Statement of Management Responsibility

We have prepared the accompanying financial statements of the Canada Revenue Agency according to accounting principles consistent with those applied in preparing the financial statements of the Government of Canada. Significant accounting policies are set out in Note 2 to the financial statements. Some of the information included in the financial statements, such as accruals and the allowance for doubtful accounts, is based on management’s best estimates and judgments, with due consideration to materiality. The Agency’s management is responsible for the integrity and objectivity of data in these financial statements. Financial information submitted to the Public Accounts of Canada and included in the Agency’s Annual Report is consistent with these financial statements.

To fulfill its accounting and reporting responsibilities, management maintains sets of accounts which provide records of the Agency’s financial transactions. Management also maintains financial management and internal control systems that take into account costs, benefits, and risks. They are designed to provide reasonable assurance that transactions are within the authorities provided by Parliament, and by others such as provinces and territories, are executed in accordance with prescribed regulations and the Financial Administration Act , and are properly recorded to maintain the accountability of funds and safeguarding of assets. Financial management and internal control systems are reinforced by the maintenance of internal audit programs. The Agency also seeks to assure the objectivity and integrity of data in its financial statements by the careful selection, training, and development of qualified staff, by organizational arrangements that provide appropriate divisions of responsibility, and by communication programs aimed at ensuring that its regulations, policies, standards, and managerial authorities are understood throughout the organization.

The Board of Management is responsible for ensuring that management fulfills its responsibilities for financial reporting and internal control and exercises this responsibility through the Audit Committee of the Board of Management. To assure objectivity and freedom from bias, these financial statements have been reviewed by the Audit Committee and approved by the Board of Management. The Audit Committee is independent of management and meets with management, the internal auditors, and the Auditor General of Canada on a regular basis. The auditors have full and free access to the Audit Committee.

The Auditor General of Canada conducts an independent audit and expresses opinions on the accompanying financial statements.

Approved by:

Linda Lizotte-MacPherson
Commissioner and
Chief Executive Officer

Stephen O’Connor
Chief Financial Officer and Assistant Commissioner, Finance and Administration

Ottawa, Ontario
August 23, 2010

Canada Revenue Agency Audited Financial Statements - Agency Activities

Auditor’s Report

To the Board of Management of the Canada Revenue Agency
and the Minister of National Revenue

I have audited the statement of financial position of the Agency Activities of the Canada Revenue Agency as at March 31, 2010 and the statements of operations, net liabilities and cash flows for the year then ended. These financial statements are the responsibility of the Agency's management. My responsibility is to express an opinion on these financial statements based on my audit.

I conducted my audit in accordance with Canadian generally accepted auditing standards. Those standards require that I plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

In my opinion, these financial statements present fairly, in all material respects, the financial position of the Agency Activities of the Canada Revenue Agency as at March 31, 2010 and the results of its operations and its cash flows for the year then ended in accordance with Canadian generally accepted accounting principles.

Sheila Fraser, FCA
Auditor General of Canada

Ottawa, Canada
August 23, 2010

Statement of Financial Position – Agency Activities

Approved by:

Linda Lizotte-MacPherson
Commissioner and Chief Executive Officer

Susan J. McArthur
Chair, Board of Management

Statement of Operations – Agency Activities

Statement of Net Liabilities – Agency Activities

Statement of Cash Flow – Agency Activities

Notes to the Financial Statements

1. Authority and objectives

The Canada Revenue Agency (the “Agency”) is an agent of Her Majesty in right of Canada under the Canada Revenue Agency Act. The Agency is a departmental corporation named in Schedule II of the Financial Administration Act and reports to Parliament through the Minister of National Revenue.

The mandate of the Agency is to support the administration and enforcement of tax legislation as well as other related legislation. The Agency provides support, advice, and services by:

(a) supporting the administration and enforcement of program legislation;

(b) implementing agreements between the Government of Canada or the Agency and the government of a province, territory or other public body performing a function of government in Canada to carry out an activity or administer a tax or program;

(c) implementing agreements or arrangements between the Agency and departments or agencies of the Government of Canada to carry out an activity or administer a program; and

(d) implementing agreements between the Government of Canada and First Nations governments to administer a tax.

