Canada Revenue Agency Audited Financial Statements - Administered Activities
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Canada Revenue Agency Audited Financial Statements - Administered Activities
To the Board of Management of the Canada Revenue Agency and the Minister of National Revenue
I have audited the accompanying statement of administered assets and liabilities of the Canada Revenue Agency as at 31 March 2012, and the statement of administered revenues and pension contributions, statement of administered expenses and recoveries and statement of administered cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information (together “the financial information”). The financial information has been prepared by management using the basis of accounting described in Note 2
Management's Responsibility for the Financial Information
Management is responsible for the preparation and fair presentation of this financial information in accordance with the basis of accounting described in Note 2; this includes determining that the basis of accounting is an acceptable basis for the preparation of the financial information in the circumstances, and for such internal control as management determines is necessary to enable the preparation of the financial information that is free from material misstatement, whether due to fraud or error.
My responsibility is to express an opinion on the financial information based on my audit. I conducted my audit in accordance with Canadian generally accepted auditing standards. Those standards require that I comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial information is free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial information. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial information, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial information in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the presentation of the financial information.
I believe that the audit evidence I have obtained is sufficient and appropriate to provide a basis for my audit opinion.
In my opinion, the financial information presents fairly, in all material respects, the administered assets and liabilities of the Canada Revenue Agency as at 31 March 2012, and the results of its administered operations and its administered cash flows for the year then ended in accordance with the basis of accounting described in Note 2
Without modifying my opinion, I draw attention to Note 2 to the financial information, which describes the purpose and basis of accounting for reporting activities administered by the Canada Revenue Agency on behalf of others. This financial information may not be suitable for another purpose. Management prepares a separate set of financial statements to report the operational revenues and expenses of the Canada Revenue Agency.
Michael Ferguson, FCA
Auditor General of Canada
Canada Revenue Agency
Statement of Administered Assets and Liabilities
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Amounts receivable from taxpayers (note 3)
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Amounts receivable under the tobacco civil settlements (note 4)
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Amounts payable to taxpayers (note 5)
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Amounts payable to provinces (note 6)
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Deposit accounts (note 7)
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Net amount due to the Consolidated Revenue Fund on behalf of the Government of Canada and others (note 8)
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Contingent liabilities (note 9)
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The accompanying notes form an integral part of these financial statements.
Approved by:
Linda Lizotte-MacPherson, Commissioner and Chief Executive Officer
Susan J. McArthur, Chair, Board of Management
Canada Revenue Agency
Statement of Administered Revenues and Pension Contributions
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Goods and services tax (note 10)
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Miscellaneous charges (note 11)
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Interest, penalties, and other revenues (note 12)
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Provincial portion of harmonized sales tax (note 13)
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Other revenues (note 14)
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Pension contributions, interest, and penalties administered on behalf of the Canada Pension Plan (note 15)
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Other revenues received by the CRA and paid or payable directly to the provinces (note 14)
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The accompanying notes form an integral part of these financial statements.
Canada Revenue Agency
Statement of Administered Expenses and Recoveries
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Provision for doubtful accounts (note 3)
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Provision for doubtful accounts administered for the Canada Pension Plan (note 3)
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The accompanying notes form an integral part of these financial statements.
Canada Revenue Agency
Statement of Administered Cash Flows
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Total net administered revenues and pension contributions
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The accompanying notes form an integral part of these financial statements.
Canada Revenue Agency
Notes to the Financial Statements – Administered Activities
The Canada Revenue Agency (CRA) is an agent of Her Majesty in right of Canada under the Canada Revenue Agency Act. The CRA 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 CRA is to support the administration and enforcement of tax legislation and other related legislation. The CRA provides support, advice and services by:
The CRA 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, provincial, territorial, and First Nations governments, and collects amounts, including Canada Pension Plan contributions, for other groups or organizations. It is responsible for administering and enforcing 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 the province of Quebec, Revenu Québec (RQ) acts as an agent of the CRA in administering and enforcing the GST. The CRA monitors cash transfers made by RQ, reports the GST revenues administered on its behalf, and transfers funds out of the Consolidated Revenue Fund to RQ so it can issue refunds.
The CRA's mandate for administering customs legislation is limited to the collection functions noted under Part V.1 of the Customs Act. The CRA also provides collection services to Human Resources and Skills Development Canada for certain accounts receivable under various acts.
For financial reporting purposes, the CRA's activities have been divided into two sets of financial statements: agency activities and administered activities. The purpose of these administered activities statements is to give information about the tax-related revenues, expenses, assets, and liabilities that the CRA administers on behalf of the federal, provincial, and territorial governments, First Nations, and other organizations. The CRA administers individual income tax for all provinces except Quebec, and corporate income tax for all provinces except Quebec and Alberta. The Financial Statements - Agency Activities include the operational revenues and expenses that the CRA manages and uses to run the organization.
Section 88(2)(a) of the Canada Revenue Agency Act requires the CRA to prepare financial statements in accordance with accounting principles consistent with those applied in preparing the financial statements of the Government of Canada. The stated accounting policies for activities administered by the CRA do not result in any significant differences from Canadian public sector accounting standards.
A new accounting standard issued by the Public Sector Accounting Standard Board - Section PS 3510 Tax Revenues - became effective for CRA on April 1, 2012. The main impact of implementing this section relates to the classification of transfers through the tax system as separate expenses rather than netted against tax revenues. The CRA will adopt this new standard for the fiscal year ending March 31, 2013.
