Canada Revenue Agency Quarterly Financial Report

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

For the quarter ended December 31, 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, Supplementary Estimates B, 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 CRA 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.

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 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. Instead, 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 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

As shown in the Statement of Authorities, CRA's total Budgetary Authorities available for use have increased from $4,425 million in 2011-2012 to $4,623 million in 2012-2013, representing a 4% increase or $198 million. The 2012-2013 authorities remain unchanged from the second quarter report, while the 2011-2012 authorities now include Supplementary Estimates B for that year and an adjustment for the deemed appropriation to Shared Services Canada. The components of the $198 million increase are discussed below.

The Vote 1 Gross Operating Expenditure Authority increased by $85 million or 2%, from $3,601 million in 2011-2012 to $3,686 million in 2012-2013. This year-over-year increase is the net result of numerous funding changes, the most significant of which are:

• An increase in authorities available for use from the prior fiscal year, $94 million;
• An increase associated with the administration of the harmonized sales tax (HST) in Ontario and British Columbia, $59 million;
• An increase for the implementation of various tax measures announced in the Federal Budget 2011, $16 million;
• An increase relating to the transfer from Public Works and Government Services Canada for annual adjustments to accommodations and real property services, $11 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, $78 million;
• A decrease, through a vote realignment, which transferred $33 million in 2012 2013 to the Capital Expenditure Authority (Vote 5) to correctly align the Agency's base spending authorities 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 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 received from the CPP and EI Accounts.

The Vote 5 Capital Expenditure Authority increased by $4 million or 5%, from $79 million in 2011 2012 to $83 million in 2012-2013, primarily the result of the following technical adjustments:

• An increase due to the vote realignment, noted above, which transferred $33 million from the Agency's Operating Expenditure Authority;
• A decrease in authorities available for use from the prior fiscal year, $24 million;
• A decrease associated with the transfer to SSC, $3 million.

Total Budgetary Statutory Authorities are forecasted to increase by $118 million or 11% from 2011-2012 to 2012-2013. The estimate for Softwood Lumber disbursements, established by the Department of Finance, was revised upwards by $140 million year over-year to reflect changing market conditions. This increase is partially offset by a decrease of $24 million 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. Minor fluctuations in employee benefit plans and the Children's Special Allowance payments account for the remaining change.

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.

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

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 often normalize 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 $7 million, from $1,048 million in 2011-2012 to $1,055 million in 2012-2013, which represents an increase of 1%. The components of this increase are discussed below.

The CRA's net Vote 1 Operating Expenditures have increased by $59 million or 8%, from $719 million in 2011-2012 to $778 million in 2012-2013. This increase in Vote 1 expenditures is primarily associated with the administration of the HST in the provinces of Ontario and British Columbia. In addition, accrual benefits for severance were eliminated in the last Professional Institute of the Public Service of Canada (PIPSC) collective agreement. This has resulted in many employees cashing out their severance entitlements, thus increasing the disbursements of severance payments in the third quarter. These increases are partially offset by a reduction in non-personnel expenditures relating to the transfer to SSC.

Vote 5 Capital Expenditures have increased by 10% or $1 million, from $12 million in 2011-2012 to $13 million in 2012-2013. 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 year-over-year by $53 million, from $317 million in 2011-2012 to $264 million in 2012-2013, primarily as a result of a 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.

B) Expended in the Third Quarter by Standard Object

As illustrated in the Departmental Budgetary Expenditures table, third quarter personnel expenditures have increased by $31 million, from $781 million in 2011-2012 to $812 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. Some 1,000 provincial employees (primarily from Ontario) who accepted employment with the CRA were integrated gradually, with the largest group transitioning in March 2012. This event contributed to the third quarter increase in personnel expenditures. In addition, severance payments have increased year-over-year due to employees affiliated with the PIPSC bargaining unit cashing out their severance entitlements.

Transportation and communications expenditures have decreased by $16 million or 37%, from $41 million in 2011-2012 to $25 million in 2012-2013, due to the transfer of telephony services to SSC.

Professional and special services have increased by $28 million or 44% from $64 million in 2011 2012 to $92 million in 2012-2013. This is largely comprised of a $22 million increase in legal services costs as well as an $8 million increase due to fluctuations in the quarterly distribution of payments made for the administration of GST in the province of Québec.

Purchase, repairs, and maintenance expenditures have decreased by $19 million or 83%, from $23 million in 2011-2012 to $4 million in 2012-2013, attributable to the transfer of several information technology maintenance agreements to SSC.

Utilities, materials, and supplies expenditures have decreased by $4 million or 42%, from $9 million in 2011-2012 to $5 million in 2012-2013, due to the elimination of the mailing of personalized T1 individual income tax returns which has reduced printing costs.

Acquisition of machinery and equipment has decreased by $7 million or 53%, from $13 million in 2011-2012 to $6 million in 2012-2013, as fewer capital assets were acquired in the third quarter of 2012-2013 due to the transfer of responsibilities to SSC, as previously noted.

Transfer payments have decreased by $4 million or 4%, from $107 million in 2011-2012 to $103 million in 2012-2013, due to a decrease in softwood lumber payments of $8 million, partially offset by a $4 million increase in the Children's Special Allowance payments.

C) Year-to-Date Expenditures by Authority

As displayed in the Statement of Authorities, the year-to-date expenditures have decreased by $14 million, from $3,152 million in 2011-2012 to $3,138 million in 2012-2013, which represents a decrease of less than 1%. The components of this decrease are discussed below.

