash flows is negligible as its financial transactions in foreign currency are immaterial.

15. Comparative figures

Certain comparative figures have been reclassified to conform with the presentation used in the current year.

Financial Statements Discussion and Analysis – Agency Activities

Introduction

This section of the financial statements provides unaudited complementary and supplementary information on Agency Activities, on an accrual basis, in respect of matters reported in the audited financial statements. Responsibility for the preparation of this financial statements discussion and analysis rests with the CRA's management.

Capacity to deliver services

The CRA's workforce of over 40,000 employees is fundamental to the achievement of its mandate. In the course of 2012–2013, this workforce was comprised on average of 81% permanent employees, 18% term employees and 1% students.

The CRA's employees are located throughout Canada, in the following operational regions: Ontario (32%), Headquarters (22%), Prairies (14%); Québec (12%); Pacific (12%) and Atlantic (8%). They provide services to taxpayers in over 40 tax services offices and tax centers, as well as program services and internal services supporting those programs.

The CRA's information technology (IT) capacity now significantly managed through Shared Services Canada (SSC) is also critical to its ability to deliver services to Canadians. It involves two data centres which process up to 4.5 million transactions per hour, 7 mainframe computers, approximately 670 physical servers and 1,750 virtual servers, and the maintenance of over 490 applications across a distributed computing environment covering more than 400 locations.

Risk management

The CRA recognizes that a variety of risks could have potential implications on its financial position and operations. Its Enterprise Risk Management (ERM) Division of the Audit, Evaluation, and Risk Branch plays a key role in ensuring that risks are identified, impacts are assessed and strategies for risk management are adopted, notably by producing the CRA Corporate Risk Profile.

Further details on ERM at the CRA are discussed in this annual report. This financial statements discussion and analysis will elaborate on specific financial risks throughout its content, where applicable.

Financial highlights

Five developments have significantly influenced the 2012–2013 results in the financial statements.

Employee sick leave benefits

In keeping with the federal government as well as a number of organizations from other levels of government, changes were made this fiscal year to the accounting for employee benefits, specifically for the non–vesting sick leave benefits. Consequently, in 2012–2013, the CRA has recorded in its financial statements the obligation and related expense for employee sick leave benefits, representing the estimated value of accumulated sick leave credits expected to be taken by CRA employees in excess of their yearly allotment. The CRA's employee sick leave benefits obligation and expense determined using an actuarial valuation amounted to $235.2 million and $0.5 million respectively as at March 31, 2013. Prior year comparative figures have been restated and the obligation and related expense were estimated at $234.7 million and $25.6 million respectively as at March 31, 2012.

Budget 2012 implementation

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. Savings associated with the CRA's Budget 2012 spending review measures are planned to reach approximately $253 million at maturity, with the 2012–2013 savings target of $28 million achieved with minimal impact on the existing workforce as a result of attrition and the use of vacancy management.

A number of tax measures were also introduced as part of Budget 2012. The CRA internally managed, through existing funding levels for fiscal year 2012–2013, approximately $13 million of implementation and administration costs associated with these tax measures.

CRA's resource management

Fiscal year 2012–2013 was the last year of the 3–year operating budget freeze announced by the Government of Canada back in the 2010 Federal Budget, according to which no incremental central funding was received by the CRA to cover the cost of its yearly salary increases pursuant to collective agreement provisions.

The funding shortfall associated with these wage increases amounted to approximately $91 million in 2012–2013. The CRA managed this operating pressure with internal funding from general administrative and program efficiencies identified through a targeted program spending review and mitigated its impacts through the use of a multi–year resource management strategy. This strategy is possible given the CRA's two–year spending authority, which allows the organization to better position itself in future years to address known pressures, including those arising from Budget 2010 and transformation costs associated with restraint measures announced in both Budget 2012 and 2013, as well as to respond quickly to any unforeseen and extraordinary operating pressures. In 2012–2013, the total appropriations available for future years were higher than prior years, totalling $299.8 million.

As part of its resource management strategy, the CRA continuously reviews and revises plans and priorities to ensure the effective use of government resources and the achievement of its core business outcomes. In 2012–2013, the majority of key performance targets were met or exceeded.

Shared Services Canada

Shared Services Canada (SSC) has been responsible for the delivery of IT infrastructure services to the CRA since November 2011. Funding of $157 million, excluding the related employee benefit plan contributions of $10 million, was transferred to SSC for fiscal year 2012–2013, which represented the first full year for the delivery of these services.

The cost of these IT services are still reported in the financial statements (note 10) as professional services provided without charge by SSC.

Provincial sales tax administration reform

The CRA received funding in 2012–2013 of $157 million ($98 million in 2011–2012), which excluded the related employee benefit plan contributions of $25 million and accommodation charges, for the continued implementation and administration of the HST in the provinces of Ontario and British Columbia. This funding was used to onboard affected provincial employees to the CRA, identify and address risk of HST non–compliance, and administer province–specific HST flexibilities.

As a result of the decision by the province of British Columbia to return to a provincial sales tax model on April 1, 2013, $12 million in funding associated with the onboarding of provincial employees was returned to the Treasury Board by the CRA for fiscal year 2012–2013. The CRA continued to administer the HST in the province of British Columbia during the transition period.

Discussion and analysis

Net cost of operations before government funding and transfers

The CRA's 2012–2013 net cost of operations before government funding and transfers amounted to $4,078.3 million, increasing by $189.8 million from the $3,888.5 million planned results for 2013. The variance is explained by a $97.4 million decrease in non–tax revenues that is attributable to a change in accounting policy of non–tax revenues not available for spending as well as a decrease in the fees for IT services now being provided to the Canada Border Services Agency (CBSA) by SSC rather than by the CRA. The variance is further explained by higher costs for severance benefits than originally forecasted in 2011 when the planned results were established, due to changes in actuarial assumptions.