A summary of the significant accounting policies follows:
The following table shows details of the amounts receivable from taxpayers as reported in the Statement of Administered Assets and Liabilities. These amounts include related interest and penalties receivable. Amounts receivable from individuals and employers include Canada Pension Plan contributions and employment insurance premiums as applicable.
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Gross
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Allowance for doubtful accounts
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Net
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Net
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Changes in the allowance for doubtful accounts include the following:
The provision of $3,813 million ($3,452 million in 2011) reported above includes an amount of $3,711 million ($3,344 million in 2011) recorded as an expense administered on behalf of the federal government (see Note 2(e)) and $102 million ($108 million in 2011) charged against expenses administered on behalf of the Canada Pension Plan.
On July 31, 2008, the federal and provincial governments entered into civil settlement agreements with two tobacco companies to resolve potential civil claims. Under the terms of the agreements, payments totalling $850 million are to be made to Canada, for Canada and the provinces. The federal government's share is $325 million and the provincial governments' share is $525 million. The settlement agreements state that the amounts will be fully paid by 2023. Up to $800 million is expected to be received in the first 10 years of the agreements and about $50 million in the following five years. These amounts are recorded at the nominal value.
The following table gives details of the amounts receivable related to the tobacco civil settlement agreements:
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Government of Canada share
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Provincial share
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Government of Canada share
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Provincial share
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The following table gives details of the amounts payable to taxpayers as reported in the Statement of Administered Assets and Liabilities:
The following table gives details of amounts payable to provinces as reported in the Statement of Administered Assets and Liabilities:
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Provincial share of the tobacco civil settlements (note 4)
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1,503
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The CRA is acting as an agent for the provinces under the tobacco civil settlements. The CRA's liability to the provinces for their expected share of the settlement amounts is limited to the amounts that will ultimately be collected from the tobacco companies.
Amounts payable to provinces, territories, and other organizations, which are settled by other departments such as the Department of Finance for provincial, territorial, and First Nations taxes, are not recorded in these financial statements because these amounts are outside the CRA's responsibility.
Deposit accounts are established to record cash and securities required to guarantee payment of GST for non-resident registrants and certain licensees for excise taxes, which are both payable pursuant to the Excise Tax Act. The following table shows activity on the deposit accounts as reported in the Statement of Administered Assets and Liabilities:
The net amount due to the Consolidated Revenue Fund on behalf of the Government of Canada and others is the difference between administered assets (taxes not yet received and/or deposited in the fund) and other administered liabilities payable by the CRA out of the fund.
The net cash deposited in the Consolidated Revenue Fund of the Government of Canada includes amounts the CRA receives on behalf of the federal government, provinces, territories, and other organizations and deposits in the fund, less refunds and payments issued from the fund during the year.
The following table shows the change in the net amount due to the Consolidated Revenue Fund during the fiscal year:
Contingent liabilities include previously assessed taxes where amounts are under objection or are being appealed to the Tax Court of Canada, the Federal Court of Canada, or the Supreme Court of Canada. As of March 31, 2012, $19,944 million was under objection at the CRA level ($17,117 million for 2011) and $4,840 million was being appealed to the courts ($3,299 million for 2011). The CRA has recorded, in the amounts payable to taxpayers or in reduction of the amounts receivable from taxpayers, as applicable, the estimated amount of objections or appeals that are considered likely to be lost and that can be reasonably estimated.
The GST reported on the Statement of Administered Revenues and Pension Contributions includes the federal portion of HST. It is net of input tax credits (ITCs), rebates, and the GST quarterly tax credit for low-income individuals and families that the CRA administers. It does not include GST revenues on imported goods, which are administered and reported by the Canada Border Services Agency. The CRA has sole responsibility for administering all ITCs, including those claimed on imported goods. ITCs relating to GST on imports are not accounted for separately from ITCs relating to GST on domestic transactions.
The following table shows details of the GST revenues that the CRA administers for the Government of Canada as reported in the Statement of Administered Revenues and Pension Contributions:
The amounts of GST net revenues reported above are net of receipts and disbursements resulting from processing GST returns. During the period, the CRA has processed $86,209 million in receipts ($69,567 million in 2011) and $78,995 million in disbursements and transfers ($62,051 million in 2011).
The following table details the miscellaneous charges that the CRA administers for the federal government as reported in the Statement of Administered Revenues and Pension Contributions:
Various tax legislation gives the CRA the authority, under certain conditions, to collect interest and penalties related to taxes due and regulations that taxpayers have not complied with. The CRA has the authority to waive the interest and penalties that would normally be charged under certain circumstances such as processing delays caused by the CRA, financial hardship experienced by taxpayers, or other extraordinary circumstances.
Other revenues consist of miscellaneous fees and charges such as court fines and administration charges for dishonoured payments.
The following table gives details on interest, penalties, and other revenues that the CRA administers for the federal government as reported in the Statement of Administered Revenues and Pension Contributions:
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Net interest and penalties
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Under agreements reached with the Government of Canada, the CRA started to administer the harmonized sales tax in Ontario and British Columbia on July 1, 2010. The CRA recorded in these financial statements the provincial portion of HST it administered for these provinces, and for Nova Scotia, New Brunswick, and Newfoundland and Labrador, in accordance with the accounting policies described in Note 2. On August 26, 2011, British Columbia announced that it will return to the provincial sales tax. This change will be effective April 1, 2013. Until then, the CRA will continue to administer HST for British Columbia. On April 18, 2012, the province of Prince Edward Island (PEI) announced that it has entered into an agreement with the government of Canada in order to bring PEI into the HST revenue allocation framework effective April 1, 2013.
