Audited Financial Statements – Agency Activities

Financial Statements Discussion and Analysis – Agency Activities

Introduction

This section of the Financial Statements provides unaudited supplementary information on Agency Activities, on an accrual basis, as reported in the audited Financial Statements. It also provides an overview of the Enterprise Risk Management.

Financial Statements Highlights

There are three significant program administration changes which have influenced the results in the Financial Statements.

1. Corporate Tax Administration for Ontario

Under the Memorandum of Agreement Concerning a Single Administration of Ontario Corporate Tax signed on October 6, 2006, the Governments of Canada and Ontario agreed to transfer the administration of Ontario corporate income taxes from the Ontario Ministry of Revenue (OMoR) to the Canada Revenue Agency (CRA) starting in the 2009 taxation year. The CRA received $210.5 million of Federal Government funding over four years (2006-07 to 2009-10) for developmental and transitional costs relating to this initiative. Of this amount, $61.3 million was spent in fiscal year 2008-2009.

To date, the Corporate Tax Administration for Ontario initiative has met all its key milestones. The CRA began receiving blended federal and provincial installment payments from corporations in February 2008. On April 3, 2008, the majority of the administration of Ontario's corporate income tax was transferred to the CRA for taxation years prior to 2008. The CRA started providing integrated audits and other related activities, such as rulings, interpretations, objections and appeals for 2008 and prior taxation years. Over 300 OMoR employees transferred to the CRA to assist with this additional workload.

All necessary agreements are now in place for the CRA to administer the harmonized T2 Corporation Income Tax Returns, starting in 2009.

2. Investment in Information Technology (IT) systems

Over the course of fiscal year 2009, the CRA had several large-scale projects that required substantial investments in the development of IT systems. Combined with the acquisition of IT hardware, the Agency has invested $144 million in IT related capital assets this fiscal year.

The value of these new capital assets has been offset by slightly higher depreciation in the year. Large-scale IT projects, by nature, generally require multi-year investments. These incremental investments add to the overall capital assets of the CRA as they occur, however, the associated depreciation of these assets only commences once a project is completed and the system enters production. This contributed to the increase of CRA's depreciation in fiscal year 2009 as completed systems entered production mode and became eligible for depreciation. The total depreciation claimed by CRA in 2009 was $88 million.

The following figure outlines investments in information technology that have been accounted for as capital assets in the last four years.

Figure 18 Information Technology Investment in Capital Assets

3. Increase in non-tax revenue

The CRA financial statements demonstrate a noticeable increase in non-tax revenue of $58 million. The increase is attributable to the provision of IT services to the Canada Border Services Agency and administration fees charged to the province of Ontario relating to the Corporate Tax Administration for Ontario and to the province of British Columbia for the British Columbia Climate Action Tax Credit and Dividend.

Analysis of Net Cost of Operations

The Agency’s 2008-2009 net cost of operations increased by $348 million from 2007-2008. Agency expenses totaled $4,434 million in 2008-2009 (2007-2008 - $4,028 million) (see Note 9 of the Financial Statements – Agency Activities for the breakdown of expenses by type). When adjusting for non-tax revenue of $538 million (2007-2008 - $480 million), the net cost of operations amounts to $3,896 million, as illustrated below:

Details on the net cost of operations

The Agency’s expenses are composed of 73% in personnel expenses (salaries, other allowances and benefits) and 27% in non-personnel expenses, as illustrated in the figure below.

Personnel expenses are the primary drivers for the Agency. A number of factors contributed to the net increase of $322 million for this type of expenses in 2008-2009. These include salary revisions pursuant to collective agreements provisions, the cost of other allowances and benefits, and increases in the staff complement due to new initiatives, such as the Corporate Tax Administration for Ontario and others announced in recent Federal Budgets.

In total, non-personnel expenses increased by $84 million. Significant elements of non-personnel expenses are made up of accommodations, transportation and communications expenses, which are, for the most part, linked to personnel expenses. The growth of $45 million in information technology costs are linked to increased amortization charges, investment projects, and infrastructure growth and renewal. Federal Goods and Services Tax administration costs by the Province of Québec have returned to more normal levels compared to the previous fiscal year in which the Province incurred higher costs related to the upgrade of their information technology systems.

Figure 19 Total Expenses by Type

Enterprise Risk Management

The purpose of the Enterprise Risk Management (ERM) Program is to ensure that the Agency develops and implements a systematic, comprehensive approach to managing risks as a management function that is fully integrated into the Agency’s decision-making, planning and reporting processes and mechanisms.

