For the quarter ended December 31, 2017

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 2017-2018 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 23, 2017, Supplementary Estimates B released on December 11, 2017, authorities available for use from the prior fiscal year and technical adjustments.

As shown in the Statement of Authorities, the CRA's total Budgetary Authorities available for use have increased by $317 million, or 7%, from $4,405 million in 2016-2017 to $4,722 million in 2017-2018. The components of the Vote 1 Gross Operating Expenditures Authority, Vote 5 Capital Expenditures and Budgetary Statutory Authorities are outlined below.

The Vote 1 Gross Operating Expenditures increased by $325 million, or 9%, from $3,726 million in 2016-2017 to $4,051 million in 2017-2018. This is mainly due to the following factors:

• $293 million increase for the reimbursement of severance payments as a result of the settlement for the Public Service Alliance of Canada (PSAC) collective agreement;
• $44 million increase for the implementation of tax measures announced in Budget 2017, including measures to continue efforts on Cracking Down on Tax Evasion and Combatting Tax Avoidance;
• $42 million increase as a result of incremental funding for the ongoing impact of the 2013 wage settlement for the PSAC collective agreement;
• $23 million increase for the implementation of tax measures announced in Budget 2016, including Cracking Down on Tax Evasion and Combatting Tax Avoidance, Enhancing Tax Collections, and Client-Focused Services for Canadians and Canadian Businesses;
• $9 million increase as a result of adjustments due to salary overpayments and advances;
• $7 million increase to fulfill administrative responsibilities in support of the Canada Pension Plan (CPP) and Employment Insurance (EI) program;
• $45 million decrease in authorities available for use from the prior fiscal year;
• $24 million decrease related to adjustments in accommodation and real property services provided by Public Services and Procurement Canada; and
• $22 million decrease as a result of a vote realignment, which in 2016-2017 transferred funding from the Operating Expenditure Authority (Vote 1) to the Capital Expenditure Authority (Vote 5) to better align the CRA Strategic Investment Plan (SIP) reference levels with planned expenditures; this adjustment is technical in nature and does not represent a change in the Agency's planned acquisitions or overall authorities.

In 2017-2018 the CRA expects to spend $349 million to fulfill its administrative responsibilities in support of the CPP and EI program, up from $326 million in 2016-2017. This $23 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 decreased by $12 million, or 13%, from $93 million in 2016‑2017 to $81 million in 2017-2018. This decrease is primarily due to the following factors:

• $28 million decrease in authorities available for use from the prior fiscal year;
• $5 million decrease for the T1 Systems Redesign;
• $2 million decrease related to tax measures announced in Budget 2015, mainly aimed at enhancing compliance measures; and
• $22 million increase, as a result of a vote realignment, which, as previously mentioned, transferred funding in 2016‑2017 from the Operating Expenditure Authority (Vote 1) to the Capital Expenditure Authority (Vote 5) to better align the CRA SIP reference levels with planned expenditures; this adjustment is technical in nature and does not represent a change in the Agency's planned acquisitions or overall authorities.

Total Budgetary Statutory Authorities are forecasted to increase by $26 million, or 3%, from $912 million in 2016-2017 to $938 million in 2017-2018. This increase is attributable to the following:

• $51 million increase as a result of an enrichment in the per child benefit amount under the new Canada Child Benefit program implemented in July 2016;
• $22 million decrease in the contributions to employee benefit plans;
• $2 million decrease for the disbursements to provinces under the Softwood Lumber Products Export Charge Act, 2006 for which the agreement expired on October 12, 2015 and final accounting was completed in 2016-2017; and
• $1 million decrease in cost recovery revenues to be received through the conduct of CRA operations, primarily attributable to initiatives administered on behalf of the Canada Border Services Agency and the Province of Ontario.

Analysis of Expenditures

A two-year comparison of the CRA's annual net authorities available for use against year-to-date and third quarter net expenditures as at December 31 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 Third Quarter by Authority

As displayed in the Statement of Authorities, the third quarter expenditures have increased by $126 million, or 13%, from $956 million in 2016-2017 to $1,082 million in 2017-2018. The components of this year-over-year change are discussed below.