The provincial portion of HST reported on the Statement of Administered Revenues and Pension Contributions is net of input tax credits (ITCs) and rebates. It includes the recaptured ITC, which applies to certain types of supplies purchased by large businesses. It does not include ITCs that importers claim for the GST they paid on commercial imports and it does not include the provincial portion of HST collected on imported goods, which is administered and reported by the Canada Border Services Agency.
The following table details the provincial portion of HST revenues as reported in the Statement of Administered Revenues and Pension Contributions:
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Transitional tax
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77,747
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The following table gives details of other revenues the CRA administers for provincial and territorial governments and First Nations as reported in the Statement of Administered Revenues and Pension Contributions. Revenues that the CRA receives then pays directly to the provinces, such as the tobacco civil settlement and the Nova Scotia workers' compensation amounts, are flow-through collection activities rather than payments made under legislative authority. These amounts are included as administered revenue and then deducted from the Statement of Administered Revenues and Pension Contributions.
The following table shows details of the transactions the CRA administers on behalf of the Canada Pension Plan as reported in the Statement of Administered Revenues and Pension Contributions:
The CRA is related in terms of common ownership to all Government of Canada departments, agencies, and Crown corporations. The CRA deposits all monies received to the Consolidated Revenue Fund (CRF), and the Department of Finance makes payments out of the CRF to provinces, territories, and other organizations for amounts such as provincial, territorial, and First Nations taxes, for which the CRA administers the revenue collection process. Old age security benefit recoveries, Canada Pension Plan contributions (net of overpayments refunded by the CRA), and employment insurance premiums are credited to Human Resources and Skills Development Canada, which administers the Old Age Security program, the Canada Pension Plan, and the Employment Insurance Operating Account. The CRA also administers a refund set-off program that can use individuals' tax refunds to pay debts they owe under federal, provincial, or territorial programs.
The CRA provides collection services to the Canada Border Services Agency under Part V.1 of the Customs Act. It also provides collection services to Human Resources and Skills Development Canada for certain accounts receivable under the Canada Education Savings Act, the Canada Student Loans Act, the Canada Student Financial Assistance Act, the Canada Pension Plan, and the Old Age Security Act. The related payments are made directly to either the Canada Border Services Agency or Human Resources and Skills Development Canada, who are responsible for their deposits to the CRF, as well as their accounting and reporting. These payments are not recorded in the CRA's accounts.
Employment insurance premiums administered on behalf of the federal government include the employer's share that the federal government pays. The GST declared to the CRA includes the GST the federal government pays to its suppliers on domestic purchases. The GST that other federal government departments collects is deposited to the CRF, declared to the CRA, and included in the GST domestic revenues.
Certain comparative figures have been reclassified to conform to the presentation used in the current year.
Financial Statements Discussion and Analysis – Administered Activities
Introduction
The Financial Statements - Administered Activities reflect the total assets and liabilities, tax and non-tax revenues, expenses and recoveries, and cash flows administered by the Canada Revenue Agency on behalf of the Government of Canada, provinces, territories, First Nations, and other government organizations. Tax revenues are recognized on an accrual basis and are net of the applicable deductions and credits allowed under various Acts.
The Financial Statement Discussion and Analysis provides unaudited complementary and supplementary information on Administered Activities in respect of matters reported in the audited Financial Statements. Responsibility for the preparation of the Financial Statement Discussion and Analysis rests with CRA management.
Tax Revenues
The Canada Revenue Agency collects the majority of federal tax revenues. Other agencies and departments, such as the Canada Border Services Agency, account for the balance of total Federal Revenues reported in the Public Accounts of Canada. For further information on revenue collected by the Government of Canada as a whole, please refer to the Annual Financial Report of the Government of Canada, available at www.fin.gc.ca/purl/afr-eng.asp.
Revenues administered on behalf of the Government of Canada
Net revenues were $198.3 billion in 2012, some $7.3 billion higher than in 2011. All administered revenues were higher except Goods and Services Tax, Energy Taxes, and Interest, penalties, and other revenues.
Individual and trust Income Tax revenues increased by $5.9 billion, or 5.2%. The increase reflects continued economic growth from higher employment and wages, and is in line with the increase in individual taxable income.
Corporate Income Tax revenues increased by $1.7 billion or 5.8%. The growth stems from a strong recovery of corporate profits in small to medium enterprises that was partially offset by cuts in the tax rate.
Non-Resident Tax Withholdings revenues increased by $163.1 million or 3.2%. Revenue recovered to historical levels as large reassessments suppressed revenue in FY2011.
GST revenues decreased by $1.2 billion or 10.5%. The decline stems from a surge in input tax credits due to an increase in capital investments and inventory levels. This was partially offset by higher revenues associated with growth in retail sales and sales of real property.
Energy taxes decreased by $29.6 million or 0.6%. The decline stems from a slight reduction in the consumption of gasoline and diesel fuel, partially offset by an increase in the consumption of aviation fuel.
Other Excise taxes and duties increased by $41.1 million or 1.2%. This increase stems from higher duty revenues from beer and liquor production as well as higher revenues on automotive air conditioners.
Miscellaneous charges increased by $32.1 million or 3.9%. This was due to higher Air Travellers Security Charge revenues.
Employment Insurance premiums increased by $1,167.9 million or 6.5%. The increase reflects continued economic growth and is in line with the increase in source deduction receipts. There were also higher premiums and increased insurable earnings.
Interest, penalties, and other revenues decreased by $364.3 million or 9.0%. This reflects the imposition of court fines related to the tobacco settlement agreements along with a large corporate income tax reassessment in 2011. Prescribed interest rates were stable.
