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

For the quarter ended June 30, 2013

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 and Budget 2013 ).

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 2013-2014 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 the Budget 2013 could not be reflected in the 2013-2014 Main Estimates. In fiscal year 2013-2014, frozen allotments will be established by Treasury Board authority in departmental votes to prohibit the spending of funds already identified as savings measures in Budget 2013. In future years, the changes to departmental authorities will be implemented through the Annual Reference Level Update, as approved by Treasury Board, and reflected in the subsequent Main Estimates tabled in Parliament.

Budget 2012 was tabled in Parliament on March 29, 2012, after the tabling of the Main Estimates on February 28, 2012. As a result, the measures announced in the Budget 2012 could not be reflected in the 2012-2013 Main Estimates. In fiscal year 2012-2013, frozen allotments were established by Treasury Board authority in departmental votes to prohibit the spending of funds already identified as savings measures in Budget 2012. In 2013-2014, the changes to departmental authorities were reflected in the 2013-2014 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, 2013, including authorities available for use from the prior fiscal year. The authorities transferred to Shared Services Canada are reflected in both the 2012-2013 and 2013-2014 Main Estimates.

As shown in the Statement of Authorities, the CRA’s total Budgetary Authorities available for use have decreased by $46 million, or 1%, from $4,623 million in 2012-2013 to $4,577 million in 2013-2014. The components of this reduction are outlined below.

The Vote 1 Gross Operating Expenditure Authority decreased by $55 million, or 1%, from $3,686 million in 2012-2013 to $3,631 million in 2013-2014. This is mainly due to the net effect of the following factors:

• A reduction identified as part of the Budget 2012 Spending Review, $56 million (excluding contributions to employee benefit plans);
• A 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, $28 million;
• A decrease for funding previously provided for the ongoing administration of the Harmonized Sales Tax in British Columbia, $16 million;
• A decrease through a vote realignment to the Capital Expenditure Authority (Vote 5) to align the CRA’s base spending authorities with the planned acquisitions, $12 million;
• A decrease in funding for government advertising programs, $2 million;
• An increase in authorities available for use from the prior fiscal year, $43 million;
• An increase for the redesign of the personal income tax processing system, $8 million; and
• An increase related to adjustments in accommodation and real property services provided by Public Works and Government Services, $11 million.

Revenues Credited to the Vote related to the administration of the Canada Pension Plan (CPP) and Employment Insurance (EI) programs decreased slightly from $322 million in 2012-2013 to $321 million in 2013-2014.

The Vote 5 Capital Expenditure Authority increased by $27 million, or 32%, from $83 million in 2012-2013 to $110 million in 2013-2014, as a result of the following adjustments:

• An increase in authorities available for use from the prior fiscal year, $9 million;
• An increase due to the vote realignment noted above, which transferred $12 million to the CRA’s Capital Expenditure Authority; and
• An increase for the redesign of the personal income tax processing system, $6 million.

Total Budgetary Statutory Authorities are forecasted to decrease by $19 million, or 2%, from $1,176 million in 2012-2013 to $1,157 million in 2013-2014. This reduction is attributable to the following:

• A decrease in the contributions to employee benefit plans, $14 million;
• A decrease in the spending of revenues received through the conduct of CRA operations, $13 million;
• An increase for disbursements to provinces under the Softwood Lumber Products Export Charge Act, 2006, $3 million; and
• An increase in payments under the Children’s Special Allowance Act, $5 million.

Analysis of Expenditures

A two year comparison of the CRA’s annual net authorities available for use against year-to-date net expenditures as at June 30 is presented in Figure 1.

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 decreased by $109 million, or 11%, from $1,042 million in 2012-2013 to $933 million in 2013-2014. The components of this year-over-year change are discussed below.

The Agency’s first quarter net Vote 1 Operating Expenditures have decreased by $46 million, or 6%, from $780 million in 2012-2013 to $734 million in 2013-2014. This is primarily due to reduced personnel costs as a result of Shared Services Canada (SSC) employees who are no longer being paid by the CRA in 2013-2014, as well as a temporary understatement of the estimated salary expenses which have been accrued to the end of the quarter.

First quarter Vote 5 Capital Expenditures have increased by $8 million, from $2 million in 2012-2013 to $10 million in 2013-2014. This fluctuation in expenditures is not unusual as the quarterly distribution of capital expenditures changes from year to year, depending on the status of major investment projects and the timing of capital procurements.

Expenditures for Total Budgetary Statutory Authorities have decreased by $72 million, or 27%, from $261 million in 2012-2013 to $189 million in 2013-2014. Softwood Lumber disbursements to the provinces, which are driven by various market conditions and fluctuate throughout the fiscal year, account for $57 million of this decrease. In addition, $11 million of this reduction is related to the spending of revenues received pursuant to Section 60 of the Canada Revenue Agency Act, which vary during the fiscal year based on the timing of the payments received.

B) Expended in the First Quarter by Standard Object

As illustrated in the Departmental Budgetary Expenditures table, the CRA’s personnel expenditures have decreased by $61 million, or 8%, from $810 million in 2012-2013 to $749 million in 2013-2014. As mentioned above, the current fiscal year’s personnel costs are lower as the CRA is no longer responsible for administering the pay and benefits of SSC employees in 2013-2014, as well as a temporary understatement of the estimated salary expenses which have been accrued to the end of the quarter.

Purchased repair and maintenance spending has decreased by $14 million, or 70%, from $20 million in 2012-2013 to $6 million in 2013-2014. This reduction is primarily related to the purchase of multi-year software licenses in 2012-2013 of $10 million, which will not take place this year.

