For the quarter ended September 30, 2018

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

Introduction

This quarterly financial report (QFR) 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) core responsibilities 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 $13 million, from $4,376 million in 2017-2018 to $4,363 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 $12 million, from $3,707 million in 2017-2018 to $3,719 million in 2018-2019. However, the authorities as of Quarter 2 have remained relatively stable as compared to the last quarter. The main components of the $12 million increase that have already been presented in the Quarter 1 QFR are as follows:

• $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. This change has no impact on the CRA's overall authorities; and
• $4 million decrease for various initiatives announced in previous Federal Budgets.

The incremental year over year changes in the Vote 1 Gross Operating Expenditures Authorities since Quarter 1 include the following two adjustments:

• $4 million increase to fulfill administrative responsibilities in support of the CPP and EI program; and
• $2 million increase related to salary overpayments and advances incurred as a result of the government pay system in 2017-2018.

In 2018-2019, the CRA expects to spend $352 million to fulfill its administrative responsibilities in support of the CPP and EI program, up from $342 million in 2017-2018. This $10 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. However, no change has occurred in authorities since the last quarter. The $4 million 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 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 in authorities has not changed from the last quarter and 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 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 $280 million, or 24%, from $1,181 million in 2017-2018 to $901 million in 2018-2019.

This year over year change is mainly comprised of a decrease in the CRA's net Vote 1 Operating Expenditures of $296 million, or 31%, from $944 million in 2017-2018 to $648 million in 2018-2019. Similar to the Quarter 1 QFR, the decrease is primarily the result of $149 million in severance payments related to the settlement of the Public Service Alliance of Canada, Union of Taxation Employees (PSAC-UTE) collective agreements which were paid out in the second quarter of 2017-2018 and, of which there are no corresponding expenditures in 2018-2019. In addition, the timing related to the payment of invoices for the Department of Justice (DOJ) explains a further decrease of $31 million in the Quarter 2 net Vote 1 expenditures. These DOJ invoices were paid earlier this year, in the first quarter, as compared to the second quarter of last fiscal year.

The remaining $116 million decrease in expenditures consists of a combination of decreases due to a planned accounting adjustment that has been offset by the implementation of Federal Budget initiatives. More specifically, this accounting adjustment relates to the reversal of retroactive payments as a result of the settlement of the Professional Institute of the Public Service of Canada, Audit, Financial and Scientific (PIPSC-AFS) and the additional economic increases for the PSAC-UTE collective agreements. The offsetting increases pertain to 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. 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 CRA's second quarter Vote 5 Capital Expenditures decreased by $3 million or 13%, from $19 million in 2017-2018 to $16 million in 2018-2019. Fluctuations in capital expenditures are not unusual as the quarterly distribution may vary from year-to-year, depending on the status of major project investments and the timing of capital procurements.

Expenditures for Total Budgetary Statutory Authorities have increased by $19 million, or 9%, from $218 million in 2017-2018 to $237 million in 2018-2019. This increase is attributable to timing differences in the spending of revenues for provincial initiatives.

B) Expended in the Second Quarter by Standard Object

As illustrated in the Departmental Budgetary Expenditures by Standard Object table, the CRA's personnel expenditures have decreased by $250 million, or 26%, from $974 million in 2017-2018 to $724 million in 2018-2019. As noted above, the year over year decrease is primarily the result of $149 million in severance payments related to the settlement of PSAC-UTE collective agreement which were paid in 2017-2018. The remaining $101 million decrease is attributable to the reversal of expenditures pertaining to fiscal year 2017-2018 due to retroactive salary payments from collective bargaining and have been offset by increased expenditures as a result of tax measures announced in Budget 2016, Budget 2017, and Budget 2018.

Transportation and communications expenditures have decreased by $1 million, or 4%, from $28 million in 2017-2018 to $27 million in 2018-2019. The decrease is the result of timing differences related to the payment of postal services between the first and second quarters and has no impact on the year to date variance.

Professional and special services expenditures have decreased by $31 million, or 33%, from $97 million in 2017-2018 to $66 million in 2018-2019. The decrease is the result of timing differences in the payment of invoices for DOJ.

Rentals expenditures have decreased by $5 million, or 6%, from $73 million in 2017-2018 to $68 million in 2018-2019. In addition, purchased repair and maintenance expenditures have decreased by $1 million, or 14%, from $10 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 CRA's multi-year occupancy requirements.