Interest expense increased by $135.9 million or 24.2%. This was due to higher interest paid on certain corporate refunds.
As shown in figure 11, the largest component of Direct Tax Revenues is Individual and trust Income Tax, followed by Corporate Income Tax and Non-Resident Tax Withholdings.
As shown in figure 12, the largest component of Indirect Tax Revenues is GST, followed by Energy taxes, Other Excise taxes and duties, and miscellaneous charges. The proportion of GST has declined due to the decrease in net GST assessed.
Provincial, Territorial, and First Nations Revenues were $94.6 billion in 2012, some $11.5 billion higher than in 2011. Canada Pension Plan Revenues were $39.0 billion in 2012; $1.8 billion more than in 2011.
Individual and trust Income Tax revenues increased by $4.9 billion, or 10.3%. The increase stems from continued economic growth and is in line with the increase in individual taxable income. Legislative changes in the province of Ontario, such as the restructuring of a tax credit to a benefit program and a lower surtax threshold also contributed to the increase.
Corporate Income Tax revenues increased by $513.0 million or 4.0%. This increase is due to higher corporate profits, partially offset by corporate tax cuts and elimination of capital tax in Ontario.
HST revenues increased by $6.3 billion or 29.2%. The increase is the result of a full year's impact after the implementation of the harmonized sales tax in Ontario and British Columbia (PSTAR) on July 1, 2010. On August 26, 2011 the Province of British Columbia announced that it will return to the provincial sales tax, and this change will be effective April 1, 2013. During this period, the Agency will continue to administer the HST in British Columbia. On April 18, 2012, the province of Prince Edward Island (PEI) announced that it has entered into an agreement with the government of Canada in order to bring PEI into the HST revenue allocation framework effective April 1, 2013.
Other revenues decreased by $283.0 million or 50.6%, due to a one-time collection related to the tobacco civil settlement agreements in fiscal year 2011.
Canada Pension Plan revenues rose by $1.8 billion or 5.0%. The increase reflects continued economic growth and is in line with the growth in source deduction receipts. There was also an increase in the contribution ceiling.
As shown in figure 13, Individual and trust Income Tax represented the largest component of revenues administered on behalf of the Provincial and Territorial governments, and First Nations. This is followed by Harmonized Sales Tax and Corporate Income Tax. The proportion of Individual and trust Income Tax decreased from the previous year, due to the impact of the full year of harmonized sales tax in Ontario and British Columbia.
Net Federal Expenses and Recoveries were $15.5 billion in 2012, $323.4 million higher than in 2011. Net Provincial and Territorial Expenses were $5.2 billion, $7.1 million higher than in 2011.
Federal Administered Expenses rose by $431.7 million or 2.6%. This stems from a higher provision for doubtful accounts that increased due to higher write-offs.
Federal Administered Recoveries rose by $108.3 million or 8.4% due to higher Old Age Security (OAS) recoveries. This increase stems from a rise in the number of OAS benefit recipients, higher entitlements, and a growth in taxable income.
Net Expenses Administered for Provinces and Territories increased by $7.1 million or 0.1%. The increase is due to the newly implemented Ontario Energy and Property Tax Credit and to the impact of a full year of the Ontario and British Columbia sales tax credits. This was partially offset by the reduced cost of the Ontario Sales Tax Transition Benefit, which had its third of three payments in 2012.
The provision for doubtful accounts administered for the Canada Pension Plan (CPP) decreased by $5.7 million or 5.3%. This decrease was due to a reduction in bad debt expenses, partially offset by higher CPP write-offs.
As shown in figure 14, Net Expenses and recoveries administered for the Federal Government made up most of the Expenses and Recoveries administered on behalf of the Government of Canada, Provincial, and Territorial Governments. The proportion of Federal Administered Expenses and Recoveries has increased due to the higher provision for doubtful accounts. The cost of the new Ontario Energy and Property Tax Credit as well as the increase in the Ontario and British Columbia sales tax credits were offset by the decrease in the Ontario Sales Tax Transition Benefit.
Summary of the assessment of effectiveness of the systems of internal control over financial reporting and the action plan of the Canada Revenue Agency
Fiscal year 2011-2012
Annex to the Statement of Management Responsibility Including Internal Control over Financial Reporting.
Note to the reader
In accordance with the Treasury Board Policy on Internal Control, departments and agencies are required to demonstrate the measures they are taking to maintain an effective system of internal control over financial reporting (ICFR).
As part of this policy, departments and agencies are expected to conduct annual assessments of their system of ICFR, establish action plans to address any necessary adjustments, and attach to their Statements of Management Responsibility a summary of their assessment results and action plan.
Effective systems of ICFR aim to achieve reliable financial statements and to provide assurances that:
- transactions are appropriately authorized;
- financial records are properly maintained;
- assets are safeguarded from risks such as waste, abuse, loss, fraud, and mismanagement; and
- applicable laws, regulations, and policies are followed.
It is important to note that the system of ICFR is not designed to eliminate all risks, but rather to mitigate risk to a reasonable level with controls that are balanced with and proportionate to the risks they aim to mitigate.
The system of ICFR is designed to mitigate risks to a reasonable level based on an on-going process of identifying key risks, assessing the effectiveness of associated key controls and adjusting them as required, as well as monitoring the system in support of continuous improvement. As a result, the scope, pace, and status of departmental and agency assessments of the effectiveness of their systems of ICFR will vary from one organization to another based on risks and taking into account their unique circumstances.