The Agency collects revenues, including income and sales taxes and Employment Insurance premiums, administers tax legislation, delivers a number of social benefit programs to Canadians for the federal government, as well as for provincial, territorial, and First Nations governments and collects amounts for other groups or organizations, including Canada Pension Plan contributions. It is responsible for the administration and enforcement of the following acts or parts of acts: the Air Travellers Security Charge Act, the Canada Revenue Agency Act, the Children’s Special Allowances Act, Part V.1 of the Customs Act, section 2 of the Energy Costs Assistance Measures Act, the Excise Act, the Excise Tax Act (including the Goods and Services Tax (GST) and the Harmonized Sales Tax (HST) except for GST/HST on imported goods), the Excise Act, 2001, the Income Tax Act, the Softwood Lumber Products Export Charge Act, 2006, the Universal Child Care Benefit Act, and others including various provincial acts.

In delivering its mandate, the Agency operates under the following program activities:

(a) Internal services: Provides internal services across the Agency, such as human resources management, financial management and information technology, to support the needs of programs and corporate obligations;

(b) Reporting compliance: Verifies complete and accurate disclosure by taxpayers of all required information to establish tax liabilities;

(c) Assessment of returns and payment processing: Processes and validates taxpayer returns; registers, establishes, and maintains taxpayer accounts; and, receives payments;

(d) Accounts receivable and returns compliance: Identifies and addresses non-compliance with taxpayer filing and remittance requirements;

(e) Taxpayer and business assistance: Assists taxpayers in meeting their obligations under the self-assessment;

(f) Appeals: Provides a dispute resolution process for taxpayers who disagree with decisions taken by the Agency;

(g) Benefit programs: Provides Canadians certain income-based benefits, credits and other services on behalf of federal, provincial (except Québec), and territorial governments;

(h) Taxpayers’ Ombudsman: Addresses requests for reviews made by taxpayers and benefit recipients with respect to service matters.

2. Summary of significant accounting policies

For financial reporting purposes, the activities of the Agency have been divided into two sets of financial statements: Agency Activities and Administered Activities. The financial statements - Agency Activities include those operational revenues and expenses which are managed by the Agency and utilized in running the organization. The financial statements - Administered Activities include those revenues and expenses that are administered for someone other than the Agency, such as the federal government, a province or territory, or another group or organization. The purpose of the distinction between Agency and Administered activities is to facilitate, among other things, the assessment of the administrative efficiency of the Agency in achieving its mandate.

As required by section 88(2)(a) of the Canada Revenue Agency Act, the financial statements - Agency Activities have been prepared using accounting principles consistent with those applied in the preparation of the financial statements of the Government of Canada. The accounting principles used are consistent with Canadian generally accepted accounting principles for the public sector. A summary of significant accounting policies follows:

(a) Parliamentary appropriations

The Agency is financed by the Government of Canada through Parliamentary appropriations. Accounting for appropriations provided to the Agency does not parallel financial reporting according to Canadian generally accepted accounting principles, as they are based in large part on cash flow requirements. Consequently, items recognized in the Statement of Financial Position and the Statement of Operations may be different from those provided through appropriations from Parliament. Note 3(b) provides a high-level reconciliation between the two bases of reporting.

(b) Net cash provided by the Government of Canada

The Agency operates within the Consolidated Revenue Fund (CRF), which is administered by the Receiver General for Canada. All cash receipts are deposited to the CRF and all cash disbursements are paid from the CRF. The net cash provided by government is the difference between all cash receipts and all cash disbursements including transactions with departments and agencies.

(c) Expense recognition

Expenses are recognized when goods are received and/or services are rendered.

(d) Services received without charge from other government agencies and departments

Estimates of the cost for services received without charge from other government agencies and departments are included in expenses. Costs are estimated using the cost recovery methodology.

(e) Employee benefit plan

The Government of Canada sponsors an employee benefit plan (health and dental) in which the Agency participates. The Agency’s contributions to the plan are recorded at cost and charged to personnel expenses in the year incurred. They represent the Agency’s total obligation to the plan. Current legislation does not require the Agency to make contributions for any future unfunded liabilities of the plan.

(f) Revenue recognition

Non-tax revenue is recognized when the services are rendered by the Agency.