Acquisition of machinery and equipment expenditures have increased by $4 million in the second quarter, from $3 million in 2017-2018 to $7 million in 2018-2019. This increase is mainly attributable to the acquisition of personal computers, software, and other computer equipment as a result of significant growth in the renewal of the CRA's Information Technology (IT) assets. Additionally, the CRA has implemented a new process that consists of maintaining a larger inventory of computer equipment to better manage the ongoing requirements and timely delivery to end users.

Other subsidies and payments expenditures have increased by $2 million, from less than one million in 2017-2018 to $2 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".

C) Year to Date Expenditures by Authority

The CRA's year to date expenditures by authority have decreased by $111 million, or 5%, from $2,279 million in 2017-2018 to $2,168 million in 2018-2019. The components of this year over year decrease are discussed below.

Net Vote 1 Operating year to date Expenditures have decreased by $136 million, or 7%, from $1,835 million in 2017-2018 to $1,699 million in 2018-2019. The year to date decrease is primarily attributable to severance payments totaling over $200 million related to the settlement of PSAC-UTE collective agreements which were paid in 2017-2018. This decrease is offset by higher salary rates in 2018-2019 as a result of the ratification of collective agreements as well as the implementation of Federal Budget initiatives mentioned earlier.

Year to date Vote 5 Capital Expenditures have decreased by $3 million, or 9%, from $29 million in 2017-2018 to $26 million in 2018-2019. This fluctuation in expenditures is not unusual depending on the status of major project investments and the timing of capital procurements.

Total Budgetary Statutory Authorities have increased by $28 million, or 7%, from $415 million in 2017-2018 to $443 million in 2018-2019, and as mentioned previously, is mainly related to timing differences in the spending of revenues as well as a slight increase in the annual forecast.

D) Year to date Expenditures by Standard Object

The CRA's year to date personnel expenditures have decreased by $129 million, or 7%, from $1,881 million in 2017-2018 to $1,752 million in 2018-2019. The year to date decrease is primarily attributable to severance payments totaling over $200 million related to the settlement of PSAC-UTE collective agreements which were paid in 2017-2018. This decrease is offset by higher salary rates in 2018-2019 as a result of collective bargaining and in addition, the implementation of Federal Budget initiatives as previously mentioned.

Professional and special services expenditures have increased by $10 million, or 6% on a year to date basis, from $173 million in 2017-2018 to $183 million in 2018-2019. The majority of the increase, $8 million, is primarily the result of timing differences in the payment of invoices for Shared Services Canada as compared to 2017-2018.

Rentals expenditures have decreased by $13 million, or 8%, from $148 million in 2017-2018 to $135 million in 2018-2019. In addition, purchased repair and maintenance expenditures have decreased by $3 million, or 17%, from $21 million in 2017-2018 to $18 million in 2018-2019. These decreases are both in line with the reduction in authorities following the review of the CRA's multi-year occupancy requirements.

Acquisition of machinery and equipment expenditures have increased by $9 million, from $5 million in 2017-2018 to $14 million in 2018-2019. A portion of this increase, $4 million, is related to deferred acquisition of computer hardware and software initially planned for the fourth quarter of 2017-2018. The remaining $5 million pertains to increased growth in the renewal of personal computers, software, and other computer equipment as well as maintaining a larger inventory of computer equipment to better manage the ongoing requirements and timely delivery to end users.

Other subsidies and payments expenditures have increased by $8 million, from less than one million in 2017-2018 to $8 million in 2018-2019 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".

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.

As mentioned in previous quarters, the implementation of the government-wide Pay Modernization Project (Phoenix) has affected departments and individuals across government. To mitigate the associated risks, the CRA continues to monitor pay transactions and makes appropriate adjustments, when necessary, in a timely manner.

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; and
• 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. On September 17, 2018, the CRA's first Chief Service Officer was appointed in conjunction with assuming the role of Chief Data Officer. The consolidation of these roles will effectively support the CRA's goal of becoming better integrated as a client-focused world-class tax and benefit administration.

On August 24, 2018 the CRA announced it would be opening three new Northern Service Centres and providing enhanced year-round services out of Whitehorse, Yellowknife, and Iqaluit beginning in the last quarter of 2018-2019. Although, the cost is expected to be less than $1 million in the current year, this internally funded initiative will better support Indigenous communities and Canadians living in the North and expand the CRA's presence.

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

Approval by Senior Officials

Approved by:

Ottawa, Canada
Date: November 26, 2018