The annual assessment of ICFR contemplated in the Treasury Board Policy on Internal Control is intended to be a management self-assessment led and administered by the Chief Financial Officer and supported by senior management. However, key external audit findings and results can contribute to this self-assessment. In the case of the CRA, federal-provincial tax collection agreements contain an audit provision requiring the Auditor General to periodically perform a review of the CRA's internal controls relevant to the financial information provided under the agreements, and to report the results to provincial and territorial finance Ministers. To fulfill these requirements, the Office of the Auditor General periodically audits those aspects of the CRA's self-assessment of ICFR that are relevant to the tax collection agreements. The portion of CRA's ICFR that is subject to audit under the agreements and the results of the control audits performed recently by the Office of the Auditor General are described in Sections 3 and 4 of the Annex.
1. Introduction
This document is part of the CRA's Statement of Management Responsibility Including Internal Control over Financial Reporting for the fiscal year 2011-2012. As required by the Treasury Board Policy on Internal Control, this document provides summary information on the measures taken by the CRA to maintain an effective system of ICFR. In particular, it provides summary information as of March 31, 2012 on the assessments the CRA conducted including progress, results, and related action plans. Some financial highlights pertinent to understanding the CRA's unique control environment are also provided.
1.1 Authority, mandate, and program activities
The CRA's mandate is based on a framework of complex laws enacted by Parliament and by provincial and territorial legislatures. To fulfill its mandate, the CRA administers a range of taxes, benefits, and related programs aimed at ensuring that taxpayers meet their obligations and receive their entitlements, and at protecting Canada's tax base. For more detailed information on the CRA's authority, mandate, and activities, refer to the Annual Report to Parliament on the CRA website or to the Report on Plans and Priorities on the C RA website.
1.2 Financial highlights
The CRA's key results for fiscal year 2011-2012 are as follows:
Canada Revenue Agency activities
- Total expenses of $4,758 million, 74% of which is personnel expenses.
- Total assets of $601 million and liabilities of $1,146 million. Capital assets comprise 67% of the CRA's total assets. Employee severance benefits comprise about 64% of total liabilities and accounts payable, and accrued liabilities comprise about 13%.
- Total administered revenues of about $331 billion, composed of $198 billion in revenue administered under tax and other related federal legislation on behalf of the Government of Canada, $94 billion in revenue administered on behalf of provincial, territorial, and First Nations governments under various Memoranda of Understanding and similar arrangements, and $39 billion in revenue administered on behalf of the Canada Pension Plan.
- Total payments of about $20.8 billion in benefits and credits administered under benefit programs and services on behalf of the Government of Canada and provincial and territorial governments.
The CRA's information technology (IT) capacity is also critical to its ability to deliver services to Canadians. This is a sizeable task which requires the involvement of two data centres which process up to 4 million transactions per hour, 7 mainframe computers, about 1,700 servers, and maintaining over 495 applications across a distributed computing environment covering more than 400 locations. Effective November 15, 2011, IT infrastructures services related to email, data centres and network services are provided through Shared Services Canada in partnership with the CRA.
The CRA's Finance and Administration Branch supports the delivery of CRA programs and services by providing sound advice, products, and services related to a number of key functions including financial administration, resource management, security, internal affairs, and administration. It also helps ensure compliance and accountability with related legislation, policies, and directives. Finance and Administration Branch activities are performed by a team of almost 2,500 employees, about 35% of whom are located in Headquarters and 65% in the regions. This team is integral to the effectiveness of the CRA's system of control over financial reporting, which encompasses two sets of financial statements: one for agency activities and one for administered activities. Also of importance to financial reporting, in particular to administered activities, are many of the procedures carried out as part of regional or Headquarters operations, such as collection, data entry, and processing of income tax returns, as well as support and development of a majority of the system applications the CRA uses. This makes the CRA's task of scoping, documenting, and assessing the related controls uniquely challenging.
1.3 Audited financial statements
As noted above, for financial reporting purposes, the activities of the CRA 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 that the CRA manages and utilizes in running the organization. The Financial Statements - Administered Activities include those revenues and expenses that are administered for someone other than the CRA, such as the federal, provincial and territorial governments, First Nations and other organizations.
The CRA has issued annual audited financial statements since 1999-2000 and has consistently received an unmodified opinion from the Auditor General of Canada.
1.4 Service arrangements relevant to financial statements
1.4.1 CRA reliance on other government service providers
The CRA relies on other organizations for the processing of certain transactions that are recorded in its financial statements.
- Public Works and Government Services Canada centrally administers salary payments and looks after items such as the calculation of general pay, payroll deductions, security of pay information, and automatic retroactive adjustments through the Regional Pay System.
- The Department of Justice provides legal advisory, litigation, and legislative services.
- The Office of the Auditor General of Canada provides auditing services.
- Shared Services Canada was created on August 4, 2011 to consolidate, streamline and improve the government's information technology (IT) infrastructure services, specifically email, data centre and network services for 43 federal departments and agencies. Effective November 15, 2011 the responsibility for email, data centre and network services, including associated resources, was transferred from the CRA to Shared Services Canada. The administration and delivery of these services were shared during the 2011-2012 transition period while Shared Services Canada was being established.
- Revenu Québec is responsible for the joint administration of the goods and services tax and Quebec sales tax for businesses in the Province of Quebec.
1.4.2 CRA services that other departments and agencies rely on
- The CRA provides information technology services to the Canada Border Services Agency's operational and financial systems and performs collection services on their behalf for duties, taxes, fees, penalties, or other amounts owing under the Customs Act, Customs Tariff, Excise tax Act, Excise Act, 2001, and/or related regulations.