In support of corporate risk management, the two key ERM products are the Corporate Risk Inventory (CRI) and the CRA Risk Action Plan. The CRI presents a strategic, high-level snapshot at a point-in-time of the Agency’s risk status. The Agency's response to each risk in the CRI is captured in a companion document, the CRA Risk Action Plan.

In addition to efforts to align corporate risk information with the Agency’s planning and resource allocation cycles, the Agency is making strides to embed risk information and commitments in other key products and processes including the Corporate Business Plan, the Corporate Audit and Evaluation Plan, and the Executive Cadre’s Accountability Regime.

Compliance with Legislation, Regulations and Policies

Aside from the legislation that the CRA administers, it is itself subject to a large array of legislation, regulations and policies, such as those related to financial management, accounting and reporting and access to information. To ensure compliance, the CRA has put in place appropriate decision frameworks, systems and procedures in each domain. The Agency also relies on its proven abilities in change and project management to adjust to evolving requirements as they arise.

Resource Optimization

There is a perpetual risk that at any point in time the manner in which the Agency’s resources are deployed is sub-optimal. The never-ending changes in the Agency’s responsibilities and environment require that it continually adjust the manner in which its resources are utilized. In addition, there is a continual need to balance immediate operational requirements with long-term investment requirements. To mitigate this risk the Agency follows a rigorous financial framework and engages in ongoing processes of reallocation involving the entire senior management team.

Organizational Responsiveness and Resilience

The pace of legislative change, the size and complexity of many of its major undertakings (such as the harmonization of the sales taxes of Ontario and British Columbia with the federal Goods and Services Tax) and all forms of disasters and business interruptions may compromise the Agency's ability to respond to changes in a timely manner. To mitigate these risks, the Agency has built an extensive capability for change and project management across the breadth of its organization. It has also put in place emergency and business continuity plans to ensure an appropriate response in the event of an emergency.

Client, Stakeholder, Taxpayer, and Benefit Recipient Expectations

The many people and organizations served by the Agency have continually evolving needs and expectations with respect to the ways in which they receive service. As a result, the Agency must remain alert to the demands of its environment and adjust its service delivery mechanisms to the extent possible. To mitigate the risk of failure in this endeavour, the Agency continually re-examines its strategies and engages in process re-engineering.

Human Resources Capacity and Capability

The Agency requires a workforce that is among the largest of any federal government entity and that is highly skilled. Maintaining that workforce means dealing with risks associated with ability to recruit and retain people in a competitive environment. Through a host of leading human resource management practices the Agency strives to offer current and potential employees with attractive career opportunities, thus ensuring a continuing high level of capacity and capability.

Knowledge Management

As more and more of the Agency’s routine tasks have been automated, its workforce has become increasingly composed of knowledge workers. A continuing challenge is the ability to effectively diffuse knowledge throughout the workforce. There is a risk that failure to surmount this challenge will inhibit the Agency from achieving maximum effectiveness. This is an area of emerging attention within the Agency as it seeks to build on solid training and learning programs.

Employee Ethical Conduct

Unethical employee behaviour can compromise any organization. The Agency holds its employees to the highest ethical standards with a strict Code of Ethics and Conduct and continual efforts to instill a strong commitment to the Code throughout the organization. To deal with any and all breaches that do occur, the Agency has its own investigative capability and discipline processes as well as recourse to appropriate law enforcement agencies.

Protection of Information

Taxpayers and benefit recipients, both individuals and corporations, entrust the Agency with vast quantities of personal and private information. The protection of that information has historically been among the highest priorities of the Agency. Potential threats to the security of information holdings include both inadvertent breaches and deliberate attempts to gain access. The Agency has an extensive system of controls that addresses all known threats. Nevertheless, the Agency must remain vigilant as new threats are constantly emerging.

Information Technology Responsiveness

For many years, the Agency has become increasingly dependent on IT to deliver its programs and services. The Agency’s numerous programs are underpinned by very complex technology and new applications are becoming more and more sophisticated. Key success factors include solid IT governance (clear roles and responsibilities) as well as good alignment between operating units and IT. The Agency continues to improve its project management approaches, particularly at the requirements definition stage, in order to ensure that the partnership between operating units and IT specialists results in maximum value added.

Information Technology Sustainability

The Agency has a massive investment in IT hardware and software assets. Many of the most important applications are custom built. Keeping these assets up-to-date and in good repair after initial acquisition requires a very large investment of resources and sound strategies for prioritizing maintenance and renewal projects. Failure to make the necessary investments could be disastrous for the Agency and its stakeholder governments. The Agency has become increasingly sophisticated in its planning and execution of sustainability investments, but is far from complacent about the residual risk that it faces.

Date modified:

2009-11-05