Canada Revenue Agency Quarterly Financial Report

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

For the quarter ended September 30, 2012

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 2012 (Budget 2012).

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 Canada Revenue Agency's spending authorities granted by Parliament and those used by the Agency consistent with the Main Estimates for the 2012-2013 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.

As part of the Parliamentary business of supply, the Main Estimates must be tabled in Parliament on or before March 1st preceding the new fiscal year. Budget 2012 was tabled in Parliament on March 29th, after the tabling of Main Estimates on February 28, 2012. As a result, the measures announced in the Budget 2012 could not be reflected in 2012-2013 Main Estimates.

In fiscal year 2012-2013, 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 2012. 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.

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.

The Agency 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

As shown in the Statement of Authorities, CRA's total Budgetary Authorities available for use have increased from $4,471 million in 2011-2012 to $4,623 million in 2012-2013, representing a 3% increase or $152 million. The components of this increase, which remain unchanged from the first quarter report, are discussed below.

The Vote 1 Gross Operating Expenditure Authority increased by $163 million or 5%, from $3,523 million in 2011-2012 to $3,686 million in 2012-2013. This year-over-year increase is the net result of numerous funding increases and decreases, the most significant of which are:

• An increase in authorities available for use from the prior fiscal year, $94 million;
• An increase, through a vote realignment, which transferred $83 million from the Capital Expenditure Authority (Vote 5) to correctly align the Agency's base spending authorities with planned expenditures; the adjustment is technical in nature and does not represent a change in the Agency's planned acquisitions or overall authorities;
• An increase associated with the administration of the harmonized sales tax (HST) in Ontario and British Columbia of $59 million;
• An increase for the implementation of tax measures, including the Hiring Credit for Small Business and new tax credits for individuals, announced in the Federal Budget 2011, $33 million;
• An increase for the ongoing redesign of the personal income tax processing system, $8 million;
• A decrease reflecting the transfer to the new Shared Services Canada (SSC) organization of the control and supervision of operational domains relating to email, data centres and network services, $140 million.

In 2012-2013, the CRA expects to spend $322 million to fulfill its administrative responsibilities in support of the Canada Pension Plan (CPP) and Employment Insurance (EI) program, up from $313 million in 2011-2012. This $9 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 Expenditure Authority decreased by $120 million or 59%, from $203 million in 2011‑2012 to $83 million in 2012-2013, primarily the result of the following technical adjustments:

• A decrease due to the vote realignment, noted above, which transferred $83 million to the Agency's Operating Expenditure Authority;
• A decrease in authorities available for use from prior fiscal year, $24 million;
• A decrease associated with the transfer to SSC, $13 million.

Analysis of Expenditures

A two year comparison of the Agency'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.

Figure 1: Annual Authorities against Year-to-Date and Second Quarter Expenditures

A) Expended in the Second Quarter by Authority

As displayed in the Statement of Authorities, the second quarter expenditures have decreased by $12 million, from $1,052 million in 2011-2012 to $1,040 million in 2012-2013, which represents a decrease of 1%. The components of this decrease are discussed below.

The Agency's net Vote 1 Operating Expenditures have decreased by $11 million or 1%, from $791 million in 2011-2012 to $780 million in 2012-2013. This decrease in Vote 1 expenditures is associated with the transfer of responsibilities to SSC, as well as timing differences in year-over-year expenditures.

Vote 5 Capital Expenditures have decreased by 19% or $3 million, from $17 million in 2011-2012 to $14 million in 2012-2013. As in the first quarter, this reduction was foreseen as a significant portion of the Agency's capital asset acquisition responsibilities, specifically relating to data centres and networks, were transferred to SSC on November 15, 2011.

Expenditures for Total Budgetary Statutory Authorities have increased year-over-year by $2 million, from $245 million in 2011-2012 to $247 million in 2012-2013, as a result of an increase in Children's Special Allowance payments partially offset by a reduction in Softwood Lumber payments. These statutory payments are externally-driven and often fluctuate throughout the fiscal year.

B) Expended in the Second Quarter by Standard Object

As illustrated in the Departmental Budgetary Expenditures table, second quarter personnel expenditures have increased from $773 million in 2011-2012 to $801 million in 2012-2013, a change of 4%. In July 2010, the CRA assumed the responsibility for the administration of the HST in the provinces of Ontario and British Columbia. Provincial employees who accepted employment with the CRA, some 1,000 FTEs (full-time equivalents) primarily from Ontario, were integrated in waves with the largest group transitioning in March 2012, creating the increase in second quarter personnel expenditures. In addition, retroactive payments were issued in the second quarter of 2012-2013 for the collective agreement with the Professional Institute of the Public Service of Canada (PIPSC) which expired in December 2011.

Transportation and communications expenditures have decreased by $11 million or 26%, from $42 million in 2011-2012 to $31 million in 2012-2013, which relates to the transfer of telephony services to SSC.

Purchase, repairs, and maintenance expenditures have decreased by $11 million or 68%, from $16 million in 2011-2012 to $5 million in 2012-2013, attributable to the transfer of several information technology maintenance agreements to SSC.

Acquisition of machinery and equipment has decreased by $16 million or 79%, from $20 million in 2011-2012 to $4 million in 2012-2013, as fewer capital assets were acquired in the second quarter of 2012-2013 due to the transfer of responsibilities to SSC, as previously noted.

C) Year-to-Date Expenditures by Authority

As displayed in the Statement of Authorities, the year-to-date expenditures have decreased by $21 million, from $2,104 million in 2011-2012 to $2,083 million in 2012-2013, which represents a decrease of 1%. The components of this decrease are discussed below.