Professional services expenditures have increased by $18 million, or 31%, from $55 million in 2012-2013 to $73 million in 2013-2014. This is mainly related to higher legal services costs of $8 million as well as other increases resulting from timing differences that are expected to even out by the end of the fiscal year.

Expenditures for Acquisition of machinery and equipment have increased by $3 million, or 274% from $1 million in 2012-2013 to $4 million in 2013-2014. This is primarily due to increased spending on computer software for the delivery of accessible saveable forms on the CRA website to comply with the Treasury Board’s Common Look and Feel standards.

Transfer payments have decreased by $56 million, or 47% from $119 million in 2012-2013 to $63 million in 2013-2014, primarily as a result of lower 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 fluctuate throughout the fiscal year.

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 Agency from the exposure to these risks and the associated financial impacts.

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.

Significant changes in relation to operations, personnel and programs

In August 2011, the Government of BC announced that the province would eliminate the HST and return to a provincial sales tax in conjunction with the goods and services tax (GST). The return to the GST in BC occurred on April 1, 2013. The CRA worked with both the Department of Finance Canada and the BC Ministry of Finance to identify the administrative steps and processes necessary to facilitate the province’s transition out of the HST. BC agreed to make job offers to its former employees who had already transitioned to the CRA. Twenty eight employees resumed employment with BC on April 1, 2013, and 73 employees are expected to transition back to the province by April 1, 2014. As a result of this decision, $16 million (excluding employee benefit plans and accommodations) in funding associated with the administration of HST in BC was returned to the Treasury Board for the 2013-2014 fiscal year.

In 2011-2012, the Government of Canada announced the creation of SSC, a new organization which represents a government-wide approach to managing information technology. For fiscal year 2013-2014, $150 million (excluding employee benefit plans and accommodations) have been transferred to SSC, along with some 700 FTEs (full-time equivalents) responsible for e-mail, data centres and network services. Due to system limitations and complexities arising from the CRA’s separate employer status, SSC was not in a position to begin administering the pay files of these transferred CRA employees as of April 1, 2013. The CRA therefore continued to administer the pay and benefits for these employees until the fourth quarter of 2012-2013 and recovered the associated expenditures from SSC throughout the year.

As part of the Economic Action Plan 2013 ( Budget 2013 ), the CRA was one of two government organizations asked to review its internal operations in the National Capital Region (NCR) and, as a result, has identified additional savings totalling some $19 million in 2013-2014, growing to $61 million in 2015-2016. These back-office changes, which will reduce duplication of effort and allow the organization to conduct business more efficiently, 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 600 positions to be eliminated in the NCR, approximately 70% will be achieved through existing vacancies and other forms of attrition. There are approximately 10,000 CRA employees within the NCR, and between 500 to 600 leave voluntarily each year. Given this environment, the CRA is well positioned to support its employees through this change.

In addition, Budget 2013 proposes a number of tax 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. The required incremental funding for implementing and administering the various Budget 2013 tax measures is the subject of ongoing discussions with officials of the Department of Finance and the Treasury Board Secretariat. There are no material financial nor 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 and programs: make it easier for Canadians and businesses to deal with their government; and modernize and reduce the back office.

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 will be a significant contributor, with planned savings of $253 million at maturity, and the elimination of 2,568 FTEs. The CRA has committed to modernizing its operations and reducing red tape to enhance services to Canadians while reducing its overall costs. 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 previously noted, the prior year’s authorities do not incorporate measures announced in Budget 2012 , which was tabled in Parliament after the tabling of the 2012-2013 Main Estimates. Instead, frozen allotments were established by Treasury Board to prohibit the spending of funds already identified as savings measures. The 2013-2014 Main Estimates reflect a reduction in authorities of $59 million for Budget 2012 savings initiatives.

In 2012-2013, the CRA achieved savings of $28 million and eliminated 399 FTEs. Initial savings primarily focused on encouraging taxpayers and benefit recipients to increase their use of electronic channels when interacting with the CRA. As part of the modernization of its service offerings, the CRA replaced payment and enquiry counter services at 28 offices with online service options and adjusted its outreach services to an improved suite of self-service options. Furthermore, in June 2012, Parliament passed the Jobs, Growth and Long-Term Prosperity Act, which implemented many of the measures announced in Budget 2012, and contained two areas of cost reduction for the CRA: the authority for the CRA to use regular mail instead of registered mail, when reminding Canadians, who have not filed their income tax and benefit returns on time, of their obligations; and the requirement that tax preparers, who prepare more than 10 returns for a fee, file those returns electronically.

In 2013-2014, the CRA will achieve savings of $59 million and will eliminate 797 FTEs. This represents an increase of $31 million over the prior year, and is related to a number of initiatives, including the centralization of a virtually managed national intranet publishing model, the e-Filing of tax returns by tax preparers, e-Payments, and reinforcing taxpayer transition to self-service. In addition, a new knowledge and research program has been implemented, and the forms and publications ordering workloads were transferred to the CRA’s general enquiries call centres, which has allowed the CRA to consolidate its call centre activities. This also provides clients with a single window into the CRA for all enquiries.

At Quarter 1, the year-over-year change in expenditures attributable to Budget 2012 savings measures is not significant. Over the last couple of years, in anticipation of budget restraint measures, the CRA had already significantly reduced 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 manage reductions through attrition, vacancy management, decreases in new hiring, and the management of term employment, as well as workforce adjustment of affected employees when necessary. The 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 2012-2013, the implementation and administration costs of $13 million (excluding employee benefit plans and accommodations) associated with those measures were managed within the CRA’s existing Parliamentary appropriations. For fiscal year 2013-2014, the CRA has requested supplementary funding of $6 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 nor non-financial impacts to report at this time.

Approval by Senior Officials

Approved by:

[original signed by]

Ottawa, Canada
Date: August 29, 2013