(g) Due from the Consolidated Revenue Fund

Amounts due from the CRF are the result of timing differences between when a transaction affects authorities and when it is processed through the CRF. Amounts due from the CRF represent the net amount of cash that the Agency is entitled to draw from the CRF without further authorities.

(h) Accounts receivable and advances

Accounts receivable and advances are stated at the lower of cost and net recoverable value. An allowance for doubtful accounts is recorded where recovery is considered uncertain.

(i) Capital assets

All costs of $10,000 or more incurred by the Agency to acquire or develop capital assets are capitalized and amortized over the useful lives of the assets. Similar items under $10,000 are expensed.

Capital assets are amortized on a straight-line basis over the estimated useful lives of assets as follows:

Assets under construction/development are not amortized until completed and put into operation.

(j) Vacation pay and compensatory leave

Vacation pay and compensatory leave are expensed as the benefits accrue to employees under their respective terms of employment. The liability for vacation pay and compensatory leave is calculated at the salary levels in effect at the end of the year for all unused vacation pay and compensatory leave benefits accruing to employees.

(k) Employee future benefits

(i) Pension benefits

All eligible employees participate in the Public Service Pension Plan administered by the Government of Canada. The Agency’s contributions reflect the full cost as employer. These amounts are currently based on a multiple of an employee's required contributions and may change over time depending on the experience of the Plan. The Agency’s contributions are expensed during the year in which the services are rendered and represent the total pension obligation of the Agency. Current legislation does not require the Agency to make contributions with respect to any actuarial deficiencies of the Public Service Pension Plan.

(ii) Severance benefits

Employees are entitled to severance benefits, as provided for under labour contracts and conditions of employment. The cost of these benefits is accrued as employees render the services necessary to earn them. The obligation resulting from the benefits earned by employees is calculated using information derived from the results of the actuarially determined liability for employee severance benefits for the Government as a whole.

(l) Contingent liabilities

Contingent liabilities are potential liabilities that may become actual liabilities when one or more future events occur or fail to occur. To the extent that the future event is likely to occur or fail to occur, and a reasonable estimate of the loss can be made, an estimated liability is accrued and an expense recorded. If the likelihood is not determinable, the Agency’s best estimate of the contingency is disclosed in the notes to the financial statements.

(m) Measurement uncertainty

The preparation of these financial statements requires management to make estimates and assumptions that affect the amounts of assets, liabilities, revenue and expenses reported on the financial statements. At the time of preparation of these statements, management believes the estimates and assumptions to be reasonable. Employee severance benefits, contingent liabilities, the useful life of capital assets, services received without charge and the allowance for doubtful accounts are the most significant items where estimates are used. Actual results could differ significantly from the current estimates. The estimates are reviewed periodically and, as adjustments become necessary, they are reported in the financial statements in the period in which they become known.

3. Parliamentary appropriations

The Agency receives most of its funding through annual Parliamentary appropriations. Items recognized in the Statement of Financial Position and the Statement of Operations in one year may be funded through Parliamentary appropriations in prior, current, or future years. Accordingly, the Agency has different net results of operations for the year on a government funding basis than on an accrual accounting basis. These differences are reconciled below.

(a) Reconciliation of Parliamentary appropriations provided and used:

(b) Reconciliation of net cost of operations to total Parliamentary appropriations used:

(c) Reconciliation of net cash provided by the Government of Canada to Parliamentary appropriations used:

4. Accounts receivable and advances

5. Capital assets

The cost of software in development, which is not amortized, is $227,841,892 as at March 31, 2010 ($166,996,563 as at March 31, 2009).

6. Lease obligations for capital assets

The Agency has entered into agreements to rent information technology equipment under capital leases with a cost of $20,737,435 and accumulated amortization of $5,770,101 as at March 31, 2010 ($15,374,292 and $1,601,489 respectively as at March 31, 2009). These capital leases expire on September 30, 2012. The obligations for the upcoming years include the following:

7. Employee future benefits

(a) Pension benefits

The Agency and all eligible employees contribute to the Public Service Pension Plan, which is sponsored by the Government of Canada. Pension benefits accrue up to a maximum period of 35 years at a rate of two percent per year of pensionable service, times the average of the best five consecutive years of earnings. The benefits are integrated with Canada/Québec Pension Plans benefits and they are indexed to the increase in the Consumer Price Index.