Net Vote 1 Operating Expenditures have increased by $28 million or 2%, from $1,531 million in 2011-2012 to $1,559 million in 2012-2013. This increase in Vote 1 expenditures is associated with the administration of the HST in the provinces of Ontario and British Columbia, which includes the integration of provincial employees into the Agency's workforce, partially offset by a reduction in expenditures relating to the transfer to SSC in 2012-2013.

The Agency's Vote 5 Capital Expenditures have decreased by 36% or $9 million, from $24 million in 2011-2012 to $15 million in 2012-2013. As previously noted, this reduction is associated with the transfer to SSC.

Expenditures for Total Budgetary Statutory Authorities have decreased year-over-year by $40 million, from $548 million in 2011-2012 to $508 million in 2012-2013, due to the reduction in the spending of cost recovery revenues as certain services previously provided by the CRA to the Canada Border Services Agency are now being delivered by SSC.

D) Year-to-Date Expenditures by Standard Object

The change in the Agency's year-to-date expenditures by Standard Object is consistent with the quarterly explanations noted above (section B). The decrease in expenditures is primarily associated with decreases in Transportation and communications of $19 million, Purchase, repairs, and maintenance of $28 million and Acquisition of machinery and equipment of $19 million partially offset by an increase in Personnel of $49 million.

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 realization of these risks and the associated financial impacts.

The measures to contain administrative costs throughout the government, announced in the Federal Budget 2010 , froze operating budgets at 2010-2011 levels for all government departments and agencies, and are in effect until March 31, 2013. Departments and agencies are required to absorb the cost of wage increases that take effect after April 1, 2010, through the reprioritization of existing operating resources.

In response to the Budget 2010 measures, the Agency undertook a comprehensive internal spending review to identify potential sources of funding for key operating pressures, including non‑compensated wage increases, which are currently estimated to be $91 million for 2012‑2013, based on approved wage settlements.

The collective agreement between the Agency and the Public Service Alliance of Canada (PSAC) expired in October 2012; contract negotiations between parties are ongoing.

Significant changes in relation to operations, personnel and programs

In 2011-2012, the Government of Canada announced the creation of Shared Services Canada (SSC), a new organization which represents a government-wide approach to managing information technology. The CRA transferred to SSC the control and supervision of operational domains related to email, data centres and network services. For the fiscal year 2012-2013, $153 million (excluding employee benefit plans) was transferred to SSC. Along with the transfer of financial resources, the Agency transferred to SSC some 700 FTEs (full-time equivalents).

SSC was not in a position to begin administering the pay files of transferred CRA employees in 2012‑2013, due to system limitations and complexities arising from the CRA's separate employer status. The CRA has been asked to continue to administer the pay and benefits for the employees who have been transferred, amounting to $28 million as at the second quarter. These costs will be transferred to SSC later in the fiscal year, which will reduce the Agency's personnel expenditures.

On July 1, 2010, the Agency successfully implemented the harmonized sales tax (HST) in the provinces of Ontario and British Columbia. The CRA received funding of $157 million (excluding employee benefit plans and accommodations) in 2012-2013 for the continued implementation and administration of the HST in both provinces. This funding was required for IT system modifications, the onboarding of affected provincial employees to the Agency, program changes to address identified risks and to administer new province‑specific HST flexibilities. The province of British Columbia has decided to return to a provincial sales tax model on April 1, 2013. In the meantime, the Agency will continue to administer the HST in British Columbia.

Budget 2012 Implementation

This section provides an overview of the savings measures announced in Budget 2012 that will be 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.

The CRA has committed to modernizing its operations and reducing red tape to enhance services to Canadians while reducing its overall costs. Canadians and businesses want a reduction in the burden of meeting their tax obligations and are increasingly comfortable with electronic options for doing so. Accordingly, the Agency is taking action to increase taxpayers' and benefit recipients' use of electronic channels when interacting with the CRA. These initiatives will not have a negative impact on tax and benefit processing.

At the end of June 2012, Parliament passed the Jobs, Growth and Long-Term Prosperity Act. This legislation, which implemented many of the measures announced in Budget 2012, contained two areas of cost reduction for the CRA: the elimination of the requirement for the CRA to deliver Demands to File either in-person or via registered mail, and the requirement that tax preparers who prepare, for a fee, more than 10 returns are to file those returns electronically.

The CRA will also streamline its internal business functions and reduce the back office. These changes include consolidating management functions, centralizing intranet publishing functions, modernizing library and research services, changing official language testing, reducing overtime costs, updating the management development program, and discontinuing the Charities Partnership and Outreach contribution program.

The CRA will achieve its 2012-2013 savings target of $28 million with minimal impact on the existing workforce in the current year and there are no significant changes in CRA's operations, personnel and programs during the second quarter as a result of implementing these initiatives.

Also referenced in Budget 2012 were a number of tax measures including (among others):

• a one‑year extension of the Hiring Credit for Small Business
• increased transparency and accountability of registered charities and registered Canadian amateur athletic associations (RCAAAs); and
• changes to the Scientific Research and Experimental Development program to simplify the tax credit base and increase the cost effectiveness of the program.

Budget 2012

Approval by Senior Officials

Approved by:

Ottawa , Canada
Date: November 21, 2012

Footnotes

[Footnote 1]

Includes only authorities available for use and granted by Parliament at quarter-end.

[Footnote 2]

Total available for use does not reflect measures announced in Budget 2012.

[Footnote 3]

Planned expenditures do not reflect measures announced in Budget 2012.

Date modified:

2012-11-29