The CRA's 2012–2013 net cost of operations before government funding and transfers amounted to $4,078.3 million, decreasing by $146.1 million from the $4,224.4 million net cost of operations before government funding and transfers in 2011–2012.

Details of the net cost of operations before government funding and transfers are illustrated below (see note 9 of the Financial Statements – Agency Activities for a further breakdown of expenses by category):

Comparative figures have been reclassified with the current year presentation.

Personnel expenses (salaries, other allowances and benefits) are the CRA's primary costs, representing 74% of total expenses while the remaining 26% of expenses are comprised of various other costs such as accommodation, telecommunication and information technology equipment and services. The decrease in personnel costs of $158.6 million is mostly attributable to a decrease in severance benefits due in part to the plan curtailment for employees represented by the Professional Institute of the Public Service of Canada (PIPSC) and to the fact that the severance benefit expenses were higher than usual in 2012 as a result of changes in actuarial assumptions. This decrease was partially offset by annual economic salary increases and salary increments pursuant to collective agreement provisions.

Non–personnel expenses have decreased by $50.5 million in 2012–2013. This variance mainly results from decreased losses resulting from the write–off of in–house developed software in the course of the fiscal year, lower travel expenses and legal fees, combined to a reduction of the provision for contingent liabilities arising from claims and litigation. The transfer of responsibilities over certain IT and telecommunication services to SSC in November 2011, though creating year over year variances in distinct expense categories, had nearly no net impact on total expenses. Expenses that used to be incurred by the CRA prior to that transfer, such as salaries, equipment purchases and repair and maintenance, are now mostly reported as IT services provided by SSC.

Non–tax revenues also decreased significantly in 2012–2013, mostly as a result of IT services now being provided to the (CBSA) by SSC rather than by the CRA.

Financial position

The change in the agency net financial position compared to the previous year is as follows:

The decrease in the agency net financial position is mainly attributable to decreased liabilities due to employee severance benefits as explained below.

Liabilities

Liabilities decreased by $174.1 million in 2012–2013, of which $151.8 million is attributable to the decreased employee severance benefits mainly as the result of the severance curtailment effective as of July 10, 2012 for employees represented by the PIPSC. These employees account for about a third of the CRA's permanent workforce.

Employee benefits are CRA's most significant liability. While an obligation for employee sick leave benefits was recorded retroactively for the first time in 2012–2013, employee severance benefits remain the CRA's most important obligation as illustrated in the figure below.

Figure 3: Liabilities by category

Employee sick leave and severance benefits combined account for 67% of the CRA total liabilities in 2012–2013. These are significant liabilities that require the use of management estimates and assumptions to determine their present value as at March 31 of every year. As such, there lies a financial risk of imprecision in the financial position of the CRA where actual liabilities and the related expenses may differ significantly from current estimates. To minimize this risk, the CRA makes use of the expertise of the Office of the Chief Actuary, who provides an actuarial valuation report yearly, discussing the actuarial assumptions and method used to determine the actuarial present value of those employee benefits.

Non–financial assets

Non–financial assets are comprised of 97% tangible capital assets. The CRA managed a capital budget of $83.4 million for the year 2012–2013 ($89.0 million for 2011–2012), of which $36.9 million ($27.9 million for 2011–2012) remains available for use in future years in accordance with the CRA's multi–year resource management strategy.

The net book value of tangible capital assets remained fairly stable in 2012–2013 with a net decrease of $12.2 million. The vast majority of tangible capital assets owned by the CRA relates to IT, specifically in–house developed software. As a large organisation responsible for delivering an extensive range of tax and benefits programs on behalf of the federal and of provincial governments, the CRA has specialized software needs that are primarily fulfilled internally through the development of in–house tailored applications by the CRA employees.

To prioritize investment decisions regarding in–house developed software and support the effective management of resources, the CRA Resource and Investment Management Committee (RIMC) oversees investment projects above $1 million. All projects brought to the RIMC require a formal attestation from ERM Division that the CRA risk management process was followed and that sound risk information forms part of the submission. The attestation process takes place at various project development stages. Enterprise risk information is used to inform the development of the CRA Strategic Investment Plan, a long–term plan of significant future investments. Alignment with the priorities outlined in the Corporate Risk Profile is one of the considerations used to inform the priority ranking of initiatives.

Investments in–house developed software represent an increasingly significant portion of the CRA's total investments in IT, with $57.6 million in software acquisitions compared to $1.9 million in hardware acquisitions in 2012–2013 ($40.9 million and 38.7 million respectively in 2011–2012), as illustrated in the figure below. The decrease in IT equipment acquisitions is attributable to the transfer to SSC of email, data centers and network services responsibilities in November 2011.

Five year comparative financial information

Below are tables that provide a five year comparison of financial information based on the accounting policies explained in note 2 to the audited financial statements.

Comparative figures have been reclassified with the current year presentation.

Comparative figures have been reclassified with the current year presentation.

Outlook

The CRA will continue to improve the efficiency and effectiveness of its operations and programs through initiatives aimed at modernizing its services and compliance activities while adhering to the Government of Canada's goal of returning to a budgetary balance. In this context, a focus will be placed on the CRA's internal operations over the next years. The CRA will also be working towards the implementation and administration of a significant number of tax measures announced in the Economic Action Plan 2013.

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