The Agency’s and employees’ contributions to the Public Service Pension Plan for the year were as follows:

The Agency’s responsibility with regard to the Plan is limited to its contributions. Actuarial surpluses or deficiencies are recognized in the financial statements of the Government of Canada.

(b) Severance benefits

The Agency provides severance benefits to its employees based on eligibility, years of service and final salary. These severance benefits are not pre-funded. Benefits will be paid from future appropriations. Information about the severance benefits, measured as at March 31, is as follows:

8. Net liabilities

Net liabilities represent liabilities incurred by the Agency, net of assets, which have not yet been funded through appropriations. Significant components of these amounts are employee severance benefits and vacation pay and compensatory leave. These amounts are expected to be funded by appropriations in future years as they are paid.

9. Expenses by category

In the Statement of Operations, expenses are presented by program activity. The following presents expenses by category.

10. Non-tax revenue by category

In the Statement of Operations, non-tax revenues are presented by program activity. The following presents non-tax revenues by category. The nature of each category is defined by the treatment permitted from a Parliamentary appropriations perspective.

11. Related party transactions

The Agency is related in terms of common ownership to all Government of Canada departments, agencies, and Crown corporations. Transactions with Crown Corporations entered into by the Agency are in the normal course of business and on normal trade terms applicable to all individuals and enterprises. Transactions with other Government of Canada departments and Agencies are conducted on a cost recovery basis.

(a) Services received without charge from other government agencies and departments:

During the year, the Agency received various services without charge from other government agencies and departments. The estimated costs for significant services received without charge include:

(b) Payables and receivables outstanding at year-end with related parties:

12. Board of Management

Pursuant to the Canada Revenue Agency Act, a Board of Management is appointed to oversee the organization and administration of the Agency and the management of its resources, services, property, personnel and contracts. The expenses relating to the Board’s activities for the year included in the net cost of operations were as follows:

The amount of compensation reported above includes an amount of $161,668 for retainers applicable to five quarters ($109,584 for three quarters in 2009). The professional services and other expenses include an amount of $109,249 for the implementation of a board portal (nil in 2009).

13. Contingent liabilities

The Agency is a defendant in certain cases of pending and threatened litigation which arose in the normal course of operations. The current best estimate of the amount to be paid in respect of the cases identified as likely to be lost has been recorded in Accounts payable and accrued liabilities. All other cases, excluding those assessed as unlikely to be lost, are considered contingent liabilities and the related amounts are disclosed whenever the amount of the contingency can be reasonably estimated. As at March 31, 2010, contingent liabilities for claims and pending and threatened litigation have been estimated at $27,716,223 ($71,920,758 as at March 31, 2009).

14. Contractual obligations

The nature of the Agency’s activities can result in multiyear contracts and obligations whereby the Agency will be committed to make future payments when the goods are received and/or the services are rendered. Significant contractual obligations, other than lease obligations for capital assets (Note 6), that can be reasonably estimated are as follows:

15. Comparative figures

Certain comparative figures have been reclassified to conform with the presentation used in the current year.

Financial Statements Discussion and Analysis (Unaudited) – 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. Provincial Sales Tax Administration Reform

In 2009, the provinces of Ontario and British Columbia entered into Memoranda of Agreement with the Government of Canada to harmonize their provincial sales taxes with the federal Goods and Services Tax (GST) effective July 1, 2010.

The CRA received incremental funding of $47.5 million (including employee benefit plan contributions) in 2009-2010 to ensure that necessary systems and processes were in place for the implementation of HST in Ontario and British Columbia, to communicate the necessary information to businesses and individual taxpayers, and to prepare for the integration of the affected provincial employees into the Agency's workforce. The level of funding to be provided in subsequent years is expected to be confirmed by the Treasury Board in the near future.

The implementation of a harmonized administration and the successful transition of provincial employees will continue to be a priority for the CRA in 2010-2011.

2. Corporate Tax Administration for Ontario

The CRA has commenced processing Ontario T2 harmonized corporate income tax returns and is also providing related services, including audits, rulings, interpretations, objections and appeals. As such the administration of Ontario corporate tax is now fully integrated into the CRA’s base operations.

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 $83.2M was expended in 2009-10. 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 tax from the Ontario Ministry of Revenue to the CRA starting in the 2009 taxation year. The Corporate Tax Administration for Ontario initiative has now met its key milestones, and all necessary agreements and systems changes have been in place since April 2009.