Net Vote 1 Operating Expenditures have increased by $87 million or 4%, from $2,251 million in 2011-2012 to $2,338 million in 2012-2013. As previously mentioned, this increase in Vote 1 expenditures is related to the additional responsibilities under CRA for the administration of HST in the provinces of Ontario and British Columbia, and higher disbursements for severance benefits, partially offset by a reduction in non-personnel expenditures relating to the transfer to SSC.

The Agency's Vote 5 Capital Expenditures have decreased by 21% or $8 million, from $36 million in 2011-2012 to $28 million in 2012-2013. 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 decreased year-over-year by $93 million, from $865 million in 2011-2012 to $772 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

As illustrated in the Departmental Budgetary Expenditures table, the decrease in year-to-date expenditures of $14 million is primarily associated with decreases in Transportation and communications of $34 million, Purchase, repairs, and maintenance of $47 million, Acquisition of machinery and equipment of $26 million and Utilities, materials and supplies of $5 million, partially offset by an increase in Personnel of $79 million and Professional and special services of $23 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 exposure to these risks and the associated financial impacts.

The measures to contain administrative costs across 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 CRA 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 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 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. Effective November 15, 2011, $72 million in CRA resources (excluding employee benefit plans) was deemed to have been appropriated to SSC for fiscal year 2011 2012. For the fiscal year 2012-2013, $153 million (excluding employee benefit plans) along with some 700 FTEs (full-time equivalents) responsible for e-mail, data centres and network services were transferred to SSC.

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 in 2012 2013. The CRA therefore continues to administer the pay and benefits for these employees and periodically transfers the associated expenditures to SSC. At the end of the third quarter, $19 million in SSC costs have not yet been removed from CRA's expenditures. A final transfer will be made in the fourth quarter to ensure all costs incurred on behalf of SSC are recovered.

On July 1, 2010, the CRA 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 CRA, 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 CRA will continue to administer the HST in that province.

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 CRA is taking action to increase taxpayers' and benefit recipients' use of electronic channels when interacting with the CRA. These initiatives facilitate the delivery of efficient and effective self-serve options for taxpayers and benefit recipients to meet their obligations.

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 the delivery of 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. There are no significant changes in CRA's operations, personnel and programs during the third quarter as a result of implementing these initiatives.

The CRA has adopted a workforce management strategy which emphasizes the use of annual attrition and the Workforce Adjustment provisions as prescribed by the collective agreements. Over the last couple of years, the CRA has significantly reduced new hiring, and has taken advantage of the vacancies created by the retirement of approximately 1,300 CRA employees every year. Moving forward, the CRA will continue to look for placements using attrition and vacancy management, wherever possible, in order to help mitigate the impact of budget reductions on permanent employees.

Budget 2012 also introduced 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.

The CRA is internally managing the implementation and administration costs associated with these various Budget 2012 tax measures through its existing Parliamentary appropriations for the 2012-2013 fiscal year. There are no financial nor non financial impacts to report at this time.

Approval by Senior Officials

Approved by:

Ottawa , Canada
Date: February 18, 2013

Statement of Authorities (unaudited) - Fiscal year 2012-2013
(in thousands of dollars)

This financial table compares the Agency s total available authorities available as of December 31, expenditures used during the quarter and year-to-date expenditures for fiscal years 2012 2013 and 2011-2012 by voted authority. This table uses parentheses to show negative numbers.

	Total available for use for the year ending March 31, 2013 [Footnote 1], [Footnote 2]	Used during the quarter ended December 31, 2012	Year to date used at quarter-end
Vote 1 - Operating expenditures
Gross Operating expenditures	3,685,919	859,192	2,579,576
Revenues netted against expenditures	minus(322,368)	minus(80,620)	minus(241,859)
Net Vote 1 - Operating expenditures	3,363,551	778,572	2,337,717
Vote 5 - Capital expenditures	83,433	12,807	28,275
Budgetary statutory authorities
Employee benefit plans	456,440	114,110	342,330
Softwood Lumber payments	280,000	43,578	154,794
Children's Special Allowance payments	233,000	58,950	178,031
Spending of revenues received	206,769	46,296	95,205
Other statutory authority payments	78	868	1,534
Total Budgetary Statutory authorities	1,176,287	263,802	771,894
Total Budgetary authorities	4,623,271	1,055,181	3,137,886

Footnotes

Statement of Authorities (unaudited)

[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]

Pursuant to section 31.1 of the Financial Administration Act and Order-in-Council P.C. 2011-1297 effective November 15, 2011, $62.9 million in Vote 1 and $9.4 million in Vote 5 is deemed to have been appropriated to Shared Services Canada, which results in a reduction in the same amount for the Canada Revenue Agency, Appropriation Act No.1, 2011-2012.

[Footnote 4]

Includes amounts incurred on behalf of Shared Services Canada from the date of transfer of November 15 to December 31, 2011. It is not possible to reasonably estimate the amount of expenditures incurred on behalf of Shared Services Canada.

Footnotes

Departmental Budgetary Expenditures by Standard Objects (unaudited)

[Footnote 1]

Planned expenditures do not reflect measures announced in Budget 2012.

[Footnote 2]

Pursuant to section 31.1 of the Financial Administration Act and Order-in-Council P.C. 2011-1297 effective November 15, 2011, $62.9 million in Vote 1 and $9.4 million in Vote 5 is deemed to have been appropriated to Shared Services Canada, which results in a reduction of the same amount for the Canada Revenue Agency, Appropriation Act No. 1, 2011-2012.

[Footnote 3]

Includes amounts incurred on behalf of Shared Services Canada from the date of transfer of November 15 to December 31, 2011. It is not possible to reasonably estimate the amount of expenditures incurred on behalf of Shared Services Canada.

Date modified:

2013-03-01