- The CRA provides information to the Department of Finance to use in determining taxes receivable and payable under tax collection agreements with provincial, territorial, and Aboriginal governments.
- The CRA provides services to Human Resources and Skills Development Canada to collect its accounts receivable and to administer a number of activities for the Canadian Pension Plan and Employment Insurance Operating Account.
1.5 Significant changes in fiscal year 2011-2012
- Under agreements reached with the Government of Canada, the CRA started to administer the harmonized sales tax in Ontario and British Columbia on July 1, 2010. On August 26, 2011, British Columbia announced that it will return to the provincial sales tax on April 1, 2013. Until then, the CRA will continue to administer the harmonized sales tax for British Columbia. Shortly after the end of fiscal year 2011-2012, on April 18, 2012, the province of Prince Edward Island announced that it has entered into an agreement with the Government of Canada to bring Prince Edward Island into the harmonized sales tax revenue allocation framework effective April 1, 2013.
- Effective September 5, 2011, Mr. Mark Perlman was appointed to the position of Deputy Assistant Commissioner and Agency Comptroller, Finance and Administration Branch.
- Effective October 3, 2011, Mr. Bill Jones was appointed to the position of Deputy Commissioner of the CRA.
- Effective November 15, 2011, Shared Services Canada is responsible for controlling and supervising the CRA's email, data centre, and network services and has ownership of relevant assets. Since Shared Services Canada came into being, it has been operating with the CRA under a business continuity framework that identifies how work and services were to continue for the remainder of the 2011-2012 fiscal year. This framework is being extended until March 31, 2013, to allow for a sufficient transition period.
2. CRA's control environment relevant to ICFR
The CRA recognizes the importance of setting the tone from the top to help ensure that staff at all levels understand their roles in maintaining an effective system of ICFR and are well equipped to exercise these responsibilities effectively. The CRA's focus is to ensure risks are well managed through a responsive and risk-based control environment that enables continuous improvement and innovation.
2.1 Key positions, roles, and responsibilities
This section explains the CRA's key positions and committees with responsibilities for maintaining and reviewing the effectiveness of its system of ICFR.
Commissioner - The Commissioner and Chief Executive Officer (CEO) of the CRA, as Accounting Officer, assumes overall responsibility and leadership for the measures taken to maintain an effective system of internal control. In this role, the Commissioner chairs the Agency Management Committee, sits on the CRA Board of Management, and attends meetings of the Audit Committee.
Chief Financial Officer - The Chief Financial Officer (CFO) reports directly to the Commissioner and provides leadership for the coordination, coherence, and focus of efforts to design and maintain an effective and integrated system of ICFR, including its annual assessment. In this role, the CFO chairs the CRA's CEO/CFO Certification Steering Committee and attends meetings of the Audit Committee.
CEO/CFO Certification Steering Committee - This Committee is chaired by the CFO and composed of Assistant Commissioners with significant responsibility for ICFR including the Chief Information Officer, the Chief Audit Executive and Assistant Commissioner, Corporate Audit and Evaluation Branch, and the Chief Risk Officer. It is responsible for reviewing the progress and results of the CRA's ICFR assessment process and approving action plans to address significant control issues.
Audit Committee of the Board of Management - The Audit Committee helps the Board of Management fulfill its oversight responsibilities by reviewing the CRA's accounting framework, internal and external audit results, financial and performance information, internal controls and financial risks, and compliance with financial and environmental legislation. On the recommendation of the Audit Committee, the Board approves the CRA's annual financial statements. The Commissioner, the CFO, and the Chief Audit Executive and Assistant Commissioner, Corporate Audit and Evaluation Branch, as well as a representative of the Office of the Auditor General, each attend Audit Committee meetings. The Audit Committee was established in 1999 and is composed of five external members who are independent of the CRA.
Agency Management Committee - As the sole decision-making Committee in the CRA, this committee oversees program development and delivery, as well as the day-to-day business operations of the CRA and all associated risks. The Committee reviews, approves, and monitors the corporate risk profile.
Chief Audit Executive - The Chief Audit Executive and Assistant Commissioner, Corporate Audit and Evaluation Branch, reports directly to the Commissioner and provides, through an effective internal audit function, independent and objective assurance on the CRA's risk management, internal control, and governance practices. In this role, the Chief Audit Executive is a member of the CEO/CFO Certification Steering Committee and attends meetings of the Audit Committee.
Chief Risk Officer - The Chief Risk Officer and Assistant Commissioner of the Enterprise Risk Management Branch reports directly to the Commissioner and oversees the CRA's enterprise risk management function designed to provide sound risk information for use in decision-making at the corporate, operational, and project levels.
Internal Controls Division - The Internal Controls Division within the Finance and Administration Branch supports the CRA's efforts to design and maintain an effective and integrated system of ICFR by documenting and testing, in collaboration with information technology and business process control owners, the adequacy of ICFR and reporting results to the CEO/CFO Certification Steering Committee, the Commissioner, and the Audit Committee of the Board. If applicable, the Division also reports information on action plans to strengthen controls.
Senior managers - Senior managers in charge of services and program delivery are responsible for maintaining and reviewing the effectiveness of their system of ICFR falling within their mandate.
2.2 Key measures taken by the CRA
The CRA also helps to ensure its control environment remains effective in mitigating financial reporting risks by promoting ethical conduct and through upholding its commitment to competence, its governance and organization structure, its enterprise risk management function, and the systems and processes that help ensure relevant information is communicated to appropriate individuals accurately and on a timely basis. Key elements and activities are listed below.
- CRA's Code of Ethics and Conduct.
- Performance management system that formalizes management's commitment to values and ethics.