The CRA's third quarter net Vote 1 Operating Expenditures have increased by $113 million, or 16%, from $705 million in 2016-2017 to $818 million in 2017-2018. The increase is primarily the result of the settlement of the PSAC collective agreement which increased salary expenditures in 2017-2018. In addition, expenditures on tax measures announced in Budget 2016, including Cracking Down on Tax Evasion and Combatting Tax Avoidance, Enhancing Tax Collections, and Client-Focused Services for Canadians and Canadian Businesses have increased in this second year of implementation. Similarly, the implementation of Budget 2017 initiatives, including measures to continue efforts on Cracking Down on Tax Evasion and Combatting Tax Avoidance, have increased the net Vote 1 Operating Expenditures.

The CRA's third quarter Vote 5 Capital Expenditures have remained relatively stable year over year, increasing less than 1% in 2017-2018 as compared to the third quarter of 2016-2017.

Expenditures for Total Budgetary Statutory Authorities have increased by $14 million, or 6%, from $229 million in 2016-2017 to $243 million in 2017-2018. This increase is largely attributable to timing differences in the spending of revenues. The annual revenue forecast for 2017-2018 is consistent with that of 2016-2017 and as such, the variance will be resolved by year-end.

B) Expended in the Third Quarter by Standard Object

As illustrated in the Departmental Budgetary Expenditure tables, the CRA's personnel expenditures have increased by $95 million, or 13%, from $748 million in 2016-2017 to $843 million in 2017-2018. The variance is attributable to the settlement of the PSAC collective agreement. In addition, as noted above, the implementation of tax measures announced in Budget 2016 have increased as compared to Q3 of 2016-2017, as well as the implementation of Budget 2017 initiatives, which are new this year.

Professional and special services expenditures have increased by $32 million, or 42%, from $76 million in 2016-2017 to $108 million in 2017-2018. The increase is the result of timing differences in payment of invoices for the Department of Justice as compared to 2016-2017.

Purchased repair and maintenance expenditures have decreased by $8 million, or 36%, from $22 million in 2016-2017 to $14 million in 2017-2018. The variance is in line with the decrease in authorities following the review of the Agency's multi-year occupancy requirements.

Acquisition of machinery and equipment expenditures have decreased by $4 million, or 50%, from $8 million in 2016-2017 to $4 million in 2017-2018. The decrease in mainly attributable to a decrease in expenditures related to computer software.

C) Year-to-Date Expenditures by Authority

As displayed in the Statement of Authorities, the year-to-date expenditures have increased by $373 million, or 12%, from $2,988 million in 2016-2017 to $3,361 million in 2017-2018. The components of this year-over-year increase are discussed below.

Net Vote 1 Operating Year-to-Date Expenditures have increased by $412 million, or 18%, from $2,241 million in 2016-2017 to $2,653 million in 2017-2018. The increase is primarily the result of the settlement of the PSAC collective agreement which increased salary expenditures in 2017-2018. In addition, expenditures on tax measures announced in Budget 2016 have increased in this second year of implementation as well as expenditures for initiatives announced in Budget 2017, including measures to continue efforts on Cracking Down on Tax Evasion and Combatting Tax Avoidance.

Year-to-date Vote 5 Capital Expenditures have increased by $3 million, or 6%, from $48 million in 2016‑2017 to $51 million in 2017-2018. 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 decreased by $42 million, or 6%, from $699 million in 2016-2017 to $657 million in 2017-2018. The variance is mainly due to a decrease of $47 million in disbursements to provinces under the Softwood Lumber Products Export Charge Act, 2006 offset by an increase of $14 million in Children's Special Allowance payments as the result of previous changes in the governing legislation.

D) Year-to-Date Expenditures by Standard Object

The CRA's personnel year-to-date expenditures have increased by $447 million, or 20% from $2,278 million in 2016-2017 to $2,725 million in 2017-2018. The variance is attributable to the settlement of the PSAC collective agreement. In addition, as noted above, the implementation of tax measures announced in Budget 2016 and Budget 2017 have increased as compared to 2016-2017.