3. Investment in Information Technology systems

In fiscal year 2010, the CRA continued to invest in information technology (IT) systems in order to ensure modern and efficient program delivery. The Agency had several large-scale projects that required substantial investments in the development of IT systems. Combined with the acquisition of IT hardware, the Agency invested $137 million in IT related capital assets this fiscal year. The value of these new capital assets has been offset by amortization expenses of $87 million in 2009-10.

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

Figure 24 Information Technology Investment in Capital Assets

Analysis of Net Cost of Operations

The Agency’s 2009-2010 net cost of operations decreased by $24 million from 2008-2009. Agency expenses totaled $4,441 million in 2009-2010 (2008-2009 - $4,434 million) (see Note 9 of the Financial Statements - Agency Activities for the breakdown of expenses by type). When adjusting for non-tax revenue of $569 million (2008-2009 - $538 million), the net cost of operations amounts to $3,872 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 decrease of $10 million for this type of expenses in 2009-2010. Additional costs were incurred for salary revisions pursuant to collective agreements provisions and in the staff complement due to new initiatives such as the Provincial Sales Tax Administration Reform, the Corporate Tax Administration for Ontario, Ontario Aggressive International Tax Planning and others announced in recent Federal Budgets but were offset by a decrease in the cost of severance benefits.

In total, non-personnel expenses increased by $18 million. Significant elements of non-personnel expenses are composed of accommodation, transportation and communication expenses. The reduction of $33 million in information technology costs is attributable to decreases in the purchase of computer equipment and software as well as decreases in loss on disposals and write offs of capital assets. Federal Goods and Services Tax administration costs by the Province of Québec have increased due to higher salary costs.

Figure 25 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 that is fully integrated into decision-making, planning and reporting processes and mechanisms.

Efforts are being made to align corporate risk management with the Agency’s planning and resource allocation cycles. Furthermore, progress is being made 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. In addition, the Agency has also instituted a structured risk management training program for managers and executives.

In support of corporate risk management, the two key ERM products are the C orporate 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 the 2009 Corporate Risk Inventory, there are 6 primary risk themes for the Agency.

Taxpayer Compliance

One of the CRA’s key program outcomes is to ensure compliance with tax laws on behalf of governments across Canada. The CRA’s fundamental approach is to encourage taxpayers to fulfill their tax obligations. While the vast majority of taxpayers are compliant, the current economic context could result in increased compliance challenges.

Government of Canada Legislative, Regulatory and Policy Framework

While the CRA has legislated authority over many aspects of its business, the organization must still deliver its programs according to the Government of Canada’s (GoC) legislative, regulatory and policy framework. The complexity and constant evolution of GoC rules create challenges for the Agency as efforts are needed to ensure the organization adjusts in a timely fashion.

Resources and Performance

The effects of a sound strategic resource allocation process are directly linked to our performance as an organization. In order to ensure optimal performance, the CRA needs to leverage its financial resources and ensure the flexibility to adapt rapidly and effectively to change. This must be done while proactively managing the service expectations of taxpayers.

Skilled, knowledgeable and Ethical Workforce

Among the CRA’s most important assets are the skills and talents of its people, their knowledge and the ethical behaviour and standards by which they fulfill their responsibilities. While recognizing that current demographic trends may present significant challenges for the organization, the CRA must continue to strive to hire the right people with the right skills, capitalize on corporate knowledge and ensure the highest ethical standards are maintained throughout the Agency.

Protection of Information

As a result of the CRA’s mandate and the nature of its work, massive amounts of personal and sensitive information are entrusted to the Agency. Protecting the confidentiality of personal and business tax information provided to the CRA is critical for maintaining the trust and confidence of Canadians. Technological advancements, a global rise in identity theft and an increased need for information availability challenge the Agency’s ability to effectively protect against inappropriate access or disclosure of protected taxpayer and benefit recipient information.

Information Technology

As an advanced and complex organization, the CRA’s programs and services depend on a complex information technology environment. The increased complexity of our legislative and business environment in addition to the increased diversity and expectations of external stakeholders put steady pressures on our IT services, facilities and applications to support rapidly changing demands.

Date modified:

2010-11-02