- An integrity framework composed of policy instruments, programs, and processes designed to reinforce a culture of integrity.
- Competency based human-resources system.
- A dedicated division on internal control.
- An independent and knowledgeable audit committee that is actively involved in overseeing the CRA's ICFR.
- An internal audit function and risk-based audit plan.
- An integrated enterprise risk management function, led by the Chief Risk Officer who reports directly to the Commissioner/CEO.
- A formal information technology strategy that guides information technology sustainability and development.
- The Internal Disclosures Office which provides a confidential channel through which employees can disclose wrongdoing.
- A delegated authorities matrix which is regularly reviewed and updated.
- A formal learning policy and annual individual learning plan process.
3. Assessment of CRA's system of ICFR
The CRA's financial statements have been audited, as required under the Canada Revenue Agency Act, by the Office of the Auditor General since 1999-2000. In parallel, the Audit Committee of the Board and CRA senior management have been providing increased oversight of the preparation and presentation of financial information including reviewing information regarding the design and effectiveness of its system of ICFR as they relate to the CRA's administered and agency activities. The objective of these reviews is to obtain greater assurance that significant financial reporting risks are being properly mitigated and our system of ICFRs is being adequately updated, tested and monitored.
In addition to the assessments that are conducted in accordance with the TB Policy on Internal Control, the CRA must also conduct assessments and undergo audits of a portion of its ICFR on Individual (T1), Corporate (T2) and Estate and Trust (T3) income tax programs under provisions outlined in the tax collection agreements between the federal government and the provincial and territorial governments. These assessments are audited by the Office of the Auditor General in accordance with the standards set out in the Canadian Institute of Chartered Accountants Handbook under the Canadian Standard on Assurance Engagements 3416 (formerly Section 5970), the guidance for audits of controls at a service organization. Audit results are reported to provincial and territorial governments to provide independent, audit-level assurance that the controls at the CRA that support the administration and reporting of provincial and territorial income tax revenue are properly designed to mitigate key risks and are operating effectively. The reports are intended to be used by provincial and territorial ministries, and their auditors, and are not public documents. However, the high level results of these audits are included in this document as they related to a key component of the CRA's system of ICFR related to administered activities.
To date the CRA has issued three Section 5970 control reports regarding the design of its ICFRs. The first two related to the T2 program as at March 31, 2007 and November 30, 2008, and the third was for the T1 program as at November 30, 2010. The fourth controls report relates to the operating effectiveness of the T2 program, and is currently being prepared for audit by the Office of the Auditor General during the 2012-2013 fiscal year.
3.1 Assessment baseline
Consistent with the Treasury Board Policy on Internal Control, the CRA has implemented a systematic risk-based and multi-year assessment plan of the design and operating effectiveness of its system of ICFR.
Through design effectiveness, the CRA will ensure that key controls relevant to financial reporting have been properly identified, documented, and in place and that they are aligned with the risks they aim to mitigate and that any remediation is addressed appropriately and in a timely manner. This includes ensuring appropriate mapping of key processes and information technology systems to the main financial statement accounts or class of transactions.
Through operating effectiveness, the CRA will ensure that the application of key controls over financial reporting has been tested over a defined period, they are working as intended and that any required remediation is addressed appropriately and in a timely manner.
Such testing covers all agency level controls which include corporate or entity, general computer and business process controls.
Testing of the design and operating effectiveness of key controls over financial reporting will lead to ensuring the on‑going monitoring and continuous improvement of the CRA's system of ICFR.
3.2 Scope of CRA assessment as of March 31, 2012
Scope
In order to define the scope of its ICFR assessment, the CRA evaluates the main accounts and line items used in preparing the agency activities and administered activities financial statements to determine where there are risks that, individually or in combination with others, could reasonably result in a material misstatement.
Based on this evaluation, the following key business processes are currently in scope:
Agency activities financial statements
- Financial close and reporting
- Fixed assets
- Payroll
- Operating expenditures (procurement to pay)
- Budgeting and projections
Administered activities financial statements
- T1 individual income tax (includes unapplied taxes and source deductions)
- T2 corporation income tax
- T3 trust income tax
- Non-resident income tax
- Goods and services tax/harmonized sales tax (GST/HST)
- Excise taxes and duties
- Benefits
Control frameworks
The CRA uses the Committee of Sponsoring Organizations (COSO) framework to assess the design effectiveness of its system of internal controls, since it is the most widely used model of control for purposes of assessing ICFR. The COSO framework is based on five interrelated components of control. Each component contains a number of principles and attributes that an organization's ICFR may be assessed against: control environment, risk assessment, control activities, information systems and communication, and monitoring.
Because the COSO only provides limited guidance to help organizations establish and evaluate information technology controls, the CRA uses the COBIT (Control Objectives for Information and related Technology) for SOX (Sarbanes-Oxley Act of 2002) framework to document and assess the design of its information technology controls that are relevant to financial reporting.
4. Progress and assessment results as of March 31, 2012
This section summarizes the CRA's key assessment results from the design and operating effectiveness testing completed to date. In accordance with the plan published in the 2010-2011 Annex, the CRA completed the following activities for the 2011‑2012 fiscal year.
Agency activities financial reporting
An assessment of the operating effectiveness of key controls over the five business processes related to financial reporting on agency activities as well as relevant application controls and information technology general controls for the Corporate Administrative System, the purchasing system (Synergy), and the budget tracking system.
- As a result of this review, the CRA identified areas for improvement and developed action plans to address findings on key controls related to segregation of duties and the design and management of access profiles.
Administered activities financial reporting
Further to the requirements of the tax collection agreements, the Office of the Auditor General completed its audit of the CRA's description of the design effectiveness of the individual (T1) income tax program as assessed by the CRA as of November 30, 2010. The audit included testing 88 entity level controls, 54 information technology controls over 44 processing systems, and 102 business process activities. The audit results confirmed that the CRA needs to enhance the design of certain key controls in the following areas:
- Documentation: Greater consistency in the quality and availability of documentation for audit trail purposes.
- Information technology general controls: Strengthen controls related to access and change management.
- Segregation of duties: Strengthen access provisioning practices as they relate to segregation of duties, and strengthen business process controls related to the design and management of access profiles.
The CRA's internal audit function completed an assessment of the operating effectiveness of controls related to the corporate (T2) income tax program. Management intends to use the assessment results to identify and plan any adjustments needed to enhance the effectiveness of these controls in preparation for the Auditor General's next controls audit under the tax collection agreements that will be completed in accordance with the Canadian Standard on Assurance Engagements 3416 auditing guidelines.
These reviews, including the Auditor General's report, included entity level control assessments and confirmed that the CRA continues to have a strong system of entity level controls.
5. CRA's action plan
This section summarizes how the CRA is addressing the results of control assessment activities and its plans for completing the assessment of the design and operating effectiveness of its system of internal control.
5.1 Progress as of March 31, 2012
In 2011-2012, CRA management substantially advanced its action plans to address the results of its 2010-2011 assessment of the design effectiveness of its controls over agency activities financial reporting, including:
- drafting a policy to clarify and reinforce roles and responsibilities of system owners for the design and management of access profiles, which will be issued in 2012-2013;
- taking measures to improve documentation of review and monitoring activities for audit trail purposes; and
- developing a long-term-strategy to strengthen and automate the management of access provisioning throughout the CRA.
In 2011-2012, the CRA addressed a good percentage of the findings from the Auditor General's audit of controls relating to the individual (T1) income tax program and made substantial progress on the following items:
- strengthening procedures for documenting review and monitoring activities related to non-routine assessments and reassessments for audit trail purposes;
- strengthening procedures for managing system changes; and
- clarifying roles and responsibilities to ensure access profiles are properly designed and monitored to address segregation of duty and access issues.
As result of the T1 audit findings, the scope of the long-term strategy for strengthening access management has been expanded in relation to segregation of duties. The strategy aims to standardize the business rules and automate how access profiles are provided and managed throughout the CRA.
Over 85% of the findings raised during the corporate (T2) income tax program design effectiveness audits conducted in 2007 and 2008 have been fully remediated and the remaining issues will be substantially remediated in 2012-2013.
5.2 Action plan for the next fiscal year and subsequent years
The CRA's assessment efforts to date have revealed that overall the CRA has a strong and effective system of entity level controls that constitutes an important component of the CRA's ICFR for both agency activities and administered activities. Given the significance of entity level controls for the overall assessment of the effectiveness of ICFR, the CRA will continue to monitor them annually based on risk, by conducting self-assessment activities, internal audits, and Office of the Auditor General controls audits, to obtain assurance that they continue to be effective.
In 2012-2013, the CRA intends to make significant progress on its action plans to strengthen the operating effectiveness of its controls, and launch a CRA-wide multi-year project to address its access management needs over the long term.
The CRA will move into an ongoing annual ICFR monitoring program that will test items requiring remediation and all new or changed controls, and will perform various other tests based on its annual risk ranking exercise.
In 2012-2013, the CRA will prepare a description and management assertion pertaining to the operating effectiveness of its controls over the corporate (T2) income tax program in the context of the tax collection agreements, based on the results of its 2011-2012 self-assessment. The CRA expects that the Office of the Auditor General will audit this description in accordance with the new Canadian Standard on Assurance Engagements 3416. Action plans for assessing the remaining administered activity business processes for the period of 2012-2013 to 2015-2016, as well as the ongoing monitoring of the agency activity controls, are detailed in the table below.
The approach and timing for assessing the operating effectiveness of controls over the T1 program, as well as for assessing both the design and operating effectiveness of the ICFR for the remainder of the CRA's administered activities including IT general controls and application level IT controls, depend on a number of factors, including:
- plans currently under development to redesign the business processes and systems related to the T1 program;
- significant shifts in the CRA's program delivery agenda (e.g., if the CRA assumes responsibility for the implementation and administration of new federal, provincial, territorial, or First Nations tax, benefit, or credit programs);
- developments in the governance model that will apply to Shared Services Canada's providing information technology services on CRA's behalf after the transition period and, in particular, Shared Services Canada's approach to complying with the Policy on Internal Control in assessing general computer controls that are relevant to the CRA and government-wide financial reporting;
- the CRA's plans and progress in implementing business transformation initiatives and other government-wide priorities;
- changes in third-party requirements (including, but not limited to, the Office of the Auditor General, Internal Audit, or Treasury Board); or
- other developments that exert significant pressure on program and information technology staff's time and capacity.
In 2011-2012, CRA management evaluated the level of effort involved in assessing the operating effectiveness of its system of internal control and used this information to establish the next three-year plan, summarized in the following table.
It is important to note that certain variables, including those described in the preceding paragraphs, may affect the CRA's ability to complete this work as planned.
The CRA updates this plan annually to confirm the feasibility of the key deliverables and to take into account any new or changed financial reporting risks.
This table provides an overview of the CRA's plans in terms of the four following key ICFR assessment stages: document, assess design effectiveness, assess operating effectiveness, and transition to a program of ongoing monitoring.
- Date modified:
- 2012-11-29