Professional and special services expenditures have increased by $7 million, or 3%, from $274 million in 2016-2017 to $281 million in 2017-2018. The variance is mainly attributed to timing in the payment of invoices for legal services provided by the Department of Justice, as well as an increase in expenditures for information technology services received from Shared Services Canada.

Purchased repair and maintenance expenditures have decreased by $23 million, or 39% from $59 million in 2016-2017 to $36 million in 2017-2018. The variance is in line with the decrease in authorities following the review of the Agency's multi-year occupancy requirements.

Transfer payments have decreased by $33 million, or 12%, from $284 million in 2016-2017 to $251 million in 2017-2018 mainly due to a decrease of $47 million in disbursements to provinces under the Softwood Lumber Products Export Charge Act, 2006 offset by an increase of $14 million in Children's Special Allowance payments as the result of previous changes in the governing legislation.

Acquisition of machinery and equipment expenditures have decreased by $6 million, or 40% from $15 million in 2016-2017 to $9 million in 2017-2018. The decrease is mainly attributable to a decrease in expenditures related to computer software.

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.

In a continuing effort to contain administrative costs across the government, Budget 2014 introduced a two year operating budget freeze which was in effect until March 31, 2016. Operating budgets for all government departments and agencies were frozen at 2014-2015 levels and as a result, departments and agencies were required to absorb the cost of wage increases that took effect after April 1, 2014.

The collective agreement between the CRA and the Professional Institute of the Public Service of Canada, Audit, Financial and Scientific (PIPSC-AFS) group expired on December 21, 2014. The CRA and PIPSC-AFS reached an agreement and ratification by the members took place in late 2017. Governor in Council approval and signing is expected in the fourth quarter of 2017-2018. The CRA and the Public Service Alliance of Canada, Union of Taxation Employees (PSAC-UTE) signed a collective agreement on October 25, 2016 that included a clause permitting the parties to re-open the agreement and engage in discussions related to economic increases for 2014-2015 and 2015-2016. As parties were unable to reach an agreement, the matter was referred to a third-party for final and binding determination. A decision is expected by the end of fiscal year 2017-2018. The CRA established a provision to cover estimated amounts for collective bargaining increases, therefore mitigating the risk to the Agency.

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.

Significant changes in relation to operations, personnel and programs

Through Budget 2015, the Government announced several legislative and enhanced compliance measures to improve the fairness and integrity of the tax system as well as strengthen tax compliance which the CRA has implemented and administers.

Implementation of the various initiatives related to Budget 2016 focused on Cracking Down on Tax Evasion and Combatting Tax Avoidance, Enhancing Tax Collections, Client-Focused Services for Canadians and Canadian Businesses, and the implementation and administration of various tax measures are well underway.

Budget 2017 included measures to improve tax fairness for Canadian families by closing loopholes, eliminating measures that disproportionately favour the wealthy, and cracking down on tax evasion, so that every Canadian has a real and fair chance at success.

As online processing grows and processing centres receive less and less paper based work, the Agency is responding to the changing environment by looking at its business differently‎. The Service Renewal initiative, launched in November 2016, is changing how the CRA operates so that it can improve service to Canadians, modernize collections and verification capacity, optimize its workforce to best meet priorities, and ensure the CRA maintains a continued presence in all regions.

The Agency is taking steps to make it easier for Canadians to file their income tax and benefit returns, no matter which method they choose. The CRA announced the launch of a new automated telephone filing service called File my Return. Over 950,000 eligible individuals with low income or a fixed income that is unchanged year-to-year will be invited to file their income tax and benefit returns simply by answering a series of short questions and giving some personal information. Canadians eligible to use File my Return will receive personalized invitation letters. This service allows all the deductions, benefits and credits that the user is entitled to, without the need for any calculations or paper forms to fill out. In addition, the CRA also announced that taxpayers who filed using paper tax forms in previous years will receive a tax package by mail. By making filing returns easier and simpler, these services will help millions of Canadians do their taxes.

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

Approval by Senior Officials

Approved by: